Sunday, May 27, 2012

Criticism of the World Bank and the IMF

Criticism of the World Bank and the IMF encompasses a whole range of issues but they generally centre around concern about the approaches adopted by the World Bank and the IMF in formulating their policies. This includes the social and economic impact these policies have on the population of countries who avail themselves of financial assistance from these two institutions.
Critics of the World Bank and the IMF are concerned about the conditionalities imposed on borrower countries. The World Bank and the IMF often attach loan conditionalities based on what is termed the 'Washington Consensus', focusing on liberalisation—of trade, investment and the financial sector—, deregulation and privatisation of nationalised industries. Often the conditionalities are attached without due regard for the borrower countries' individual circumstances and the prescriptive recommendations by the World Bank and IMF fail to resolve the economic problems within the countries.
IMF conditionalities may additionally result in the loss of a state's authority to govern its own economy as national economic policies are predetermined under the structural adjustment packages. Issues of representation are raised as a consequence of the shift in the regulation of national economies from state governments to a Washington-based financial institution in which most developing countries hold little voting power.
With the World Bank, there are concerns about the types of development projects funded by the IBRD and the IDA. Many infrastructural projects financed by the World Bank Group have social and environmental implications for the populations in the affected areas and criticism has centred around the ethical issues of funding such projects. For example, World Bank-funded construction of hydroelectric dams in various countries have resulted in the displacement of indigenous peoples of the area. There are also concerns that the World Bank working in partnership with the private sector may undermine the role of the state as the primary provider of essential goods and services, such as healthcare and education, resulting in the shortfall of such services in countries badly in need of them.
Critics of the World Bank and the IMF are also apprehensive about the role of the Bretton Woods institutions in shaping the development discourse through their research, training and publishing activities. As the World Bank and the IMF are regarded as experts in the field of financial regulation and economic development, their views and prescriptions may undermine or eliminate alternative perspectives on development.
There are also criticisms against the World Bank and IMF governance structures which are dominated by industrialised countries. Decisions are made and policies implemented by leading industrialised countries—the G7—because they represent the largest donors without much consultation with poor and developing countries.
It further shows the links between tremendous odious debt and poverty in the developing countries with the effects of the current forms of globalization that marginalizes a vast majority of people around the world.
While not the only part of the global financial system that has been destructive for most people of the world, the IMF and World Bank policies have been a major instrument to structure the global economy (via structuring the national economies of developing countries) to allow a form of neoliberal globalization to be pursued that has led to the criticisms mentioned above.
Critics also point out that the beneficiaries will be largely the wealthy people in western nations and the transnational corporations, while the majority of people in the world will not benefit.
The Critics Many from the political left who criticize the IMF and the World Bank deride those organizations' clear preference for free-market policies. But free-market advocates think that whatever policies the organizations prefer are beside the point; their actions per se cause undesirable market distortions that almost always cause more harm than good. This apparent discrepancy is caused by the schism between the rhetoric of the Fund and the Bank and what they actually do. When a sovereign nation's economy is so imperiled that the government faces a default on its debt, the IMF and World Bank provide it with low-interest loans, under the auspices of preventing any global economic crisis that might ripple outward. (This is why developed nations fund the IMF and the World Bank out of their own treasuries: They ostensibly provide protection from the worldwide economic chaos that might ensue if one nation or region were to go under.) The loans often come with conditions, called "Structural Adjustment Programs." This means that in order to get the loan, an imperiled nation's government must promise to make reforms in its economy to reduce the likelihood of such an economic crisis occurring in the future. The current administration of the Fund and the Bank favor the implementation of free-market policies, such as trade liberalization, as the best solution to a country's economic woes. This is where leftist thinkers come in with their critiques. First of all, they point out, most of these imperiled countries, almost all of which are in the developing world, do not have the institutions that developed economies have built over time to properly regulate a market economy. Yet a market economy is forced on these countries as a condition of receiving the loans they need to stave off catastrophe. Often, they say, the result is an even worse combination of wealth disparity, increasing poverty and environmental exploitation. To top it all off, the countries eventually have to pay off the IMF and World Bank loans, when often their economy hasn't even improved. The left would rather see the Fund and the Bank give out loans with radically different conditions, or none at all. They see the conditionality of the loans as the cause of the widely noted failures - in East Asia, in Russia, in Latin America - of the IMF and World Bank to succeed in their missions of global economic stability and poverty eradication.
To impose one-size-fits-all economic policies to any country, no matter how right those policies might be, is to institute the kind of top-down economic planning that is anathema to free-market thinkers.
But why then, if the IMF and the World Bank are going around promoting free-market economics, do free-market advocates oppose the IMF and the Bank? The answer is that free market critics oppose the actions of the institutions themselves - their interference in the global economy. To force one-size-fits-all economic policies to any country, no matter how right those policies might be, is to institute the kind of top-down economic planning that is anathema to free-market thinkers. Central planners at the Fund and the Bank cannot take into account all of the many subtle effects the policies they promote might have on the countries they de facto control with their loans. Even if all the IMF policy recommendations are correct, countries have no incentive to follow them once the bailout check clears. Loan conditionality is a threat with no teeth, because the IMF has demonstrated that it will continue loaning even to delinquent countries. The only real incentive governments have to reform is given when their economies start to fail; then they must either reform or watch their countries slide further into the abyss. IMF bailouts and loans give countries excuses not to make needed reforms and prolong economic backwardness while building up enormous levels of debt. But this is not the only way in which IMF and World Bank interventions usually leave a country worse off than before. By putting together generous bailout packages with the principal purpose of enabling cash-strapped countries to pay off their foreign creditors, these institutions encourage foreign investors to engage in risky lending behavior around the world - a market distortion that causes global instability when the whole purpose of the IMF is to prevent it. The repeated failures of the IMF and the World Bank have inspired passionate opposition from 20-30 year-olds, because these failures often have devastating consequences for the world's poor. But when this generation came looking for answers, it found Bono rather a thoughtful spokesperson for free trade. It would be a severe understatement to say that the protectionist, anti-trade left has been more successful at tapping into this well of discontent for grassroots support. The free-market movement did not even begin to fight. The free-market movement made a good intellectual case against the international financial institutions and suggested a solution to the problem: The United States should refuse to extend to the IMF or the World Bank any more funding for their disastrous interventions; instead, it should remove all barriers to the free exchange of goods and services across its borders, regardless of what policies other countries pursue, as an alternative way to strengthen the global economy.
By putting together generous bailout packages, these institutions encourage foreign investors to engage in risky lending behavior around the world causing global instability when the whole purpose of the IMF is to prevent it.
But the movement was unable to educate and energize a grassroots army on this issue. Instead, a protest movement powered by the organizational muscle of the large labor unions and radical environmentalists used opposition to the Fund and the Bank to advance a protectionist agenda, calling for the erection of tariff walls and subsidies to impede the flow of goods and services across borders. This movement advocated "democratizing" rather than dismantling the Fund and the Bank - in other words, trying to open the Fund and the Bank to pressure from groups that support protectionism and closed borders rather than free trade. The free-market movement espoused a more internationalist position, but the protectionist left overwhelmingly attracted the most grassroots support. But a lack of grassroots support is not the only reason why the free market movement has failed to drive the debate. Another reason is that the business lobbies that drive the formation and passage of free trade agreements, such as the proposed Free Trade Area of the Americas, have no interest in defunding and dismantling the IMF and the World Bank. Rather, most businesses would not mind if these organizations continued to provide a safety net for risky but high-yield investments in recently opened markets. Because deep-pocketed business lobbies drive much of the free-market agenda at the political level, the movement is missing a key ally in Washington. This, in addition to a lack of grassroots support, has all but silenced free-market opposition to the Fund and the Bank, and magnified the left's position in the debate. The battle to reform or dismantle the IMF and the World Bank, from either the left or the right, faces an extraordinarily daunting road. Criticisms of the IMF and the World Bank tend to anger Wall Street, and can be fatal to conservative politicians. Wall Street was rocked when former Treasury Secretary Paul O'Neill suggested that most of the money from an IMF bailout to Brazil in 2002 might wind up in "Swiss bank accounts" and thus opposed the move. This and other candid statements contributed to the Bush Administration's decision to axe O'Neill shortly after the 2002 elections. The movement on the left also faces significant political obstacles, as its inability to project a coherent message and the strange tactics of its most vocal adherents have relegated it to the margins of American political debate. With friends like these, The IMF and World Bank scholarship programs for underachieving countries look safe for the near term. But the problems they pose to the world economy are real, and must be addressed at some point by a consensus of opponents. While this consensus might contain strange bedfellows at first, unlikely alliances can sometimes demonstrate the seriousness of a problem. Perhaps such an alliance is needed to help the developing world graduate to developed economies. Further Reading
· Bastiat, Frederic. Economic Sophisms. Irvington-on-Hudson: Foundation for Economic Education, 1996.
· Friedman, Thomas L. The Lexus and the Olive Tree: Understanding Globalization. New York: Anchor Books, 2000.
· Hazlitt, Henry. Economics in One Lesson. San Francisco: Fox & Wilkes, 1996.
· International Financial Institution Advisory Commission (Meltzer Commission). "Report to the U.S. Congress and the U.S. Department of the Treasury." March 8, 2000.
· Lindsey, Brink. Against the Dead Hand: The Uncertain Struggle for Global Capitalism. New York: John Wiley & Sons, 2002.
· Shultz, George, William Simon and Walter Wriston. "Who Needs the IMF?" Wall Street Journal, February 3, 1998.
· Smith, Adam. The Wealth of Nations. Modern Library Edition. New York: Random House, 1937.
· Stiglitz, Joseph E. Globalization and Its Discontents. New York: W.W. Norton & Co., 2002.