Undoubtedly, the International Monetary Fund (IMF) and the World Bank play a huge role in the global economy, especially in directing global economic policy, controlling the flow of aid and related mobilization activities, and in the development of markets in developing countries. However, the IMF and World Bank have also been criticized for imposing economic restructuring programs based on neo-liberal paradigms of development that emphasizes the centrality of markets and free trade in creating economic growth.
Arguably, such efforts impoverish the poor further rather than reduce inequity and fail miserably in contributing to the genuine development of recipient countries. The International Monetary Fund (IMF) and the World Bank were established through the Bretton Woods Agreement right after the Second World War. In general, these institutions were created to rebuild European economies and markets significantly damaged by war, as well as establish controls in currency exchange rates, in order to re-energize trading and investment activities. (Ahluwalia 1999, p.
2) Likewise, the establishment of the IMF and World Bank were considered necessary in making economic cooperation between countries a possibility. (Stiglitz 1999, p. F577) In particular, the International Monetary Fund was tasked to ensure that the global financial system worked seamlessly by monitoring different countries’ compliance with the par value system or the gold standard which was reinstituted after the war. At the same time, the IMF assisted countries through the provision of short-term loans and in stabilizing balance of payments.
(Ahluwalia 1999, p. 2) The World Bank, meanwhile, was tasked with overseeing post-war reconstruction efforts and in extending aid for the development of poor countries. (Stiglitz 1999, p. F577) Consequently, most of the activities of the IMF and the World Bank in their infancy years involved aiding the post-war reconstruction of Europe as well as in establishing a stable global system of financial payment and capital acquisition. (Ahluwalia 1999, p.
2) The World Bank’s role in funding the reconstruction of Europe, however, was quickly taken over by the United States’ Marshall Aid, which compelled it to focus its efforts on funding development projects in poorer countries in the aim of poverty reduction. The World Bank was “expected to to finance projects which were economically viable but which otherwise might not be financed because of the scarcity of domestic resources and the difficulty in obtaining external finance” due to the “absence of international capital markets. ”(Ahluwalia 1999, p.
2) Meanwhile, the IMF handled “exchange rates and restrictive systems, for adjustment of temporary balance-of-payments disequilibria, and for evaluating and assisting members to work out stabilization programmes as a sound basis for economic advance. ” (Ibid) Massive changes occurred in the global economy which influenced a shift in policy and direction for the two institutions. By the 1960s, the world economy was fully recovered and new surplus in capital brought about by the discovery of oil in the 1940s hastened the development of international capital markets.
By the 1970s, however, the world was threatened anew with economic stagnation due to oil crises. (Ahluwalia 1999, p. 3) In 1973 the gold standard was abandoned in favor of floating rates, which rendered the IMF’s function as a source of financing for wealthy nations obsolete. At the same time, there was a tremendous increase in external lending activities to the developing countries from commercial banks who wanted to recycle surplus capital from oil, (Evans 273) which shifted the IMF’s focus to debt management and the revival of economies in Africa and elsewhere from stagnation.
The World Bank was also forced to take on balance of payment problems of heavily indebted countries. By the 1980s, both institutions had developed stringent conditions on their lending activities in the form of Structural Adjustment Packages based on the analysis that funding would make little impact on economic growth if their partners, poor countries who had acquired massive external debts, did not implement policies that ensured macroeconomic stability and increased trade and investment activities. (Ahluwalia 1999, p. 4)
Since then, both institutions have evolved in terms of their policy focus and directions along with rapid changes in the global economy. For instance, the World Bank has shifted its focus “from large-scale, growth-oriented projects towards projects, programmes, and policy advice that more explicitly incorporate the poverty reduction goal” (Stiglitz 1999, p. F580) while the IMF has maintained its role in ensuring sound fiscal management systems in its partners and has refrained from playing an active role in the achievement of Millenium Development Goals for poverty reduction in developing countries.
(Bird & Rowlands 2007, p. 866) More recently, the World Bank has been influential in poverty alleviation efforts specifically in achieving Millenium Development Goals (MDGs) in poor countries and those set by the United Nations that call for the equitable distribution of economic resources within and among nations, in addressing environmental concerns such as climate change, and in pushing for sustainable development frameworks by encouraging socially responsible corporate practices.
(World Bank 2007) Stiglitz (1999) observes that many of the World Bank’s projects have had positive outcomes as exemplified by its success in reducing malnutrition in India and in promoting women and girls’ access to educational opportunities in Bangladesh. (p. F580) Clearly, the IMF and the World Bank, through the application of conditionality in granting aid to countries, laid the foundation for globalization and the integration of individual countries’ economies into the international economy.
Stiglitz (1999) notes that the IMF and the World Bank were primarily established to address the imperfections of the Capitalist system, glaringly illustrated by the phenomenon of the Great Depression, based on Keynesian concepts of state intervention to facilitate crisis recovery when markets fail to work. (p. F578) Hence, the IMF and the World Bank are instrumental in maintaining the global economic order and in ameliorating the negative outcomes of capitalist growth such as social inequity.
However, the work of both the IMF and the World Bank have also been the subject of criticism among development workers and organizations, who allege that the two institutions, in actuality, tend to produce outcomes that are advantageous to wealthy nations while contributing to the increased income disparities in poorer countries.
These criticisms are largely targeted at the IMF and World Bank’s conditionality, wherein countries badly in need of aid are pressured to adopt structural adjustment packages (SAPs) geared at creating favorable environments for trade and investment through the promotion of liberalization, privatization, and stabilization. (Trainer 2002, p. 58) Trainer (2002) contends that SAPs “reduces national control over the economy, eliminates protection and other arrangements which previously had hindered transnational corporation access, transfers productive capacity to the private sector, and reduces the cost of labour.
” (p. 58) Thus, the consequences of implementing SAPs imposed by the IMF and World Bank have been dire. Stiglitz (2002) observes that “countries that have followed the recipes of the IMF, from Bolivia to Mongolia, are asking: we have felt the pain, we have done everything you have told us to do: when do we start to reap the benefits? ” (p. 3) On the other hand, countries like Chile and China, which carefully managed their integration into the global economy through the selective application of IMF and World Bank-sponsored policies, are faring much better in terms of economic growth.
Accordingly, this informs the contention that the IMF and World Bank are not genuinely interested in poverty reduction but in the “dismantling of the old economy” and the development of an economy that is favorable for the business interests of wealthy capitalist countries. Cammack (2004) argues, for instance, that “while the Bank’s commitment to poverty reduction is real, within limits, it is conditional upon, and secondary to, a broader goal” which is “the systematic transformation of social relations and institutions in the developing world” according to the Capitalist interest and agenda of advanced capitalist countries.
(p. 190) It is in this light that critics have called for serious reforms within the IMF and the World Bank ranging from the demand for greater accountability from these institutions (Woods 2001, p. 100) to calls exhorting the abandonment of its neo-liberal policy imposition (Stiglitz 2002, p. 24). Woods (2001) believes that the IMF and the World Bank can only be made accountable to developing countries, which compose their biggest stakeholders, if these countries are adequately represented in these institutions’ decision-making structures. (p.
100) On the other hand, Stiglitz (2002) points out the need to institute mechanisms to control and regulate market forces and ensure the provision of basic social services in order to achieve a balanced growth in the developing world. (p. 23) Therefore, while the IMF and the World Bank have significantly contributed to the maintenance of a global economic order and have been successful at restructuring majority of the world’s economies for globalization, their efforts at minimizing the effects of unbridled capitalist growth on the poor remain questionable.
This is primarily due to the fact that the two institutions have generally carried the interests of wealthy countries who are its main shareholders instead of formulating policies that accurately mirror the concrete needs of impoverished nations. Works Cited: Ahluwalia, Montek S. (1999) “The IMF and the World Bank in the New Financial Architecture. ” In International Monetary and Financial Issues for the 1990s, Vol XI. Geneva: UNCTAD: 1-45. Bird, Graham & Dane Rowlands (2007). The IMF and the mobilisation of foreign aid.
Journal of Development Studies, 43(5):856-870 Cammack, Paul (2004). What the World Bank means by poverty reduction, and why it matters. New Political Economy, 9(2):189-211. Evans, Hwu (1999). Debt relief for the poorest countries: why did it take so long? Development Policy Review, 17:267-279. Stiglitz, Joseph E. (1999). The World Bank at the millenium. The Economic Journal, 109:F577-F597. Stiglitz, Joseph E. (2002). Development policies in a world of globalization. Paper presented at the seminar “New International Trends for Economic Development,” Rio Janeiro.
Trainer, Ted (2002). Development, charity and poverty: the appropriate development perspective. International Journal of Social Economics, 29(1/2):54-72. Woods, Ngaire (2001). Making the IMF and the World Bank more accountable. International Affairs, 77(1): 83-100. World Bank (2007). “Frequently Asked Questions about the World Bank. ” Retrieved May 2, 2008 from the World Bank Official Website: http://web. worldbank. org/WBSITE/EXTERNAL/EXTSITETOOLS/0,,contentMDK:20147466~menuPK:344189~pagePK:98400~piPK:98424~theSitePK:95474,00. html