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The IMF, World Bank and trade: an overview

STWR
19 May 2008

The failure of the IMF, World Bank and WTO to represent and further the interests of the developing world, through their one-size-fits-all approach, has lead to the collapse of trade negations, widespread criticism of their effectiveness, and bitter international protest. Many countries are rejecting the neoliberal ideologies of the ‘unholy trinity’ with intensifying calls for their reform or decommissioning. Below is a brief overview, some key facts and further resources that relate to climate change.

Contents

Overview

Since the 1999 protest in Seattle, the international debate on globalization has focused more directly on the activities of those influential organizations at the heart of this economic process - the International Monetary Fund (IMF), the World Bank (WB) and the World Trade Organization (WTO). The vast majority of progressives concerned with critical issues such as the growing levels of inequality, poverty, unfair trade, unsustainable debt and climate change, are vociferously calling for a debate on whether these organizations should be simply reformed or progressively dismantled.

Working For Development?

The mandates of the IMF and World Bank have changed significantly since their creation by the US and UK Governments at The Bretton Woods Conference in 1944. They were initially designed to ensure global financial stability and economic growth in countries affected by the war - mainly in Europe, a function which they were largely successful in thanks to a generous Marshall Plan initiative.

Since then the World Bank has steadily increased its original mandate to become the single largest source of development finance in the world, lending for large-scale development and infrastructure projects such as building roads, dams, pipelines, and extracting natural resources. Whilst the IMF was originally created to maintain global financial stability and monetary cooperation by making loans to countries with balance of payment problems, it is now the lender of last resort for cash strapped developing countries.

In their respective capacities, both institutions are often heavily criticized for imposing harsh conditions on their loans known as Structural Adjustment programs (SAPs). These SAPs tend to reduce government expenditure for social needs such as education, health and welfare in order to channel finance to loan repayments, and in this way exacerbate poverty in many developing countries.

In 1995, the World Trade Organization (WTO) was established to replace the General Agreement on Tariffs and Trade (GATT), with the intention of providing an international framework for the rules that govern trade and to staunchly promote free trade. The liberalizing or ‘opening up' of markets in developing countries to global competition is one of the WTO's key policies, and the organization clearly states that trade rules, although binding on governments, are primarily for the benefit of the business community that produce, import and export goods and services.

Economic Growth and Globalization

Together the policies of free-trade, development loans, SAPs and privatization are the key ingredients of economic globalization, and have been for the past few decades.  There is now a glut of evidence that supports the fact that these institutions, which are broadly unaccountable and opaque, are not effective at reducing poverty and inequality, or in facilitating fair trade or fair finance. They are also heavily criticized for ignoring human and labor rights, and for being heavily biased in favor of the economically dominant countries which largely control their operation. So widespread is the dissent and criticism against them that Latin America as a continent has recently created an alternative means of financing trade and development - The Bank of the South.

It is the underlying ‘neoliberal' ideology that these organizations propagate which needs most careful examination - namely the belief that economic growth and free-markets are the best means of generating wealth for development and poverty reduction. The evidence, after the 30 years of economic globalization that these institutions have spearheaded, is that the benefits are unevenly distributed, accruing more readily to corporations and the wealthy. In addition, the export-led agriculture policies that these institutions promote tend to reduce domestic food security and leave developing countries at the mercy of market forces.

The Need for Reform

Whilst market efficiency and economic growth are important for development in many respects, the blind pursuit of these goals is clearly harmful to a planet whose resources are vastly over-consumed, as well as failing the world's poorest citizens - almost half of whom still lack the essentials of life such as access to basic food, clean water and essential medicine.

Calls to substantially reform these institutions, and even to progressively dismantle them in favor of representative, pro-poor alternatives which operate within the United Nations framework, are increasingly pertinent in this time of growing economic disparity. They demand serious consideration if the distribution of essential goods and services is to be coordinated in a more sustainable and cooperative manner by the international community.

Key facts

Institutional structure

Both the IMF and the World Bank institutions are based in Washington USA, and are owned by their 184 member countries.

The World Bank is the single largest source of development finance in the world, managing a loan portfolio totalling over US$250 billion.

Voting rights at the World Bank are the same for each member state, but additional votes can be granted, depending on financial contributions to the organization.

Voting rights at the IMF are allocated according to financial strength (‘one dollar one vote'), resulting in those financially powerful countries (and the commercial interests that influence them) determining the monetary, economic and development architecture of the global economy. The majority (40%) of all votes are held by just 7 countries (the G7).

For both institutions, the US holds the largest share at 16-17%. Significant changes in policy direction require a "super-majority" of 85%; therefore the US can block any major change in policy.

Structural Adjustment Programmes (SAPs)

IMF/World Bank conditions, known as "structural adjustment programs" (though the institutions are trying to escape that term's negative reputation by changing the name to "poverty reduction and growth programs") generally implement "free market" programs and policy. These programs include internal changes (notably privatization and deregulation) as well as external ones, especially the reduction of trade barriers. Countries which fail to enact these programs may be subject to severe fiscal discipline. Critics argue that financial threats to poor countries amount to blackmail, and that poor nations have no choice but to comply.

In addition, the SAPs divert funds away from social and welfare services (such and health and education) as governments must instead prioritise loan repayments. This is seen to block achievement of the UN's Millennium Development Goals.

Iraq's entire economy has recently been fashioned by the IMF and World Bank. The Paris Club of creditors, through the IMF, quickly approved the cancellation of 80% of Iraq's debts, approximately $39 billion. Using this as leverage, neoliberal structural changes were swiftly enacted including the privatisation of assets and state owned enterprises.

SAPs in Bolivia resulted in per capita income dropping to less than it was 25 years ago, with 63% of Bolivians living in poverty.

Corporate links to IMF

These institutions have financially supported corporations directly - in 1995 the IMF gave almost $18 billion to Wall Street interests who stood to lose billions with the Peso devaluation.

The IMF bailed out foreign investors in Russia with an $11 billion package and orchestrated a massive payout to large banks that made bad loans to Asian countries in the 90's.

Growing resistance to IMF

The IMF has faced criticism as a result of the East Asian financial crisis (where it imposed austerity programs on South Korea, Indonesia, and Thailand) and the massive default in Argentina.

Most recently, seven Latin Americans formed The Bank of the South as an alternative to the World Bank and IMF.

WTO and world trade

The World Trade Organization (WTO) was established in 1995 to provide an international framework for the regulation of rules that govern trade.

The increase in international commerce - corporate globalization that followed the widespread imposition of SAPs in the 1980s - led to demands by corporations and investors for ways to lock in their privileges and protection against the perceived danger of governments seizing assets or imposing new regulations. The WTO, established in 1995, was the answer to those demands, an institution whose tribunals can overrule national laws if they are found to violate the rights of corporations.

The WTO is, constitutionally, a democratic organisation with an equal share of votes distributed to all member nations regardless of their economic power. Yet the poorer nations still find themselves unable to exercise their democratic rights in WTO global trade negotiations.
 

The dominant economic powers - USA, Canada, the EU and Japan (also known as the ‘Quad' or ‘Quartet') - very clearly establish the agenda before a round of trade talks. The Quad then invite a selected group of poorer nations to a ‘Green Room' meeting where the key decisions are made about which issues will be open to negotiation in the formal talks, and a declaration is drafted. During the formal talks, nations can only agree with or block the predetermined proposals.

World Trade

Global trade is very big business, currently accounting for around 55% of global economic growth, and as much as 75% of GDP in the EU.

Foreign direct investment now exceeds $1 trillion per year for projects such as the privatisation of public utilities and the creation of banking systems.

500 corporations control 70% of world trade. For example Cargill, one of the world's largest global food trading corporations, reported profits of $2.1billion in 2005- almost five times those of 2000.

Benefits are also minimal for the employees of these corporations. In 2002, the top 200 corporations had combined sales equivalent to 28% of world GDP, whilst employing less than 1% of the global work force.

The share of world trade for the 50 least developed countries has declined to 0.6%, less than a third of what it was 40 years ago.

Growing resistance to WTO

Developing countries continue to resist the imposition of WTO agreements, and recently this resulted in the collapse of the Doha Round of trade talks (2006).

Further resources

Organisations

Campaigns

Reports

Articles

Further resources

Filed under: 
Global governance, International trade