How and Why the IMF and the World Bank have come to play an increasingly important role in the third World since the 1980s

In the period during World War II most countries took part in the war and countries affected by the war were under internal pressure to stall their economic growth. Most countries were unable to stabilise their economies. Kiely (2005) describes the world economy between the wars as having a characteristic of depression, a breakdown in world trade, and competitive currency devaluation (Kiely 2005: 88). After the war there was an international effort to avoid its repetition. That was the settlement of international institutions to bring countries across the globe, particularly the major players of the economic sphere, to work closely together in the hope that the world economy would be more secure.

This intention, as a result, brought some countries to the meeting in Bretton Woods, the United States, to discuss crucial issues and how the world can work together in order to tackle the enormous consequences and problems brought by the war and find an effective solution which can provide for a more protected post- war era. As a result of the meeting, in 1944, an agreement was made to create the International Monetary Fund (IMF). The World Bank was also established (IMF’s Website, 2006) in the same year.

This essay will discuss how and why the IMF and World Bank have come to play such an important role in economic development since the 1980s. The controversy regarding the policy, sub-institutions and the conditions attached to the developing countries will be argued from different perspectives. The debate over the criticism will also be illustrated. During the lifetime of these two international institutions, there have been satisfactory successes in reconstructing and developing countries after the wars and the effort to alleviate poverty in the impoverished countries. Nevertheless, there are a lot flaws that sceptics advise them to reform without any hesitation, including the structure of the board, the policies and the conditions which they have set on behalf of the poor.

The International Monetary Fund (IMF):
The IMF was created in July 1944 by the formation of 45 governments in Bretton Woods, New Hampshire, in the northern United States. Member states initiated an agreement on International Economic Cooperation and set up a framework to prevent the re-emergence of the devastating economic policy that led to the economic depression in the 1930s (What is the IFM: 2006). Since 1945 to 2005 the IMF’s membership has gradually grown, voluntarily joined by the states of former colonies, the former Soviet bloc, Latin American and Asia. According to the IMF website, today the IMF has expanded its membership to 184 countries until June 2006 (IFM, 2006).

The World Bank:
At the same time as the establishment of the IMF, the World Bank was created and it currently has the same number of country members. However, the World Bank has different mandates from the IMF. The World Bank claims itself to be an international agency that was established for the purpose of reconstruction and development in the post-war era and its loans were first provided to the European countries and Japan. Then by the early 1960s, the World Bank had redirected its lending to the newly independent and emerging nations of Africa, Asia, Latin America and the Middle East and the transition counties of Central and Eastern Europe in the 1990s (IFM: 2006). Since its mission has been broadened, the overarching goal of its work is poverty alleviation along with debt release, good governance and the lending project (World Bank: 2006).

Structure:
There are lots of criticisms over the formulation of the IMF and World Bank’s structure and the question still remains, who really drives the IMF and World Bank and do the policies set by the IMF and World Bank favour the interest of the developing members or the foreign investments. In the theory its member countries, through the board of the governors, who is from each member country, govern the IMF and the World Bank. This board meets annually to decide on major policies and provides the power to the executive board or executive director to operate. The executive board and executive director are responsible for the day-to-day work and recruit staff internationally (Who runs the IMF: 11). The World Bank and the IMF work very closely together and cooperatively set-up guidelines to run its process and both complement each other’s work. The World Bank focuses on long-term development and poverty reduction, while the IMF’s concern is on macroeconomic and financial issues (IMF: 2006). Under the Articles of Agreement of International Bank for Reconstruction and Development (IBRD), to become a member of the Bank a country must first join the International Monetary Fund (IMF) (World Bank: 2006).

The IMF’s voting system is considered as a non-democratic one as its member countries’ quotas and votes are based on its economic strength. According to Peet, R (2003), the IMF has five major shareholders who politically and economically influence on the framework of the IMF (Peet, R, 2003: 57-60). The US holds 17% of the votes and has veto power while Japan and Germany have 7%, France and the UK have 5% along with China, Russia and Saudi Arabia. The rest has less than 30% of the vote and the west controls 62% of the total vote. Despite this, there is an attempt by China, Mexico, RoK and Turkey for the reformation of the structure of the IMF, in an attempt to increase quotas. However, the west still has a 57% majority vote (IFM and World Bank: Trevor’s lecture: Oct 2006). The purpose of the IMF and the World Bank:

The purposes of the International Monetary Fund are:
(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.(ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
(v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
(vi) (From IFM’s website )In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article (The IMF: Article I).

The mission of World Bank:The mission of the World Bank is to help developing countries and their people reach the goals by working with our partners to alleviate poverty. To do that we concentrate on building the climate for investment, jobs and sustainable growth, so that economies will grow, and by investing in and empowering poor people to participate in development (World Bank: Challenge).