The International Monetary Fund and The World Bank

The IMF and the World Bank are the 2 primary institutions concerned with so called “Economic development”. It can be hard to distinguish the 2 from each other, but to do so it is first necessary to find out how these institutions came to be. The 2 institutions were formed in New Hampshire USA, after a conference among 44 nations in July 1944. The World Bank was initiated in order to oversee and help stimulate growth in the economies of post WW2 Western European countries. When these economies regained some strength, the bank then shifted its focus to the developing world. The purpose of the World Bank is to “promote economic and social progress in developing countries by helping to raise productivity…”. The IMF on the other hand was formed with a different purpose in mind. Following the Great Depression in the 1930s the IMF was established to deal with any future fallout that might surface from the financial instability of the time. It was formed to ensure stability in the monetary system.

The structure of these 2 organizations is somewhat different. The IMF is not to be mistaken for a bank, and it is not an intermediary between investors and its recipients. It also does not have subsidiaries. The World Bank on the other hand is more complex as an organization. It is known as an investment bank, which acts as a middle man between the investors and the recipients. It is about 3 times larger than the IMF in terms of employees.

To understand how these organizations really work, it is necessary to take a look at where exactly the funding comes from, who are the stakeholders and who decides what to do with the money. Because the World Bank is an investment bank, this means that it is essentially the middle person. Think of the World Bank as a real estate agent. You give them money, they give the money to the homeowner. It is the same principle, though much more complex. The World Bank’s owners are 188 member nations with a certain amount of stock in the bank. This also means that the countries with the most stock, or the most shares in the bank have a greater say in what happens with their money. The assistance provided by the World Bank is generally long term. The World Bank loans hold with them an interest rate above market rate, and must be paid within 12-15 years. The bank typically lends to countries with a gross national product (GNP) below $1,305. In special circumstances, the International Development Association (IDA) , a branch of the World Bank will lend to a country with a GNP below $865. The IDA loans must typically have a due date of 40 years, however they are interest free.

The IMF on the other hand is different. The main source of their funding comes from “membership fees” or quota subscriptions paid by 188 member states. Generally, a country’s contribution is based on their economic might. Countries contribute to a pool of resources. Instead of lending out like the World Bank, the IMF acts as a sort of credit card company whose member states can have access to this pool in times of financial need. The assistance that the IMF generally provides to its member states is short to medium term. Interest rates are typically slightly below market rates.

In hindsight these principles and facts may seem like they would reduce poverty, and stimulate growth in the developing world and in the struggling developed world. However this is not the case, as with the loans and support that these organizations provide to countries come with certain conditions besides the interest rates. Both the IMF and the World Bank call these conditions “Structural Adjustment Programs (SAP’s)”. There are many conditions to a SAP and the effect it can have on the rich and the poor. One of the most common SAP’s is to cut social spending. This means cutting out schools, healthcare, etc. This means that the IMF and World Bank both get more debts repaid to them, while the poor are forced to pull their children out of school, and leading to more annual deaths due to reduced spending in health care.

A common tactic used by both organizations is to eliminate tariffs. This allows easy access of foreign goods to the market, making them cheaper than those produced in the country. This makes it much harder for local businesses and farmers to compete with well-equipment foreign suppliers leading to closures and layoffs. Cutting subsidies for basic goods is also used as part of a SAP. This means items such as basic survival necessities, fuel, etc. This, just like the social spending cuts means that there is more money floating around to pay the debts. However it can often serve as a catalyst for civil unrest in the country.

Providing incentives for cash crops is a very common way to pay back debts to the IMF and World Bank. This involves increasing incentives for crops such as coffee, cotton, etc. This means that there are fewer goods available to the general population that have been produced locally. This coupled with the fact that foreign corporations have started selling their goods in the country for much cheaper prices means that local businesses and farmers that used to serve the general population are basically extinct. Increasing interest rates is a very common way to combat the inflation brought on by all these SAP’s. This works because essentially inflation is when too much money is circulating around too few goods that are able to be sold. By reducing the amount of money circulating (high interest rates) you can remedy this situation. This means that farmers and small businesses can’t get capital to compete with the richer foreign corporations. It also means that foreign investors can pour money into local banks to exploit the high interest rates. This shuts down entire businesses and farms.

Even though on the surface the World Bank and the IMF may seem to have a good strategy, all these SAP that they put in place with their loans ensures that the local businessman can’t sell to his country, and that foreign corporations can come in and sell and overpower local farms. This essentially means that all the money that was lent out to the country in need flows right back to the rich and the wealthy that it came from. The rich get richer and the poor get poorer. These SAP’s apply to IDA loans as well. Besides the SAP’s, the country is solving debt by going into more debt, through going to the IMF or the World Bank. It’s like being in credit card debt, and solving that by getting another credit card to pay that one. It doesn’t necessarily benefit you.

The counter-argument that may be used to this is that, why shouldn’t we include SAP’s in our loans. How are the World Bank and the IMF supposed to know that their money is being spent wisely and in good conscience if they don’t? Without any regulations the money could be used on anything, and this could be troublesome in corrupt governments. Ignoring the fact that these loans are not necessarily good for the country because they are solving debt with more debt, these SAP’s could be put in place much more effectively. There are many conditions that could be put in place which wouldn’t put the country in such an economic burden. The SAP conditions in place right now are just making sure that the money that has been lent goes back to those who lent it out in the first place. If we really wanted to help the countries, this wouldn’t be the case. More sensible conditions could be put in place to ensure effective use of the financial aid. However the world we live in revolves around money, so it isn’t necessarily a surprise that this is happening. It may be interesting to know that some of the largest donors, and therefore the countries that control these SAP’s include the Canada, Japan, and Germany.

More information can be found here:

http://www.globalexchange.org/resources/wbimf/facts
http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm
http://www.youtube.com/watch?v=WYCH1Ylncxc
http://www.youtube.com/watch?v=NQ952ba75Yk