31 Aug Bretton Woods Institutions: Enforcers, Not Saviours?
Anis Chowdhury and Jomo Kwame Sundaram
According to their own internal evaluations, both the World Bank (WB) and the International Monetary Fund (IMF) have huge credibility deficits due to the policy conditionalities and advice they have dispensed to developing countries in recent decades.
Taking advantage of debt distress in many developing countries early in the 1980s, the WB championed neoliberal reforms, telling countries to ‘privatize, liberalize and globalize’. The IMF added ‘stabilization’ – primarily cutting government expenditure to contain inflation and balance of payments deficits – to the list of conditions for countries to qualify for BWI financial resources.
Accepting these packages of WB advice for economic restructuring, known as ‘structural adjustment programs’ (SAPs), became a condition for access to concessional credit. These claimed to reflect agreement on ‘good’ and necessary policies between the two Washington based BWIs and the US Treasury Department, later dubbed the ‘Washington Consensus’.
WB research later admitted the failure of IMF-WB inspired policy reforms, acknowledging that “…the expected growth benefits failed to materialize, at least to the extent that many observers had forecast. In addition, a series of financial crises severely depressed growth and worsened poverty… both slow growth and multiple crises were symptoms of deficiencies in the design and execution of the … reform strategies that were adopted in the 1990s…”
BWIs’ lost decades
Assessing SAPs in Latin America, where they were first imposed, Sebastian Edwards concluded, “The adjustment process has been quite costly, generating drastic declines in real income and important increases in unemployment. In fact, … in a number of Latin American countries in 1986 real per capita GDP was below its 1970 level!”
William Easterly, then a senior WB economist, noted that during 1960-1979, median per capita income growth in developing countries was 2.5 per cent, compared to zero per cent during 1980-1998. With SAPs including trade liberalization, Africa de-industrialized and turned from a food exporter into a net food importer.
By advising developing countries to liberalize their capital account and financial market, the BWIs also advanced the interests of big finance. Professor Jagdish Bhagwati argued that this ‘Wall Street-Treasury complex’ was responsible for the 1997-1998 Asian crisis. The WB and the IMF have provided credit as a means of influencing government policies.
Worsening financial crises
Evaluating the IMF’s role in two 1997-1998 Asian crisis countries, namely Indonesia and South Korea, its Independent Evaluation Office (IEO) observed that Fund surveillance failed to ‘adequately appreciate’ the implications of their financial sector weaknesses and vulnerabilities. The IMF also mishandled the crises, deepening some of their worse consequences.
Raghuram Rajan, then IMF chief economist, is often credited with having warned of the imminence of the 2008-2009 global financial crisis before he left the Fund. If so, the IMF ignored his advice, failing to alert its membership of the coming 2008-2009 financial crisis, leading to the Great Recession and its ongoing aftermath.
In July 2007, a month before the first tremors of the US ‘sub-prime’ mortgage crisis, the IMF updated its World Economic Outlook, claiming: “The strong global expansion is continuing, and projections for global growth in both 2007 and 2008 have been revised (upwards)”!
The IEO attributed IMF inability to recognize risks to “a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches, [w]eak internal governance, lack of incentives to work across units and raise contrarian views…”
Beware BWI policy advice
The IEO found member countries wary of IMF involvement in policy advice due to its “inadequate knowledge of country-specific circumstances, frequent changes of mission chiefs and teams, a perceived lack of even-handedness… and insufficient use of cross-country perspectives or cross-cutting analysis.”
The IMF also displayed double standards, exposing its developed country and other biases. After then UK Prime Minister Gordon Brown raised over US$800 billion in additional IMF funding at the London G20 summit in April 2009, Eurozone bail-outs accounted for four-fifths of total IMF lending between 2011 and 2014, even though the currency bloc had the means to look after itself, with its lower aggregate debt ratio than in the US, the UK and Japan.
Greece, Ireland and Portugal were allowed to borrow twenty times their quotas, thrice the normal limit; such generosity has never been available to Asian, Latin American and African countries in trouble. For the global South, the IMF has imposed fiscal austerity, causing large-scale destitution, distress and malnutrition, according to the Lancet medical journal.
Meanwhile, even The Economist, usually a neoliberal cheerleader, pointed out several flaws of the WB’s most influential publication, the Doing Business Report (DBR). It considered DBR ranking unreliable as countries might amend regulations, as urged by the BWIs, only to improve their rankings to impress foreign investors and donors.
Dubious track record
After two decades of IMF-WB promoted fiscal contraction, liberalization and privatization, then WB President James Wolfensohn acknowledged, “… if we take a closer look, we see something alarming. In developing countries, excluding China, at least 100 million more people are living in poverty today than a decade ago. And the gap between rich and poor yawns wider.”
China, which has contributed most to reducing global poverty in recent decades, has gone its own way during this period, constantly revising development policies to accelerate economic growth and social progress, instead of simply implementing Washington Consensus prescriptions.
More recently, especially under its last President Jim Yong Kim, the WB has reinvented itself yet again, from a creditor for major development projects, to a broker for financialized private sector investment, a “creature of Wall Street”, according to The New York Times. Kim left the Bank early in his second term to join a private investment firm figuring in its proposed new reorientation.
(This article was originally published in Inter Press service (IPS) news on August 7, 2019.)