5.2: World Bank, IMF, WTO

The 1944 Bretton Woods conference set up two important international institutions, the World Bank and the International Monetary Fund. The World Bank was set up to give development loans, initially to the ruined countries of Europe, and later to the poor countries of the Global South. The International Monetary Fund was set up to give out loans for currency emergencies.

Governance

Critics point out that in both institutions, voting power is based on the amount of funds put up by each country. In both institutions, the U.S. subscribes the largest amount and, with its allies, holds the largest, controlling percentage of the votes. (The U.S. also has enough for a veto). Recently, the U.S. agreed to give China more senior posts and more voting power, but within the existing limits.

The World Bank (International Bank for Reconstruction and Development)

The World Bank has also been criticized for focusing on big, unneeded, showy projects such as state-of-the-art airports and superhighways that are usually constructed by big companies from the rich countries. Steel mills were built when there was a worldwide glut of steel, and the mills soon fell apart from lack of maintenance. Some never produced any steel at all. The Bank has repeatedly claimed that it is focusing on projects to help the poor, but studies show that very little of the money actually trickles down. For instance, the first year after the Taliban was overthrown in a totally-destroyed Afghanistan, instead of building roads and bridges, 25% of development funds went to building a new Marriott hotel in the capitol city of Kabul. Presumably this was so that bureaucrats from the World Bank and other international agencies would have a comfortable place to stay during their endless rounds of fact-finding visits.

The Bank has also been criticized for pushing loans beyond the ability of countries to repay, resulting in huge debts. Then, when the country gets in trouble and cannot keep up its payments, the Bank makes demands before it will restructure the loans. These so-called Structural Adjustment Programs include severe loan conditions that require countries to cut budgets for education and health, to privatize government-owned telephone, energy and other companies (which typically means foreign takeovers, layoffs and increased unemployment), to reduce food and fuel subsidies for the poor, and to allow free trade, unrestricted foreign investment and unlimited currency flows. These hurt the poor while enabling banks, investors and corporations to make money.

There is sometimes public resistance to such policies. For instance, privatization of water authorities in Peru and steep price increases led to massive protests in 2000, and the foreign companies were forced to pull out. Riots erupted in Egypt in 2010 when food and fuel prices were increased.

There have also been problems with corruption in the countries receiving the loans. For instance, the leaders of Chad reneged on an 2001 agreement to use the revenues from a World-Bank financed oil pipeline for community needs like schools, housing and health. Instead, the money is going to government officials’ Swiss bank accounts. In the Philippines under Marcos, one former World Bank staffer wrote about how he objected that a proposed $50 million loan did not appear to have an actual project. Nevertheless the loan was approved. The money disappeared, with the loan to be repaid by Filipino taxpayers. The staffer and his boss got promoted for making lots of loans.

Finally, many World Bank projects have also been criticized for their negative environmental impacts. The problems arising from deforestation by timber projects and pollution from mining and power plants are borne by local residents, while the products and profits typically go to the rich countries. The Bank has made some efforts to reduce and mitigate the environmental problems from its projects.

For years, critics called for the Bank to forgive its loans to the poorest countries. After all, loans were forgiven when Egypt signed the U.S.-sponsored Camp David Agreements with Israel and when Pakistan allied with the U.S. against Al Qaeda. However, the Bank resisted in the name of accountability. In 2005, the Bank did agree to forgive some loans to the poorest countries, in return for promises of cleaner, more open government. But billions in debt payments continue to cripple many countries.

The Bank has recently had competition from China, which is willing to lend large amounts without lengthy environmental, corruption or human rights reviews, has now lent more money than the World Bank and IMF combined, and is able to finish major infrastructure projects in less time than it would take the World Bank to approve a loan and begin work. China greatly expanded its overseas development projects with its Belt and Road Initiative, but has also been criticized for using Chinese companies and workers for construction and for building unaffordable projects that increase debts. In one famous case in 2018, China took over a port it had built in Sri Lanka after the government could not repay the loan.

Also, Brazil, Russia, India, China, and South Africa set up a BRICS development bank in 2014 (mostly with Chinese money) and China set up an Asian Infrastructure Investment Bank (AIIB) in 2016, with over 50 countries around the world participating.

The IMF (International Monetary Fund)

The IMF gives loans to countries with currency problems in order to prevent defaults and crashes. In general, the IMF is criticized for intervening too little, too late. One example was in 1997, when the IMF refused to help Thailand when its currency fell; the result was a huge meltdown and recession that spread throughout Asia. Critics also say that the IMF’s policies bail out banks, corporations and other investors while compelling policies that increase suffering by the poor. For instance, during the 1997 crisis, the IMF required that Indonesia cut government subsidies and institute steep price increases on food, fuel and electricity, leading to massive unrest which toppled the government.

IMF loan conditions also generally require that countries raise interest rates and cut health, education and welfare budgets, which slow down the economy and hurt the poor. For instance, it told Honduras that it must cut its budget to reach a deficit of less than 2.5% of GDP, which was less than the budget deficits of the U.S., Germany or France. Since this is exactly the opposite of the deficit spending strategy used by rich countries to stimulate their economies in troubled times, there is intense criticism of these conditions as being hypocritical.

Interestingly, after decades of European and American IMF officials imposing such conditions on African, Asian and Latin American countries, when they imposed austerity programs on white people in European countries during the 2008 Euro crisis and got massive protests and very poor results, they suddenly discovered that these policies are ineffective in promoting growth and actually increase poverty, unemployment and budget deficits. Nevertheless, Germany and other lenders continue to demand austerity policies in Greece and Italy.

After the worst of the Euro crisis passed, Portugal did the opposite of the IMF prescription and instead followed conventional policy of stimulating the economy with more government spending. It worked and the economy grew. But don’t bother me with facts - the austerity theory is correct.

IMF and World Bank demands to allow foreign investment have also been controversial. During the 1997 crisis, the IMF insisted that foreign corporations be allowed to take over struggling South Korean companies as a condition of emergency loans. U.S. companies bought the companies cheap and later sold them at large profits, infuriating the Koreans.

Finally, the IMF has joined the World Bank in calling for privatization of government corporations, deregulation, free foreign investment and unrestricted currency movement. For instance, the IMF encouraged deregulation and privatization in Russia in the 1990s. This was followed by a financial crash. Russia defaulted on their loans, had to accept large currency devaluations and experienced increased unemployment and poverty. This is only one of many instances of financial deregulation causing a bubble and crash.

In contrast, China and Malaysia, which followed exactly the opposite of IMF policies e.g., controlling foreign investment and currency flows during the 1997 Asia meltdown, suffered less than other countries and recovered faster because they were not at the mercy of international speculators.

There have been a recurring series of crises over unpaid loans and currency drops over the decades since WWII involving Brazil, Mexico, Africa, Pakistan, etc. In each case, the financial restructuring by the World Bank and IMF has been criticized for intervening too little and too late, while pushing the usual policies such as higher interest rates, budget cuts and free trade that help banks and other corporations but are painful for ordinary citizens. For instance, NAFTA and IMF requirements on Mexico for free trade resulted in a flood of cheap corn imports from huge mechanized farms in the U.S., which impoverished farmers and increased illegal immigration to the U.S..

As more countries develop significant foreign exchange reserves and China has been willing to finance projects with no questions asked, the World Bank and IMF weren’t as needed any more. Business decreased. In an effort to generate more demand, the IMF said it would no longer set conditions for loans. However, when it was brought in to help Greece and other European countries facing budget problems, it set the usual harsh requirements.

In 2019, Pakistan used the competition between China and the IMF to play both sides of the street. It got conditional loans from the IMF and loans from China that probably include approving a big pipeline and transportation corridor from China through Pakistan to the Arabian Ocean.

Which policies work best?

Differing responses to the 2008 crash provided an interesting natural experiment over which policies work best. China increased government spending and lending on a large scale and only suffered one quarter of decreased growth (although its debt increased). The U.S. passed a proportionally smaller spending stimulus that was partly counteracted by cutbacks in spending in the states and Republican-imposed austerity on the federal level, and suffered a deep recession, a slow recovery and an increase in debt. Europe followed a full austerity strategy of spending cutbacks and still has high unemployment, high deficits and increased debt. But the austerity theory is correct, regardless of the evidence, right?

World Trade Organization

At Bretton Woods in 1944, the U.S. tried unsuccessfully to set up an international free trade regime. By 1948, they settled for GATT, the General Agreement of Tariffs and Trade, a series of non-binding tariff reduction treaties among dozens of countries that continued through the 1980s. Finally, in 1994 the World Trade Organization was established to institutionalize and enforce free trade. The key difference between the WTO and previous trade agreements under GATT is that the WTO can set penalties such as tariffs against countries for violations.

Critics cite several problems. The WTO has not pushed for cuts in the tens of billions in subsidies given to U.S. and EU farmers or U.S. and EU import tariffs on agricultural goods. These hurt farmers in the poor countries, who would normally have a comparative advantage because of cheap labor. On the other hand, the WTO has pushed free trade in manufactured goods, in which the rich developed countries have a comparative advantage because of their advanced technology.

In addition, environmental and worker concerns are consistently overruled in favor of free trade, to the point of declaring some domestic labor and environmental laws illegal; the costs of filing complaints is beyond the resources of many poor countries; poor countries don’t have enough trade with the rich countries to enforce significant tariffs even if they win a case; poor countries are excluded from many negotiations; and the deliberations of the arbitration panels are secret. Examples abound. The EU banned hormones in beef but the WTO said this was an unfair restraint of U.S. beef exports. The WTO also banned U.S. gasoline regulations that hurt Venezuelan imports.

Large anti-WTO protests occurred at its 1999 meeting (the so-called Battle of Seattle) and the WTO has been a focus of criticism and protests ever since. Most recently, Donald Trump has refused to appoint any members to the WTO’s dispute resolution board, paralyzing the process.

Obama proposed the Trans-Pacific Partnership (TPP) free trade treaty among twelve Pacific Rim countries (but not China). Supporters claimed it would increase jobs and U.S. exports to the other countries and counteract Chinese influence, while providing new labor and environmental protections. But, like the WTO, it was criticized for being written by industry and business lobbyists, allowing the loss of U.S. jobs, having secret tribunals with the power to overturn domestic laws, and protecting the high prices of drug companies. Opposition to TPP became a campaign issue in 2016, and when Trump was elected, he immediately withdrew from the project. However, Japan has stitched the remaining eleven countries together to salvage the agreement.