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The International Monetary Fund and World Bank

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Words: 3058 |

Pages: 7|

16 min read

Published: May 24, 2022

Words: 3058|Pages: 7|16 min read

Published: May 24, 2022

At the just ended World War II, the International Monetary Fund (IMF) and World Bank were created by the U.S.A and British governments in 1944. They are twin intergovernmental institutions that are puissant in shaping the structure of the World’s development, financial arrangement and to ensure peace. The twin institution was essential to renew stability in monetary system at international level and to find effective means to deconstruct the war economies of the European countries. The institutions is also known as the Bretton Woods institutions (BWI’s), the fundamental decisions leading to the establishment of both IMF and World Bank were largely managed and steered by United State of America and to a lesser extent the United Kingdom, and during the post-war period the IMF and world Bank were thoroughly influenced by the USA’s geopolitical strength.

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Even so, the USA mandates, focus, audacity and programmes towards the Bretton Woods institutions (IMF and World Bank) have emit greatly overtime, as espied, for example, by the transpose of their crucial role as designers of the fixed exchange rate regime created by the Bretton Woods system, to their active promotion of a fluctuating exchange rate system after its collapse in 1973. Both World Bank and International Monetary Fund can be found under the Bretton Woods institutions but does not perform the same function, they do have similar functions and aspirations and constitute mainly in the development of their member countries and the world. Thus, the International Monetary Fund stands out as one of the Bretton Woods institutions which was conceived in July 1944 at the United Nation Bretton Woods Conference in New Hampshire USA, whose pivotal objective is to promote international financial firmness and monetary cooperation, the IMF attracts to its membership nations that are prepared, in a spirit of enhanced self-interest, to render some measure of national sovereignty by taking back practices detrimental to the economic well-being of their fellow member nations.

The rules of the institution, contained in the IMF's Articles of Agreement signed by all members, constitute a code of conduct. The code is simple: it requires members to allow their currency to be exchanged for foreign currencies freely and without restriction, to keep the IMF informed of changes they contemplate in financial and monetary policies that will affect fellow members' economies, and, to the extent possible, to modify these policies on the advice of the IMF to accommodate the needs of the entire membership.

The institution is governed by and accountable to its 190 member countries and to facilitate international trade, sustainable economic growth and to eradicate competitive currency devaluations that contributed to the Great depression of the 1930’s. The mission and objective of IMF is to help work with member countries to eradicate poverty and financial setbacks and to provide advice to member countries and policies schemed to nurture economic stability, reduce vulnerability to economic and financial crises and raise living standards. The IMF has three principal functions and activities which are; surveillance of financial and monetary conditions in its member countries and of the world economy, financial aid to help countries combat major balance of payments problems, and technical assistance and advisory services to member countries. They also work as an institution with member countries to modernize their economic policies and institutions.

Wherefore, the World Bank is also a twin sister to the International Monetary Fund  whose historical evolvement can be traced back to July 1944 at the Bretton Woods monetary conference in Bretton Woods, New Hampshire USA, whose initial aim was to provide assistance to revitalize European countries devastated by World War II. The World Bank generally acts as an organization that attempts to fight poverty by offering development assistance to middle and low -income countries. The Bank gives attention to projects that can directly benefit the poorest people in developing countries. The direct involvement of the poorest in economic activity is being promoted through lending for agriculture and rural development, small-scale enterprises, and urban development. The Bank is helping the poor to be more productive and to gain access to such necessities as safe water and waste-disposal facilities, health care, family-planning assistance, nutrition, education, and housing. Within infrastructure projects there have also been changes.

In transportation projects, greater attention is given to constructing farm-to-market roads. Rather than concentrating exclusively on cities, power projects increasingly provide lighting and power for villages and small farms. Presently, there are two pivotal goal slated by the World Bank to achieve by 2030, the first and foremost of this goal is to put and end to the extreme poverty by decreasing the number of people living on less than $1.90 a day to below 3% of the world population, the second goal is to increase overall prosperity by increasing income growth in the bottom 40% of every country in the world. The organization’s prime functions are provide financing, advice, and research to developing nations to assist their economic advancement and continue to offer a multitude of proprietary financial assistance products and solutions for international governments as well as a range of research based thought leadership for the global economy at large.

The World Bank help fights poverty and financial grievances globally by supplying qualify governments with low-interest loans, zero-interest credits, and grants, all for the development of individual economies. On the authority of Suharto, the former President of Indonesia, in order to understand how and why this was even possible, it is necessary to go back to the very beginning. Though numerous countries were involved at the Bretton Woods conference, the US played an inarguable dominant role in establishing the IMF and dictating how it would operate. A crucial factor in it make up, and in the USA ongoing influence within the organization, was the distribution of voting power among member states. Rather than allocating votes in accordance with the size of a member’s population which would be the most democratic approach to take the US instead pushed for voting power to correspond with the volume of contributions made. Unsurprisingly, those contributions made by the US, the world’s biggest economy, were far greater than those of any other member state.

Notwithstanding, the United States of America (USA) dominate the International Monetary Fund and the World Bank in many ways. There are many considerable factors, claims and practical examples that in my view makes the USA surpass and tend to have control on the IMF and the World Bank. From the creation of the IMF and the World Bank till today, the US is the only country to have a whether by right or not to veto at the World Bank. With the creation of the Bank, the US had 35.07% of the voting rights since the last modification of voting rights, made in 2013, they enjoy 15.85% since 1947, the year the Bank went into operation, the majority required to modify the statutes was 80% held by at least 60% of the member countries which in fact gave the US a right of veto. The wave of newly independent countries in the South increased the number of member nations of the World Bank Group, gradually diluting the weight of the US vote. Thus, the US took care to preserve its right of veto in 1966, it had only 25.50% of voting rights but this percentage was still enough for the purpose.

When in 1987 the situation was no longer tenable for the US, the definition of the qualified majority was modified in its favor. In fact, that year, Japan negotiated a significant increase in its voting rights with the US, placing it as the second most important country ahead of Germany and Great Britain. In order to concede this increase to their Japanese allies, the US accepted a reduction of its voting rights provided that the required majority was raised to 85%. In this manner it gave full satisfaction to Japan while maintaining its right of veto. However, the United States of America is seen as economically powerful and sizable in terms of contributions to the IMF and the only countries with enough political power to make many decision, one of the major influence of the USA on IMF can be traced to the 2008 financial crisis where the United State of America increased its support to the help the IMF, this support from the USA created a huge dominance on the IMF working forward. Throughout the evolution of the World Bank the United States of America has been the largest shareholder and the most influential member country. USA support for, pressure on, and criticisms of the Bank have been central to its growth and the evolution of its policies, programs, and practices. Also, the World Bank and the IMF seeks and spends much more time meeting with, consulting, and responding to the United States than it does with any other member country.

Furthermore, since its origin and up to the present time, the president of the World Bank has been a US citizen proposed by its government. The members of the Board of Governors simply ratify the candidate presented by the US. This privilege does not figure in the statutes of the Bank. Although the statutes allow it, no governor has ventured up to now or at any rate, publicly to propose a candidate of another country or even an American candidate other than the one selected by the government. Once the highest form of power is vested in the hands of a bonafide citizen of the US, he deliberately makes decision and sets meetings with the US government to discuss issues concerning the development of the Bank and the country the Bank is situated.

Wherefore, the US cohesion and influence on the World Bank to suspend loans and other assistance to other member countries. Countries like Vietnam, chile, Yugoslavia and others. To talk mainly on the Vietnam suspension of loan influenced by the US at the just ended Vietnam war in 1975, the US successfully encouraged the Bank, through its affiliate International Development Association to grant loans regularly to the South Vietnam regime, an ally of the US. After the end of the war and the defeat of the US, the World Bank sent two successive factfinding missions which concluded that the Vietnamese authorities, although not pursuing a totally satisfactory economic policy, fulfilled the conditions required to receive concessional loans. Shahid Husain, director of the Bank’s mission, specified that the economic performances of Vietnam were not inferior to Bangladesh or Pakistan, which received aid from the Bank.

Despite this, the Bank management, under pressure from the United States of America, suspended loans to Vietnam and its president, Robert McNamara. In the case of the Chile suspension to the IMF loan it occurred after the election of Salvador Allende in 1969 and the government’s setting up of the Popular Unity, the Bank, under US pressure, suspended its loans to Chile from 1970 to 1973. The Chilean case shows that there can be a contradiction between the judgment of the Bank and the position of the US government, the latter finally getting the Bank to modify its position. Although the Bank’s management considered that Chile fulfilled the conditions to receive loans, the US government made sure that no loan was granted to the Salvador Allende government. According to Catherine Gwin, “The United States pressured the Bank not to lend to the Allende government after nationalization of Chile’s copper mines. Despite the pressure, the Bank sent a mission to Santiago (having determined that Chile followed Bank rules requiring that for lending to resume after nationalization, procedure for compensation had to be under way). Robert McNamara subsequently met with Allende to indicate that the Bank was prepared to make new loans contingent upon government commitments to reform the economy. But the Bank and the Allende regime could not come to terms on the conditions for a loan”.

Yet, from the 1970s, the US systematically used its influence to convince the Bank not to grant loans which facilitated the production of goods that would compete with US products. Thus, the US regularly opposed the production of palm oil, citrus fruits and sugar. In 1987, the US got the Bank to drastically reduce loans granted to the steel-manufacturing industry in India and Pakistan. In 1985, the US successfully opposed an investment project by the International Financial Corporation (IFC) in the Brazilian steel industry and later a loan from the Bank to support the restructuring of the steel-manufacturing sector of Mexico. It also threatened to use its power of veto to block a loan for the Chinese steel industry in the 1980s. The US also blocked a loan from the International Financial Corporation to a mining company for the extraction of iron ore in Brazil. It took similar action regarding an investment by the International Financial Corporation in the Chilean copper industry.

The World Bank management justifies allocation or non-allocation of loans on purely economic grounds. But, the policies of granting loans are first and foremost determined by the intervention of the US government in the Bank’s business, based on mainly political objectives. This is not to say that economic objectives have no importance, but they are subordinated or supplementary to political and strategic choices. Catherine Gwin, who defends the generally positive result of US influence on the World Bank, from the Washington standpoint, adopts a rigorous approach in which she does not conceal the contradictory aspects of the policies of both the US and Bank management. Hence, the United States of America has a great dominance, influence and control on the Bretton Woods Institutions, the International Monetary Fund and the World Bank in decision making, money lending and assistance to the developing countries when they those help most leaving the USA as economically powerful country.

For the fact and records of regarding the United States of America as superior does not mean that it has control over every organization, country and institution. We can widely accept the United States of America that if has much influence on the Bretton Woods institution (IMF and World Bank) but there are other countries whose actions and inaction do cause a huge influence on the IMF and World Bank, such countries are the United Kingdom, France, Japan, Spain and many more. There are a host of agreements and augmentation that countries have had between the IMF and the World Bank that has helped created influence on the Bretton Woods institutions, some of the agreements and augments are discussed with realistic incident and example in detail below.

The Poverty Reduction and Growth Trust (PRGT). This is as agreements that was signed to respond to the unprecedented demand for concessional financial during the Covid-19 pandemic. This agreement was a fast-track loan mobilization instrument set to allow the fund to raise access limits and scale up emergency financing to low-income countries (LIC’s). The agreements and augmentations of the existing agreements that have been finalized are from Belgium, Brazil, France, Japan, the Netherlands, Norway, Spain, Sweden, and the United Kingdom. Put these agreements together provided a total of SDR 10.6 billion in new Poverty Reduction and Growth Trust (PRGT) loan resources for low-income countries. In a simple term, this agreement was signed between the above-mentioned countries and IMF in favor of the less privileged countries, the countries who needed help the most in the Covid-19 pandemic period.

Thus, this agreement been signed ton help other countries, the IMF seems to owe those countries who brought that agreement to the table and there is a 100% possibility of returning that favor to them some years to come. This enlighten countries with marginal income and well developed status to always have slight influence on the IMF and the World Bank, this particular agreement was signed between the above mentioned countries national Banks, to talk of a few national few Banks; the National Bank of Belgium, Banco Central Do Brazil, Banque De France, the Government of United Kingdom and others reaching on the understanding of borrowing agreement between the Banks and the International Monetary Fund as Trustee for the purpose of providing new loan service to the Trust.

However, there is a bias global mechanism that has been levelled against the International Monetary Fund specifically and how politicized its seen when it comes to money lending and assistance to the developing countries, this bias and politicized mechanism of the IMF is primarily characterized by major Europeans countries. This influence exercised by a subset of states in the IMF through their overrepresented voting shares, personnel, or informal influence distorts the application of conditional lending, resulting in harsh treatment of some states and lenient policies toward others. In turn, political intervention often reduces the credibility of IMF conditionality and undermines reforms in borrowing states, it is conceived that political discrepancy in IMF governance have broader assumption for the global economy. Political influence in relation to the IMF affects expectations about whether and how the institution will intervene in the event of a crisis. This alters the incentives of policymakers and private investors, encouraging risk taking in some countries but not others. Countries that expect favorable treatment from the IMF are subject to moral hazard by the developed countries, the expectation of a generous bailout reduces the perceived costs of risky policies, such as holding fewer international reserves and relaxing financial regulations. By contrast, countries lacking political influence in the IMF face strong incentives to pursue self-insurance.

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To sum up, it can certainly be argued with no objection that the United States of America has a dominance control over the IMF and the World Bank, talk of the geographical posture of the institutions, the leaders within both the IMF and the World Bank, the rights to Veto power and the US government intervention in the decision and approval of money lending to other member countries. This and many factors make the USA superior on the IMF and the World Bank.

References

  1.  American Action Forum (2018). U.S. Participation in the international monetary fund, Retrieved February 3 rd , 2021 from https:www.americanactionforum.org
  2. Catherine Gwin, in Kapur, Devesh, Lewis, John P, Webb Richard. 1997. The world Bank, its first half century, volume 1; p.103
  3.  International Monetary Fund (2020). The IMF at a glance, Retrieved January 31st , 2021 from https:www.imf.org
  4.  The World Bank (2021). History of the IMF and The World Bank, Retrieved January 31st , 2021 from https:www.worldbank.org
  5.  World Finance (n.d). The politics of the IMF , Retrieved February 4th , 2021 from https:www.worldfinance.com
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The International Monetary Fund and World Bank. (2022, May 24). GradesFixer. Retrieved March 29, 2024, from https://gradesfixer.com/free-essay-examples/the-international-monetary-fund-and-world-bank/
“The International Monetary Fund and World Bank.” GradesFixer, 24 May 2022, gradesfixer.com/free-essay-examples/the-international-monetary-fund-and-world-bank/
The International Monetary Fund and World Bank. [online]. Available at: <https://gradesfixer.com/free-essay-examples/the-international-monetary-fund-and-world-bank/> [Accessed 29 Mar. 2024].
The International Monetary Fund and World Bank [Internet]. GradesFixer. 2022 May 24 [cited 2024 Mar 29]. Available from: https://gradesfixer.com/free-essay-examples/the-international-monetary-fund-and-world-bank/
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