Let the Debate Begin on the Dismal Record of World Bank-IMF Policies

The current presidential campaign has focused on the economy. But there is one crucial economic issue that never makes the headlines or sound bites (and scarcely even makes the back pages).

A virtual world government has emerged over the last 15 years, headed by the parallel international economic institutions--the International Monetary Fund and the World Bank. During the 1980s and early 1990s, their policies have devastated the lives and livelihoods of hundreds of millions of people in the developing countries. And the United States government has close to a controlling interest in those two institutions.

But where is the debate about World Bank-IMF international economic policy and the U.S. role in crafting that policy? Who is publicly asking the people of the developing countries: “Are you better off than you were four, eight, 12 years ago?” Does anybody even notice?

Let’s look first at some background about the IMF and World Bank and then explore the issues raised by their recent policies.

Both institutions were created at the end of World War II as part of the “Bretton Woods system” for international economic stability, named after the 1944 conference in New Hampshire at which the plans for the postwar global system were hatched.

The IMF was intended primarily to help countries stabilize their currencies in international exchange markets. The World Bank, which is actually an amalgam of three distinct funding institutions, was established to provide development support for poorer countries, affording some of the same kind of backing for recovery and development that the Marshall Plan extended to Europe after World War II.

Both institutions are controlled by a board of governors representing each of the more than 100 member countries. Each governor’s voting power is proportionate to the monetary backing which the respective countries furnish to the institutions, and these monetary obligations are in turn pegged to the relative economic power of those members.

The United States, as the largest global economic power, controls roughly a fifth of the votes, with its power on the executive directors and its share of top managers at the institutions even higher.

Up through the late 1970s, the IMF maintained a fairly passive role in global finance, responding with assistance when countries were experiencing difficulty with their balance of payments. And the World Bank concentrated on capital grants for specific projects among the developing countries, with their aid dispersed across relatively small initiatives.

With gathering force during the 1980s, however, both institutions adopted a dramatically new strategy toward the developing countries. They began to turn aggressively to what is usually called “structural adjustment” or “stabilization” policies. One might think of these policies as hardball economics on a global scale.

The policies are based on an offer the developing countries can’t refuse. The IMF and the World Bank provide developing countries, often heavily in debt, with direct loans, technical assistance and help in securing private-sector credit. In return, the institutions insist that debtor countries put their economic houses in order.

Under structural adjustment plans, the IMF and World Bank require that recipient countries make enough adjustments in their national economic policies to move fairly quickly from economies with trade balance deficits to trade balance surpluses.

This basically means economic austerity. The typical policy packages include, MIT development economist Lance Taylor writes, “fiscal austerity, monetary tightness, currency devaluation, liberalization (of markets) and wage restraint.” While the policies have had mixed success in “putting houses in order,” they have almost uniformly contributed to dramatic reductions in workers’ real wages, sharp cuts in the standard of living of the vast majority of households and rising income inequality.

Even more strikingly, by the mid-1980s, these policies were beginning to result in a massive net flow of resources out of the developing countries back to the advanced countries. Rising trade surpluses have permitted substantial increases in debt repayment by the South to the North, while private bank lending, frightened off by the excesses of the early 1980s, has continued to decline.

In the late 1980s, Taylor estimates, this transfer from South to North totaled between $20 billion and $40 billion a year. The developing countries desperately need investment capital, but it’s running the other way.

What’s the role of the United States in all of this? Few would dispute that the United States has more influence over the IMF and World Bank than any other country. Structural adjustment policies reflect precisely the same “free market” and monetarist policy logic that has ruled supreme in the United States during the reign of conservative economics. You don’t need to be a rocket scientist to trace the clear lines of influence running from the executive branch of the U.S. government to the international institutions just a few blocks away in Washington.

Could it be different? Are these structural adjustment strategies the only way to deal with problems of economic instability and financial fragility?

The issues are too complex to fully debate here. But it is certainly fair to argue that there are reasonable alternatives to structural adjustment policies that have some record of success and that tend to impose less stringent sacrifices on the vast majority of households. And it is equally reasonable to insist that the United States change its policies.

In the meantime, the IMF and World Bank are contributing to real devastation in people’s lives. It should come as little surprise that political instability often results.

Peru is a dramatic case in point. Peru has been swallowing strong IMF medicine since the late 1980s, and its economy is near total collapse. It has also witnessed the rapid spread of its strange and often brutal guerrilla movement, the Shining Path--whose leader, Abimael Guzman, was recently captured by Peruvian police.

“Abimael Guzman may speak in the dogmas of Mao or of his own creation,” one Peruvian social researcher recently observed.

“But do you think they sound any crazier to an Andean Indian than the edicts of the International Monetary Fund of the World Bank?”