Hight time to reform IMF and World Bank

Yanuar Nugroho, Director, The Business Watch Indonesia, Secretary General, Uni Sosial Demokrat Jakarta, yanuar-n@unisosdem.org

Ten years ago, many international NGOs launched the legendary "50 Years is Enough!" campaign to highlight the negative roles of the World Bank and the International Monetary Fund. Now, ten years later, they have decided to launch the International Days of Action Against the IMF and the WB on from April 16 to April 25 to expose -- this time more extensively -- the WB and IMF's failures.

What is the significance of this action? How can we understand what is going on in these financial institutions with regard to the globalization process taking us by storm today?

The IMF and the WB (formerly the IBRD, the International Bank for Reconstruction and Development) were created at the end of World War II, at Bretton Woods, New Hampshire, in July, 1944, when delegates from 44 nations created a new set of rules for the global economy.

Seen as pillars of the status quo after colonialism, these postwar financial institutions are now blamed for the socially and environmentally destructive economic model they have imposed on the world by favoring corporate-led globalization.

The following three points may help us to understand why both institutions have failed to accomplish their missions.

Firstly, the WB is designed to fight poverty and improve the living standards of people in the developing world by providing loans, giving policy advice and building economic infrastructure, including education systems. The WB believes that developing nations can only achieve economic "take-off" from a strong infrastructural "runway".

However, after almost 60 years, despite concessional lending rates for poor countries, the very poor countries experience difficulties in meeting loan repayments. In terms of development, their industrial production has fallen steadily, and life expectancy has declined by three years. The International Development Association (IDA) was set up in 1950 to help the poorest countries with interest-free loans but it did not help much.

Secondly, the IMF was founded with the mission of creating global economic stability -- through the promotion and maintenance of high levels of employment and real income -- in a world that had just experienced the trauma of depression and the devastation of war. It was also tasked with helping countries to avoid devaluing their national currencies and to promote currency convertibility in a bid to facilitate international trade.

Yet, the IMF has failed. Designed to help countries avoid financial crises, it has presided over 100 of them in the past quarter of a century, often making them even worse. Take the East Asia financial crisis. Countries like Thailand, Indonesia and South Korea followed IMF advice by opening up their financial markets. But their currencies were attacked by the world's speculators and an economic catastrophe ensued. Unemployment increased fourfold in Korea, threefold in Thailand, and tenfold in Indonesia. Indonesia's gross domestic product fell by 13.1 percent, and Thailand's by 10.8 percent in 1998.

Lastly, both the WB and the IMF launched a policy to "structurally adjust" the Third World by deflating economies and demanding government withdrawal -- not only from public enterprises but also from compassionate support for the basic health and welfare of the most vulnerable. Besides, the developing countries have been pushed to apply financial liberalization and open up their markets, privatize state companies, and cut basic social services and subsidies on basic foodstuffs.

Clearly, there is a wide and deep gap between the raison d'etre of the WB and IMF, and the reality. Why? By looking into the structure and system of "decision-making" in these institutions, one can immediately see the reason.

Nearly half of the voting power in the WB and IMF is vested in the hands of seven developed countries. Powerful states are always going to have a major role in global decision-making, although there is plenty of room to give poorer countries a real say in helping confront the challenges of a more interdependent world. However, the developing countries have virtually no power to change the current policy-making processes in both the IMF and the WB.

This imbalance in power is just one aspect. Another aspect is the so-called Washington Consensus, which has been heavily influencing and shaping the policies of the two multilateral agencies.

The Washington Consensus focuses on macroeconomic stability by lowering inflation, cutting public spending and pursuing trade liberalization. Particularly during the 1980s, macroeconomic austerity measures were widely implemented in the developing world through the WB's Structural Adjustment Programmes (SAP).

It is needless to emphasize the urgent need to reform both the WB and IMF.

Firstly and fundamentally, the reforms should maximize effectiveness, and increase accountability as regards lending decisions in order to curb their adverse impacts on the developing world.

Secondly, the IMF should redirect its emphasis toward managing and stabilizing the international financial system, not just through crisis management, but primarily through crisis prevention. It also needs to institute greater transparency and accountability to the governments of member countries as the absence of public scrutiny means no checks and balances.

Moreover, the IMF should review its thinking on macroeconomics so as to support the integration of developing countries into the world economy in a manner that promotes, rather than hinders, development.

Thirdly, the WB should stop acting as a moneylender and become more concerned with development.

WB policies need to be more flexible as the premise that "one size fits all" is always entirely wrong -- one size never fits all.

And lastly, the IMF and the WB need to be more accountable and representative by restructuring their current voting systems. The largest share of voting rights is vested in a small number of rich countries, despite the fact that developing countries are the principal stakeholders and provide most of the income for the WB through interest payments.

The upcoming WB-IMF Spring Meetings on April 24 and 25, and the round of consultations currently being held with civil society organizations in Washington are good opportunities to work out an overall reform program for the WB and IMF, notably as regards the role of the IMF in developing countries and the giving of a voice to developing countries on the WB and IMF executive boards.

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