IMF World Bank

IMF World Bank
The World Bank and IMF: Advocates of Liberalization and Privatization

Topic III: Discuss the way that two or more supra-national organizations

interact to shape global policy in any one policy area.
 

Abstract

The World Bank (the Bank) and the International Monetary Fund (IMF or the Fund) are now regularly criticized for being unaccountable and ineffective. This article attempts to dissect the way of the Fund and the Bank to form the policy in economic context at international level, to explain its flaws and influences in many developing countries. Firstly examine the conditions that the Bank and the Fund attach to the recipient countries of their loans and financial aid. Then discusse the role of the Bank and the Fund in global economic policy making, particularly in privatization and liberalization policy. Next summarizes unfavorable consequences of such one-heal-all privatization and liberalization policy. The conclusion suggests that many conditionality, neither necessary nor desirable for the receiptors, should be diminished.
 

1.0 Introduction.

The functions of international institutions have greatly expanded over the past years, and their programmes and policies have affected a wider range of people, groups and organizations than before, as Woods and Narliar (2001) point out, in the 1990s, the IMF and the World Bank expanded the range of the conditionality they apply to borrowing members, including conditions on domestic governance and the institutional framework of economic policy making (ibid).

Following such fashion, this paper will, based on some former research, examine the way of these international institutions to form the policy in economic context at international level, particularly in respect of the IMF and the World Bank. Therefore, this paper will firstly take an overview of the IMF and the World Bank, especially the development of their conditionality; secondly, the exact way through which the IMF and the World Bank make the global policy in economic area will be presented; finally, some critiques of the result related to IMF and the World Bank imposing conditions to members to shape global economic policy will be summarized.
 

2.0 Overview of Conditionality of the World Bank and IMF.

Dreher (2002) gives some background of those IFIs, in particular IMF and the World Bank. And he thinks that attached conditionality, which now becomes very common enclosed to IFIs' financial support program, had not been considered when the IMF and the Bank were founded in Bretton Woods in 1944. The IMF was founded to provide short term balance of payments credits and stabilise the post war financial system, and the Bank should improve long term growth in its member countries.

In that research Dreher (2002) also detailed some development of the conditionality related to the financial aid program of the Fund and the Bank. According to Dell's (1981) statement cited by Dreher (2002), at the beginning of the Fund operations, its conditions mainly focus on monetary and fiscal policy, such as decreasing relative price distortion, reducing current account deficits, export promotion, increase in international reserves. In the#p#分页标题#e#

same paper, Dreher (2002) also cited Kapur's (et al., 1997) description about the Bank's conditions which were very similar to that of the Fund and covered deficits of public budget, credit to the private sector, currency devaluation, and reduction in the current account deficit, export promotion. It is clear that there is a huge overlap between the conditionality of the Fund and the Bank, thus they signed an agreement to redefine the main duties of them (Dreher, 2002). According to this agreement, the Fund should be responsible for exchange rates and restrictive exchange practices, temporary balance of payments disequilibria and stabilisation programmes while the Bank should generate broader development strategies and pursue project evaluations (ibid).

Gold (2001) points out that between 1969 and 1978, IMF's conditions became increasingly detailed, which focused on the expenditure limitations on government's wage bills and subsidies (cited by Dreher, 2002). Meanwhile, World Bank conditionality mainly aimed at improving management of money and credit, government expenditures and revenues, exchange rates and foreign debt (Kapur et al. 1997 cited by Dreher, 2002).

In the 1980s, deficits became a big issue, which resulted in high inflation (Ferreira and Keely 2000 cited by Dreher, 2002). During this time, conditions focused on mapping countrywide investment, enhance incentives for optimal resource allocation, developments in infrastructure, promotion of exports and reduction of protectionism (Kapur et al. 1997 cited by Dreher, 2002). Dreher (2002) also points out that between 1980 and 1984, conditions focused primarily on international trade and the fiscal sector, and then, conditions referring to the financial sector as well as privatization and institutional reforms gained importance. Since the beginning of the 1990s poverty reduction became a core element of adjustment programmes (Ferreira and Keely 2000), and gender equality is regarded as a main condition as well (Thiele and Wiebelt 2000) (cited by Dreher, 2002).

Finally Dreher (2002) thinks that both the Fund and Bank today tend to focus on continuous growth and poverty elimination in member countries. And, overall, conditions aim at reforms of the financial sector as well as privatization and restructuring of the public sector gained weight relative to exchange rate and trade liberalization (Dreher, 2002). Therefore, it is very clear that providing financial aid arrangement with specified conditions has become the main characters of IFIs' operations in their member countries. The following sector therefore will explain how these IFIs use those powerful conditions to influence economic policy making among their member countries.
 

3.0 The Role of the World Bank and IMF in Economic Policy Making.

The research conducted by Eurodad (2006) shows, conditionality is often simply referred to as the commitments enclosed within a loan contract that receivers of the funding have to meet. Besides, this report Eurodad (2006) also points out that in the case of the IMF, its quantitative conditions and structural conditions were imposed to its financial arrangements receivers. And Quantitative conditions impose a set of macroeconomic targets on receivers' governments; Structural conditions, on the other hand, push for institutional and legislative policy reforms, such as trade reforms, price liberalization and privatization (Eurodad, 2006).#p#分页标题#e#

3.1 Impacts on Privatization

According to Brune et al (2004), in the early 1980s, a wave of selling state-owned assets began to emerge in other countries after it was initiated from Britain, and IFIs may play an important role in such privatization fashion - both the IMF and the World Bank provide loans or grants to developing countries, which enclosed a series of conditions.

In Brune's (et al., 2004) point of view most of governments in developing countries often need IFIs' financial aid to maintain the economy stablisation or support the development programmes fund, conditionality may therefore generate credible commitments to the IFIs' agendas. In turn, this credibility could provide future possible investors with confidence to stimulate them to buy shares of privatized firms in countries that under aid programme from the IMF or the World Bank (Brune et al., 2004).

This paper (Brune et al., 2004), also cites Polak's (1994) idea that IMF conditionality is generally considered to be much more binding than the World Bank, and the Fund plays a pivotal role in monitoring and enforcing fulfillment, and the next tranche of loans is not released once any condition can not be met. On the other hand, the World Bank are often not set quantitative targets for its loans, and rare apply its punishment for failure (ibid). Furthermore, Brune (et al., 2004) stresses although the Fund and World Bank do not have cross-conditionality, the failure to meet a condition of single institution also will cause the default from others.

Another research by Eurodad (2006) reveals the relationship between IFIs and privatization as well. It says that there is an increasing number of privatization conditions were forced on receivers from the World Bank and IMF between 2002 and 2006. This research (Eurodad, 2006) also points out that the World Bank and the IMF often impose the similar privatization conditions. One quarter of the countries assessed in this paper (ibid) had the same privatization condition enclosed in their loans or grants provided by the Bank and the Fund, and the majority of which were related to banking privatization.

What's more, Euro dad's research in June 2006 also represents a similar fact with the findings by Brune (et al., 2004), that the Bank and Fund often work collusively, so if one institution failed to persuade a government to implement a suggested reform, the other would pick it up. It (Eurodad, 2006) presents Bangladesh as an example of the Bank's privatisation failure of Bangladesh's banks, and then became a target and underlyingaction of IMF's lending, as well.

3.2 Contribution to Liberalization.

In the paper conducted by Dreher and Boockemann in 2003, a great many of ways in which the programmes and policies of the IFIs may influence economic liberalization, have been summarised. They reher and Bookeman, 2003tate that there is a direct impact of the IMF or the World Bank from the moment a country receives their financial arrangement, because only the compliance with those imposed conditions can make countries be qualified for credit tranches.#p#分页标题#e#

In addition to the direct impact of conditionality, Dreher and Boockmann (2003) also point out more informal channels how the agreement of a credit programme may influence policies in recipient countries. For example:

(t)he IFIs' programmes may raise awareness about the relevance of economic imbalances and therefore help to bring about a different policy approach (Stallings 1992). They may also face social partners with the necessity to reach consensus over the measures demanded by conditionality (Venkata 1996). As a consequence, Fund and Bank may reinforce the liberal consensus in the recipient countries (Drake 1998). (Dreher and Boockmann, 2003)

Moreover, Dreher and Boockmann (2003) cited Nelson's (1990) claims as following, in almost all developing countries some senior officials have spent a period of time as staff members in the IMF, the World Bank, or a regional development bank, which also make a transfer of knowledge from creditor countries to the IFIs. In their (Dreher and Boockmann, 2003) opinion, the influence of senior officer who used to work with the IFIs could gain another leverage of the IFIs on national policies, then results in the change of attitudes and policies towards liberalization.
 

4.0 Unfavorable Consequences of Privatization and Liberalization Policy

In Taylor's (1997) paper, he summarizes many cases of various countries in the research conducted by Taylor himself and Pieper (1996), and suggests that attempts by the authorities to stabilize, liberalize, and privatize, could reverse, and the unfavorable consequences might lead to: Contraction, Badly unbalanced relative price structures, especially in the wake of exchange rate, Financial instability, often centered around stock markets which have been created to accompany public enterprise privatization, Visibly increased corruption unaccompanied by faster growth, Rising unemployment and (or) regressive income redistribution and deeper poverty.
 

5.0 Conclusion.

This report examined the conditions that the World Bank and the International Monetary Fund (IMF) attach to the recipient countries of their loans and financial aid. Meanwhile, it also reveals that recipient countries still face an unacceptably high and increasing number of conditions in order to gain access to the World Bank and IMF financial aid arrangements. Besides existing massive administrative burden, governments suffering crisis have no other choice but to accept the IFIs' conditions, which often contribute to economic policy reforms, like trade liberalization and privatization of essential services.

However, some former researches revealed that they could also have a harmful impact on economy, resulting in some unfavorable consequences. Therefore, in the future, the IFIs should leave more right and space for receiptors to make their own policy decision, and manage their country in a realistic way rather than totally depending on empirical conditions. And all conditions which impose controversial economic policy reforms should be diminished.#p#分页标题#e#
 

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