Bretton Woods institutions' relevance and the IMF's structural adjustment policies

Bretton Woods: Still Relevant Fifty-One Years Later?

Are the Bretton Woods institutions still relevant and viable fifty-one years after they went into effect? There are scholars and internationally respected political leaders who believe that in fact some of the institutions created at Bretton Woods are in need of adjustment or abandonment.

This paper will examine research available in the literature that touches on the relevance -- or lack of relevance -- of today's Bretton Woods institutions.

The International Monetary Fund: Issues, Criticisms

Walden Bello and Shalmali Guttal make the point in the peer-reviewed journal Multinational Monitor (Bello, et al., 2005, p. 19) that while the International Monetary Fund (IMF) and the World Bank (WB) stood "at the pinnacle of their power" in 1985, twenty years later (2005) the "…credibility of the IMF was in shreds." The downturn in credibility for the IMF, according to Bello, can be traced to the late 1990s. The economies of the East Asia were averaging 6 to 8% growth rates until the summer of 1997, when things drastically changed for the worse.

Because the IMF had imposed "structural adjustment" on funds it had provided to the East Asian nations -- along with a total of 70 developing and post-socialist economies worldwide -- "poverty and inequality in most adjusted economies had increased" (Bello, 2005, p. 20). Moreover, a study by the Center for Economic and Policy Research reflected, "…77% of countries [loan clients of IMF] for which data is available saw their per capita rate of growth fall significantly during…1980-2000," Bello explains. The culprit for this freefall of economic growth is the IMF's structural adjustment policies, Bello insists. He refers to structural adjustment as a "massive disaster" in South Asia, in Latin American and in Africa (p. 21).

A closer look at the policy of structural adjustment seems appropriate at this point in the research. William Easterly writes in the Journal of Development Economics that former U.S. Secretary of Defense Robert McNamara -- who became president of the World Bank -- received the go-ahead from the WB in 1980 to launch the structural adjustment loan (SAL) program. Easterly explains that an SAL offered to a third world economy was intended to "…reduce their current account deficit to more manageable proportions by supporting programs of adjustment…to strengthen their balance of payments…" while at the same time allowing them to continue gaining momentum in their growth and development spheres (Easterly, 2005, p. 2).

The "adjustment" that the IMF / WB imposed on recipients of loans was actually a kind of stern stipulation: we will give you these millions of dollars, but we expect you to "restructure" your agricultural system, restructure the management of your public enterprise and to restructure "incentives, to promote efficient export-oriented industrial investments" (Easterly, 2005, pp. 2-3). In other words, countries that accept IMF loans must adhere to the policies that are dictated, including fiscal adjustments, liberalizing their trade policies and moving towards "free markets" and away from "state intervention," according to Easterly (p. 3).

Too often the economic changes that the IMF demanded did not take into consideration the history, the culture and the political dynamics of the nations receiving the money. This caused huge problems and led to a perception that the IMF was "Distant, feared, and arrogant…" in the 1990s, according to Bello's research article (p. 19). When the IMF loans money to a nation and insists that the nation change its "controlled economy" into a "market economy" -- as the IMF often did -- the result is "avoidable hardship" (Collier, et al., 1999, p. F634). Collier explains that the IMF adjustment programs "…have often been flawed by a lack of distributional analysis and by poor sequencing of reforms"; indeed, the lack of investigation into precisely what a particular nation's economy really needs and requires stands out as one of the major flaws in IMF loans. How can a powerful funding source require that the nations receiving the loans create mandatory policies that are "virtually identical across countries" and expect them to work? (Collier, 1999, p. F634).

Meanwhile, Bello asserts that during the crisis in Asia the IMF insisted that their client nations engage in "…fiscal tightening to stabilize exchange rates and restore investor confidence"; however, the assumption that led to the IMF demands was "drastically wrong" and in fact what should have taken place was not fiscal tightening but fiscal expansion (p. 20). Moreover, during the Asian financial crisis the IMF was further discredited because it was seen as a "tool of the United States," Bello goes on (p. 20).

The Japanese government had proposed an "Asian Monetary Fund" (AMF) -- of up to $100 billion -- as an alternative to the IMF that would be more flexible. The AMF would be a multi-purpose funding mechanism that would not be as stringent as the IMF funding and there would be less demands made on how the loans would be used by individual Asian governments, Bellow continued on page 20. But there was "strong opposition" from the IMF and the United States; the IMF's Managing Director and his U.S. deputy Stanley Fischer argued that the AMF would "…subvert the IMF's ability to secure tough economic reforms" from those Asian nations in deep fiscal trouble.

The bottom line: the U.S. helped to kill Japan's proposal for an AMF; apparently the U.S. believed the AMF would have posed "a threat to America's influence in Asia" and ultimately Japan dumped the idea, Bello writes (p. 20). That episode created a bitter taste in the mouths of many Asians towards the U.S. And the IMF, Bello explains on page 20.

An article in the Ecologist (Chossudovsky, 2000, p. 1) by Michel Chossudovsky -- Professor of Economics at the University of Ottawa -- asserts that the 1998-2000 Ethiopian famine "in large part" was a product of "…the economic reforms imposed to the advantage of large corporations by the IMF, World Bank, and the U.S. Government." What Chossudovsky uses as backup for his bold accusations is that by imposing structural adjustment demands on Ethiopia, the IMF weakened the system of traditional exchange and "replenished" the village level seed banks with "commercial hi-bred and GMO seeds" (p. 3). These emergency programs were targeted to agribusiness-biotech companies, leaving the village farmer to be dependent upon GMO seeds -- and hence "setting the stage for the outbreak of future famines" (Chossudovsky, 2000, p. 3).

More serious perhaps than disrupting a developing nation's economy, the IMF's structural adjustment programs tended to "undermine the democratic process" itself, according to former World Bank Chief Economist, Joseph Stiglitz (Stiglitz, 2000, p. 1). Stiglitz writes that in theory the WB and IMF "support democratic institutions" but in practice the IMF does not allow sufficient time for "broad consensus-building" of consultations with parliaments or communities prior to imposing its demands. The IMF also has a habit of dispensing with "…the pretense of openness altogether and negotiates secret covenants," Stiglitz reports (p. 1).

International Bank for Reconstruction and Development (IBRD)

The International Bank for Reconstruction and Development (IBRD) is the main lending component of the World Bank, according to Jeremy Bulow and Kenneth Rogoff. The article by Bulow, et al., explains that the IBRD reports a "29% equity to loans ration and a 3% bad debt reserve" which by any simple calculation puts IBRD in "rock solid financial condition" (Bulow, et al., 2005, p. 394).

Conclusion

To answer the question as to which acronym helps a country with balance of payments, and which might help rebuilding roads in a developing country, the IMF (theoretically) is designed to help nations with balance of payments and the IBRD's work is related to projects like rebuilding roads. Meanwhile, Bulow raises the possibility that developing nations might be better off if the World Bank made "outright grants" rather than loans. The author asserts that "stronger international enforcement" of loans to developing nations tends to encourage more borrowing "…by exactly those kinds of weakly government states for whom expanded borrowing is least likely" to be helpful and "most likely" to lead to crises related to heavy debt. Bulow has a great idea, one that deserves a thorough flushing out by international scholars, politicians and economists.