The Bretton Woods Institutions

By Seifu Tsegaye Demmissie
May 30, 2006

I am of the opinion that if we grasp the missions of these institutions and their working mechanisms, we can devise better and effective strategies to combat them or safeguard us against their unfavorable policies. It is with these views that I contribute this piece obtained from their own sources (pages). The piece could provide a keyhole view of the Bretton Woods Institutions to any reader who is not familiar with them and is by no means professional. We should not expect development or justice from such an arrangement and draw lessons from countries that have been clients for a long time and ended up with a collosal burden of overdue debt. Many developing economies nay not be beneficiaries of economic policies and structural adjustments recommended by the Institutions.

What are the Bretton Woods Institutions?

The Bretton Woods Institutions are the World Bank, and the International Monetary Fund (IMF). They were set up at a meeting of 43 countries in Bretton Woods, New Hampshire, USA in July 1944. Their aims were to help rebuild the shattered postwar economy and to promote international economic cooperation. The original Bretton Woods agreement also included plans for an International Trade Organisation ( ITO) but these lay dormant until the World Trade Organisation (WTO) was created in the early 1990s.

The creation of the World Bank and the IMF came at the end of the Second World War. They were based on the ideas of a trio of key experts - US Treasury Secretary Henry Morganthau, his chief economic advisor Harry Dexter White, and British economist John Maynard Keynes. They wanted to establish a postwar economic order based on notions of consensual decision-making and cooperation in the realm of trade and economic relations. It was felt by leaders of the Allied countries, particularly the US and Britain, that a multilateral framework was needed to overcome the destabilising effects of the previous global economic depression and trade battles.

In his opening speech at the Bretton Woods conference, Henry Morganthau said the "bewilderment and bitterness" resulting from the Depression became "the breeders of fascism, and finally, of war". Proponents of the new institutions felt that global economic interaction was necessary to maintain international peace and security. The institutions would facilitate, in Morganthau's words, "[the] creation of a dynamic world community in which the peoples of every nation will be able to realise their potentialities in peace".

The IMF would create a stable climate for international trade by harmonising its members' monetary policies, and maintaining exchange stability. It would be able to provide temporary financial assistance to countries encountering difficulties with their balance of payments. The World Bank, on the other hand, would serve to improve the capacity of countries to trade by lending money to war-ravaged and impoverished countries for reconstruction and development projects.

What is the World Bank Group?

The World Bank Group is now made up of five institutions, four of which were created after 1944, but all sharing a similar mandate, of reducing poverty and facilitating economic growth in developing countries. The original institution is the International Bank for Reconstruction and Development (IBRD), often simply known as the World Bank. Since then other institutions have been added: the International Development Association (IDA); the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency ( MIGA ); and the International Centre for the Settlement of Investment Disputes (ICSID).

While each of these institutions possess their own governing Articles of Agreement, all of them come under the general administration of the World Bank, sharing a common Board of Governors and Board of Directors and working under the leadership of World Bank president appointed by the US government - currently James Wolfensohn.

The World Bank Group comprises of 183 member countries and is based in Washington DC. All members of the World Bank must be members of the IMF and membership of the IDA, IFC and MIGA are contingent upon membership of the World Bank. The IDA currently has 161 members; the IFC has 174; MIGA has 154; and ICSIID has 133 members.

What are the main concerns and criticism about the World Bank and IMF?

Criticism of the World Bank and the IMF encompasses a whole range of issues but they generally centre around concern about the approaches adopted by the World Bank and the IMF in formulating their policies. This includes the social and economic impact these policies have on the population of countries who avail themselves of financial assistance from these two institutions.

Critics of the World Bank and the IMF are concerned about the conditionalities imposed on borrower countries. The World Bank and the IMF often attach loan conditionalities based on what is termed the 'Washington Consensus', focusing on liberalisation—of trade, investment and the financial sector—, deregulation and privatisation of nationalised industries. Often the conditionalities are attached without due regard for the borrower countries' individual circumstances and the prescriptive recommendations by the World Bank and IMF fail to resolve the economic problems within the countries.

IMF conditionalities may additionally result in the loss of a state's authority to govern its own economy as national economic policies are predetermined under the structural adjustment packages. Issues of representation are raised as a consequence of the shift in the regulation of national economies from state governments to a Washington-based financial institution in which most developing countries hold little voting power.

With the World Bank, there are concerns about the types of development projects funded by the IBRD and the IDA. Many infrastructural projects financed by the World Bank Group have social and environmental implications for the populations in the affected areas and criticism has centred around the ethical issues of funding such projects. For example, World Bank-funded construction of hydroelectric dams in various countries have resulted in the displacement of indigenous peoples of the area. There are also concerns that the World Bank working in partnership with the private sector may undermine the role of the state as the primary provider of essential goods and services, such as healthcare and education, resulting in the shortfall of such services in countries badly in need of them.

Critics of the World Bank and the IMF are also apprehensive about the role of the Bretton Woods institutions in shaping the development discourse through their research, training and publishing activities. As the World Bank and the IMF are regarded as experts in the field of financial regulation and economic development, their views and prescriptions may undermine or eliminate alternative perspectives on development. There are also criticisms against the World Bank and IMF governance structures which are dominated by industrialised countries. Decisions are made and policies implemented by leading industrialised countries—the G7—because they represent the largest donors without much consultation with poor and developing countries.

How does the World Bank operate?

The World Bank is the largest public development institution in the world, lending around US$ 25 billion a year to developing countries. The main purposes of the Bank, as outlined in Article One of its Articles of Agreement, are: "to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes" and "to promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment ... thereby assisting in raising the productivity, the standard of living and conditions of labour in their territories".

The Bank aims to achieve these goals through the provision of long-term loans to governments for the financing of development projects and economic reform. Voting power on the Bank's board is based on the members' capital subscriptions which means the members with the greatest financial contributions have the greatest say in the Bank's decision-making process. The US government holds 20 per cent of the vote and is represented by a single Executive Director. The 47 sub-saharan African countries, in contrast, have two Executive Directors and hold only seven per cent of votes between them.

Each member of the Bank contributes two per cent of its subscription in gold or US dollars and 18 per cent in its national currency. Members pay in 20 per cent of the capital while the remaining 80 per cent is kept "callable" (to be paid in the event of a default). This guarantee allows the Bank to raise money for its lending purposes on international capital markets by the sale of its bonds.

Interest rates on World Bank loans are revised every six months and typically, the Bank charges borrowers a rate of interest 0.5 per cent above its own cost of borrowing on the international market, the proceeds going towards paying the Bank's operating costs and to add to reserves.

Loans were originally supposed to be given only to "specific projects"—usually infrastructural projects, such as the construction of highways, dams, and telecommunications facilities, and social welfare projects, such as those in the health and education sector.

In 1980, the Bank introduced adjustment lending under its structural adjustment programme (SAP) to provide financing to countries experiencing balance of payments problems while stabilisation measures took effect. These loans are provided to countries for social, structural and sectoral reforms, for example for the development of national financial and judicial institutions. The World Bank attaches conditions to its loans with the stated aims of ensuring the country's economy is structured towards loan repayment.

-------
Source: www.brettonwoodsproject.org/