In one of his numerous media interviews, Patrick Loch Otieno Lumumba (P.L.O. Lumumba), a Kenyan lawyer and activist, who once served as the director of the Kenya Anti-Corruption Commission, labelled the Bretton Woods institutions – the International Monetary Fund (IMF) and the World Bank (WB) – as “enslavers” of African countries.
These were his words: “When the IMF and the World Bank were created in Bretton Woods in New Hampshire in the United States, it was in 1944. None of the African countries participated in its creation. It was [created by] British and American economists and it was specifically designed, at that time, during the rebuilding of Europe and the implementation of the Marshall Plan; and when we regained our independence as African countries, we were then grafted into it. IMF and World Bank are economic enslavers: what they are designed to do is to ensure that we are in a perpetual state of debt; you can never get out of the IMF and Bretton Woods institutions, generally because they want to ensure that they control your economy and when they control your economy, they control your politics; and when they control your politics, they control you; and when they control you, they bring in military bases and when they bring in military bases, they determine who governs you because if you don’t play ball, they are going to instigate the armies to overthrow you because in any event, African armies want to be trained in Sandhurst, they still want to be trained in the United States of America, so, their worldview is dictated by those foreign powers”.
Why the IMF and World Bank were set up
According to the websites of both the IMF and the World Bank, the two institutions share a common goal of raising living standards in their member countries. Their approaches to achieving this shared goal are complementary: the IMF focuses on macroeconomic and financial stability while the World Bank concentrates on long-term economic development and poverty reduction. The two say they share a common goal of raising living standards in their member countries.
The IMF says it promotes global macroeconomic and financial stability and provides policy advice and capacity development support to help countries build and maintain strong economies. The IMF also provides short- and medium-term loans to help countries that are experiencing balance of payments problems and difficulty meeting international payment obligations. IMF loans are funded mainly by quota contributions from its members. IMF staff are primarily economists with wide experience in macroeconomic and financial policies.
The World Bank, on the other hand, says it promotes long-term economic development and poverty reduction by providing technical and financial support to help countries implement reforms or projects, such as building schools, providing water and electricity, fighting disease, and protecting the environment.
World Bank assistance is generally long-term and is funded by member country contributions and by issuing bonds. World Bank staff are often specialists on specific issues, such as climate, or sectors, such as education. The World Bank Group comprises five organisations: The International Bank for Reconstruction and Development (IBRD), The International Development Association (IDA), The International Finance Corporation (IFC), The Multilateral Investment Guarantee Agency (MIGA) and The International Centre for Settlement of Investment Disputes (ICSID).
The IMF and World Bank routinely collaborate to assist member countries under terms set out in the 1989 Concordat and subsequent frameworks.
This entails:
- High-level coordination
During the Annual Meetings of the Boards of Governors of the IMF and the World Bank, Governors present their countries’ views on current issues in international economics and finance and decide how to respond to them. A group of IMF and World Bank Governors also sit on the Development Committee that advises the two institutions on promoting economic development in low-income countries. - Management consultation
The Managing Director of the IMF and the President of the World Bank meet regularly to consult on major issues. They issue joint statements, occasionally write joint articles, and may visit regions and countries together. The First Deputy Managing Director of the IMF and the World Bank Managing Director of Operations also hold regular meetings to discuss country and policy issues. - Staff collaboration
IMF and Bank staff also collaborate closely on country assistance and policy issues that are relevant for both institutions. IMF assessments of a country’s general economic situation and policies inform the World Bank’s assessments of potential development projects or reforms. Similarly, World Bank advice on structural and sectoral reforms informs IMF policy advice. The staff of the two institutions also cooperate in specifying the policy components in their respective lending programmes.
The Big Debate
Whether the IMF and WB have been enslavers or enablers of poor economies is a subject that has widely been debated in academia. ‘The World Bank and IMF in Developing Countries: Helping or Hindering?’ is one such academic work co-authored by Muhumed Mohamed Muhumed, Department of Political Science and International Relations, Istanbul Aydin University. Istanbul, Turkey; and Sayid Aden Gaas, Department of Economics, Marmara University. Istanbul, Turkey. The two scholars noted in their abstract that the two Bretton Woods institutions are “imperialism tools used to exploit resources of the developing world and to protect interests of the West”. In their view, the IMF and WB “provide painful and destructive financial and technical support, leading to retarded growth, expanded inequality, and occasionally global instability”. “We argue that it is time for the developing countries, to join and contribute to the improvement of existing alternative financial and development institutions such as the New Development Bank established by BRICS countries”.
The paper observed that “developing countries are marginalised in power-sharing, decision-making and designing policies and projects in these institutions”. The scholars quoted Stiglitz (2007), as having said of the World Bank: “To those in the developing world, it seemed another example of the rich old boys club imposing their will.” The paper holds a similar view of the IMF.
The two scholars indicated that the “governance structure and power-sharing are among the principal sources” of the criticism of the World Bank. “The dominance of the US and other members of the G7 in voting and administration and the marginalisation of the developing countries reveal the level of injustice in the bank. Since the shares are distributed on the basis of the country’s relative size in the world economy, the United States alone enjoys approximately 17 per cent of the share of votes to be the only state which has a veto power over the major decisions. Moreover, the borrowing countries – mainly from developing countries – have 38 per cent of the votes (clear minority). They also have clear minority of the chairs and the president of the bank never came from a borrowing country (Griffith-Jones 2002). Likewise, Stiglitz (2007) argues that who becomes the president of the bank depends on the will of the US president and whoever he picks is appointed. He also highlights that the good governance that the Western countries advocate contradicts the bad governance they practise in the World Bank and describes this inconsistency as hypocrisy”, they wrote.
On the World Bank’s Constituencies, Executive Directors, and Voting Status, they indicated that just five developed countries, namely US, Japan, Germany, France and UK possess approximately 38 per cent of the total votes while on the other hand, 44 developing countries together have 5.35 per cent of the total votes.
Other scholars, the paper pointed out, agree with Stiglitz that the World Bank, together with the other global economic institutions, are imperialist tools which protect the interests and ideas of the western rich countries and expand their dominance in the rest of the world. “According to Kakonen (1975), in the post-war period, the bank served for the imperialist countries in different ways and reproduced the dominance-dependence system. It enabled foreign capital to get access to the investment fields of developing countries safely and easily. Likewise, it facilitated their private capital to move to the international field. Another plan was to establish a favourable investment environment for the imperialists, the US in particular, to ensure access to necessary infrastructure and raw materials. Among the aims of the bank also include securing markets for the production of US and other imperialists. Above all, the bank’s financing preferred substituting foreign currency expenses which resulted in projects favouring imports and in turn gave preference to the exports of imperialists. Furthermore, certain operations of the bank clearly demonstrate how it serves for the West. Odious loans – loans specific for infrastructure building – have a condition that US companies have to run them (Elsayed 2016). This leads much of the funds to go back to US”, the paper highlighted.
Another imperialist trait cited by the two scholars in their paper is the term ‘Washington Consensus’ coined in 1989 by John Williamson, which referred to policy instruments and reforms agreed by the IMF, World Bank and US government (Williamson 2008). The three main ideas behind the Washington Consensus were: a market economy, openness to the world and macroeconomic discipline (Serra, Spiegel and Stiglitz 2008), the paper quoted.
Also, Muhumed and Gaas noted: “In general, the disbursement of IMF and World Bank loans are primarily affected by both the donor interest and the need of the recipient. Given the dominance of the donors in these institutions, however, they decide who gets what in many cases on the basis of their interests. Thus, some countries are granted loans with the absence of economic need (Harrigan, Wang and El-Said 2006)”.
Muhumed and Gaas’ work also noted that both the World Bank and IMF are not transparent in their dealings. Further, they exposed the flaws of the two institutions’ Structural Adjustment Programmes.
“Structural Adjustment Programmes (SAP) imposed by both IMF and the World Bank severely affected the developing countries since their inception. To join the World Bank, a country should initially join the IMF and accept its conditions – adjustment policies – on loans. Liberalisation of prices; liberalisation of trade and shift toward export, and privatisation of the public sector are the three main axes of the adjustment programmes (Elsayed 2016). Ismi (2004) explained how and when the SAPs came to being, when the World Bank adopted them and their contents at the time as:
‘The debt crisis in the 1980s gave Washington the opportunity to ‘blast open’ and fully subordinate Third World economies through World Bank-IMF structural adjustment programmes (SAPs). Starting in 1980, developing countries were unable to pay back loans taken from Western commercial banks which had gone on a huge lending binge to Third World governments during the mid to late1970s when rising oil prices had filled up their coffers with petro-dollars. The World Bank and the IMF imposed SAPs on developing countries who needed to borrow money to service their debts. The World Bank’s SAPs, first instituted in1980, enforced privatisation of industries (including necessities such as healthcare and water), cuts in government spending and imposition of user fees, liberalising of capital markets (which leads to unstable trading in currencies) market-based pricing (which tends to raise the cost of basic goods) higher interest rates and trade liberalisation. SAPs evolved to cover more and more areas of domestic policy, not only fiscal, monetary and trade policy but also labour laws, health care, environmental regulations, civil service requirements, energy policy and government procurement (Ismi 2004:8)’.
They continued: “In Africa, the adjustment programmes resulted in slow growth, higher poverty, lower incomes, increased debt burdens, low human development indicators and deteriorating social services such as healthcare, water and education. For instance, between 1960 and 1980, the GDP per capita of Sub-Saharan Africa grew by 36 per cent, and then fell by 15 per cent between 1980 and 2000. Between 1994 and 2003, the number of people living under the poverty line ($1 a day) increased 75 per cent (from 200 million to 350 million). Estimated per capita income in Africa was the same in 1960 and 1990, while it decreased by 25 per cent in most Sub-Saharan countries during the 1980s (Ismi 2004). As far as the financial assistance provided by the bank is concerned, many critics stress the ineffectiveness as well as the helplessness of the bank’s aid and grants in developing countries. Moyo (2009) in her book ‘Dead Aid’ argues that aid is not only part of the potential solution to Africa’s economic drawbacks but also part of the problem if not the problem per se. The analyses of the book lie under the systematic aid, defined as “aid payments made directly to governments either through government-to-government transfers (bilateral aid) or transferred via institutions such as World Bank (multilateral aid).”
“A substantial amount of aid poured to developing countries for decades has very little to show in return and might exacerbate existing conditions or cause further problems in certain situations. This is captured as:
‘More than US$2 trillion of foreign aid has been transferred from rich countries to poor over the past fifty years Africa the biggest recipient, by far. Yet regardless of the motivation for aid-giving economic, political or moral- aid has failed to deliver the promise of sustainable economic growth and poverty reduction. At every turn of the development tale of the last five decades, policymakers have chosen to maintain the status quo and furnish Africa with more aid (Moyo 2009:28)’
More specifically on the IMF, Muhumed and Gaas pointed out that since its establishment, the European countries nominate the IMF Managing Director (Sanford and Weiss 2004).
They chronicle a tall list of scholarly critiques against the IMF’s operations and decisions. For instance, they cite fellow scholars who have observed that since the establishment of the IMF in 1944, member countries have been changing in terms of their economic weight, population and geographical coverage that they control but unfortunately, “countries’ representation in terms of share and quota has not changed to reflect the real change of the world structure”. They underscore with scholarly evidence that this “gives more power to few countries including US, Germany and some other European nations”, illustrating, for instance, that while China, with a GDP of $10.8 trillion has only 6.16% per cent of voting share, the USA, with a GDP of $17.9 trillion, enjoys 16.73 per cent of the total voting share. “This is based on nothing but willingness of the West dominating system”, mentioning that the structure of the IMF is unjust, taking the population of member countries. For example, it cited that “Ethiopia, with a population of 70 million, has half of the vote share than that of Luxembourg, which has only half a million population (Woodward 2007)”.
The paper also said the IMF’s excludes beneficiary countries from participating in the designing of the programmes meant for those same countries. “For any kind of project, say infrastructure or agriculture, the West alone designed [it] with the help of Western experts’ recommendations and contributions, and then financed by their institutions. The consequence is clear: failure of that project, exacerbating living conditions of those poor people, and merely the repayment of the debt in years”.
Under Structural Adjustment Programmes, the paper noted that “to receive a loan from the IMF, countries must first accept certain macroeconomic conditions and/or adjustments. These macroeconomic adjustments include: reducing budget deficit, devaluating currency, increasing interest rate and reducing domestic credit expansion, and other structural adjustments like making prices free of any control, reducing trade restrictions and privatising state enterprises”.
The scholarly work impugned Structural Adjustment Programs (SAPs) that “force countries to remove all kinds of trade and capital restrictions” which “decrease employment systematically”. In such cases, Muhumed and Gaas stressed that “It is not easy for companies from developing countries to compete with goods from Europe and America, produced with large government subsidies. That is why many companies which used to produce variety of goods including agricultural products become out of the market. This paved the way to large unemployment in these countries (Stiglitz 2006)”.
“On the other hand, capital liberalisation gave a significant chance for financial speculators who could profoundly affect financial systems due to the absence of any regulation and supervision”, they posited.
They cited Przeworski and Vreeland (2000), who examined the effect of IMF programmes on economic growth and concluded that IMF programmes “lower growth rates for as long as country remain under” them, stating: “Once a country leaves a programme, they grow faster than if they had remained. But not faster than they would have without participation”.
The work mentioned Barro and Lee (2003) as reaching a similar conclusion, saying that the larger the loans countries take from IMF, “the more its economic growth declines. Not only that, but, IMF programmes have strong effects on inequality and it increases the gap between economic classes (Gilbert & Unger 2009)”.
To quote their work extensively, they argued: “Some may claim that the inequality caused by IMF programmes is the price paid to reach economic efficiency, but according to their study on these projects Gilbert and Unger (2009) insisted that there is no such ‘trade-off’ between two variables – inequality and economic efficiency. In their words, they expressed that ‘IMF’s involvement not only reduces the size of the pie but also causes it to be split in more unequal ways’. Likewise, Eiras (2003) noted that ‘An examination of the record of IMF and World Bank performance in developing countries shows that, far from being the solution to global economic instability and poverty, these two international institutions are a major problem’”.
Also, they asserted that “trade liberalisation and privatisation are also serving the interests of the developed countries and increased poverty. “In Somalia, where SAPs came into force in 1981, privatisation of the banana sector, for example, only gave a market opportunity to Italian company ‘De Nadia’ which, with the other foreign agencies, was gaining 75 per cent of the income (Samatar 1993). Hence, liberalisation programmes in the banana sector in Somalia did not help the farmers, local business people or the country as a whole”.
Additionally, the paper said there is also strong condemnation from developing countries who see IMF programmes as a threat to their economic and political sovereignty.
“The researches on economic expansion, development, and richness generally agree that the way to economic success is economic autonomy built on a well-built rule of law (Eiras 2003). Almost all highly industrialised countries such as Japan and the United States had developed their economies by intelligently and selectively shielding some of their industries up to the point they become tough enough to defend their market share against foreign companies (Stiglitz 2006). When it comes to developing countries, whether it is a difficult time that they are struggling with economic crisis, or in their normal conditions, experts from IMF and Western countries read specific and selective pages of their history in economic development platforms, to convince them that the only way to improve economic conditions is through lifting all kinds of trade and capital barriers or opening their markets to the rest of the world. As far as the economic freedom is concerned, conditionality – the conditions that global leading figures oblige to countries to reach standard that it can take loan from IMF – weaken national independence (Stiglitz 2006). This is because, economic freedom is basic for development in both individual and government level. Loosing economic sovereignty not only gives the West access to loot resources of that country, but it also undermines service delivery of those governments. In accordance with the world economic freedom report in 2003, countries with the least economic freedom have smallest income (O’Driscoll et. al. 2003). So, double standard of the IMF experts and those who are managing behind the curtains are putting all their energy and expertise to read specific lines of the history, while hiding other parts that might reveal how they did apply mixed policies of restrictions and subsidising to climb the ladder and reach their current level. On the other hand, not only historical facts but the existing data and reports like this we have seen in the previous paragraphs (economic freedom reports) are supporting that economic freedom is one of the basic requirements for economic growth”, Muhumed and Gaas observed.
They concluded that: “Apparently, the structures of these institutions, which are Western designed and dominated, show that they were not intended to help the developing world, but serve for the West. The developing countries have a clear minority in the administration and they are marginalised in power-sharing, decision-making, designing projects and policies, problem-solving and even operating in the field (Griffith-Jones 2002; Woodward 2007; Stiglitz and Tsuda 2007; Gerber 2014). Not only they protect the interests of the west, but they are also used as imperialism tools. Both the World Bank and IMF replicated the dominance-dependence system and enabled the foreign capital to get easy and safe access to the markets and investment fields of developing countries (Kakonen 1975; Sundaram 2015)”.
“We can say that the road map of these institutions is the Washington Consensus – policy instruments and reforms agreed by IMF, World Bank and US government. It is clear that the mission and vision of these institutions are predetermined, and developing countries have no chance either to alter or to improve. The West sounds like ‘this is for you, but we know you better than yourself, so don’t question our efforts’. The interest of the donor countries always outweighs the need of the recipient, as Harrigan, Wand and El-Said (2006) demonstrated their analysis on Middle East and North Africa”.
