25.1.1 IMF and World Bank: Role, Significance, Strengths, and Weaknesses

International Monetary Fund (IMF)

Role and Function:

• The IMF was established in 1944 during the Bretton Woods Conference and became fully operational in 1947. Its primary role is to promote global financial stability, encourage economic growth, and reduce poverty around the world.
• The IMF is often called upon when a country's economic problems threaten to undermine global financial security. It aims to stabilize world exchange rates through surveillance, monitoring, and by providing financial assistance to countries facing economic crises.
• The IMF has 189 member states, each contributing funds to a pool, which the IMF uses to lend to countries in economic distress. The voting power within the IMF is weighted according to how much a state contributes financially to the quotas, giving economically developed states more influence over decision-making.

When Does the IMF Intervene?

• The IMF knows when a country is in danger under Article IV consultation, meaning that the IMF monitors each member country's economic and financial policies.
• The IMF judges a country's financial state by looking at its fiscal position (the size of the government budget deficit and the amount of debt it has outstanding) as well as balance of payments (how much money is flowing in and out).
• One of the most well-known, influential interventions followed the 2008 global financial crisis which left Europe's economies reeling, as well as the Asian financial crash (1997), emergency lending to Brazil (1998), and Argentina (2000).

Structural adjustment programmes (SAP's)

• When the IMF makes a loan to a country in need, it is often conditional
• The state must undergo economic reforms to overcome issues with economy e.g.
• Cutting wasteful public spending and raising taxes = budget deficit
• Selling government-owned assets to private ownership = privatisation
• Increasing taxes to help pay for public services
• Reducing public sector wages

Strengths

• Global Financial Stability: The IMF plays a critical role in maintaining global financial stability, particularly during economic crises. Its interventions, such as those during the Asian financial crisis (1997-1998) and the global financial crisis (2008), have been seen as essential in preventing further economic collapse.
• Economic Reforms: The IMF's economic reforms, particularly in countries like Brazil (1998) and Greece (2010s), have helped stabilize economies and lay the groundwork for future growth.
• Capacity Building: The IMF provides training and technical assistance to member states, particularly in sub-Saharan Africa, helping them manage their economies more effectively and implement fair tax systems.
• In defence of them, people argue that states got themselves into this place, and are given an unconditional grant would not deter them from entering a state of decline in future

Weaknesses

• Infringement on Sovereignty: SAPs are often criticized for imposing harsh economic reforms that can undermine state sovereignty and prioritize the interests of developed countries over those of the local population.
• Social Impact: SAPs have been associated with increased inequality and poverty in some developing countries.
• They make excessive demands on states and this infringes on state sovereignty - imposing western-driven ideas of economic management
• SAP's have become so controversial that the WB and IMF have renamed them 'poverty reduction strategies'
• Economic reforms such as privatisation see an increase in corporate benefits but are not necessarily shared among society
• Some developing countries see increased prosperity but also increases in inequality and child poverty suggesting the programmes disproportionately affect the richest
• Tax rises can hit the poorest the hardest, particularly indirect taxation such as sales tax which poor people cannot avoid if they are to continue to buy goods
• With many of the poorest working in subsistence activities or the informal sector, reform of the formal sector of the economy has little impact on improving their lives
• Opening markets to foreign investors aids in boosting FDI but can also expose fragile economies to the effects of foreign economic crisis.

Examples of where SAP's have been used:

Member Country	Example of SAP Requirement	SAP Impact
Pakistan	Increase the amount of taxes the central government raises in order to ease government debt. • In 2009, it was estimated that 3.2 million Pakistanis who owned multiple properties and bank accounts were not registered for paying tax. They were required to privatize the national airline and 67 other state-owned companies that had accumulated billions of dollars worth of losses.	Removing tax breaks created progress, but the IMF assessed tax revenue in 2016 as still below Pakistan's potential. Pakistan received several new loans despite not making progress on privatization.
Greece	Required to reduce public spending on government wages and welfare benefits. The Greek state pension system was costing 17.5% of Greece's GDP – the Greek government was required to make $1 billion of savings through pension reform alone.	The Greek parliament voted in 2016 to approve reforms to income tax and generous state pension schemes. Greece's governing anti-austerity party proposed reforms in the face of public protests. Pensions have been cut many times and are now estimated to be worth 25-55% less than at the beginning of the debt crisis.

Positives	Negatives
Some economists characterize the IMF's performance in the Asian financial crisis of 1997-98 as a success.	The IMF promotes financial stability more than actively reducing global poverty.
The economic reforms championed by the IMF allowed countries to recover quickly and laid the foundations for sustained growth in the 2000s.	Many economic reforms imposed by the IMF require conditions like financial austerity, high interest rates, trade liberalization, privatization, and open capital markets, which have often been counterproductive for target economies and devastating for local populations.
The role of the IMF in Brazil in 1998, where early recovery post-intervention allowed IMF loans to be repaid ahead of schedule.	Critics point to deep recessions and high unemployment in IMF loan-recipient countries, such as Greece and Spain, which have some of the highest youth unemployment rates in the EU (over 30%).
Tax reform due to SAPs (Structural Adjustment Programs) can be seen as addressing inequality if wealthier citizens are taxed more.	The IMF forces states to comply with SAPs, which interfere with sovereignty. SAPs do not benefit the poorest, but instead boost corporate profits to serve the interests of developed states.
Pakistan added 2.5 million more citizens to the tax roll, where previously fewer than 1% were registered.	The IMF promotes a neoliberal, Western-dominated economic model and failed to predict or prevent the 2008 financial crisis.
	The imbalance of voting powers within the IMF is outdated, as rising powers like Brazil, India, and China have less than 1/3 of the voting power compared to the USA.

World Trade Organisation

Founded in 1944 at the Bretton Woods conference

189 member states as a membership between WB and IMF linked, voting power is also weighted according to how much a state contributes (the USA carries 16% voting power, no other state carries more than 5%)

Role

• The World Bank issues loans and grants to low-middle-income countries that are classified as developing.
• It loans $30 billion annually to the world's poorest countries at below-market interest rates
• They also provide these states with advice on human and social development - in contrast to the IMF only provides economic advice
• The projects of the World Bank are mainly successful however projects have often ignored the opinions of local communities displaced Indigenous groups and struggled to fight widespread corruption.
• The categorisation method of developing countries is argued by leaders to be too broad and failing to recognise the differences between economic states e.g. China is currently classed as developing.

Split into two key institutions within the World Bank:

1. The International Bank for Reconstruction and Development: Loans and assistance provided to middle-income countries. Some of these loans include conditionality's and elements of SAP's.
2. The International Development Association: provides loans to the poorest countries which tend to have very low interest rates and sometimes none at all.

Example Projects of the World Bank

Example Projects of the World Bank	Details
Rural Development in Afghanistan	• Small agriculture, livestock, and handcraft businesses in rural communities are in need of investment. • The World Bank implemented a $45 million project from 2010-2018 to help people grow small businesses. • As of 2018, the initiative has created 22,000 new jobs.
Reconstruction in Bosnia and Herzegovina	• The Mostar bridge, a symbol of tolerance, was damaged in the country's ethnic war. • The World Bank financed a project in 1999 to rebuild damaged monuments, including the bridge, to promote reconciliation. • The reconstruction connected residents on both sides of the bridge and led to a spike in tourism, boosting the local economy.
Higher Education Programme in Africa	• $140 million invested in higher education centers to improve training and research in key sectors such as health, education, and agriculture. • Since 2002, the World Bank has invested over US$3.3 billion for development and reconstruction in Africa—mostly through grants and non-interest loans.
Renewable Energy in Ghana	• The World Bank invested $700 million to develop offshore natural gas resources to provide electricity and renewable energy for Ghana. • The ability to exploit the gas resource now generates 40% of Ghana's domestic power.

Strengths and Weaknesses of the World Bank

Positives	Negatives
Has a specific role in reducing poverty and helping developing countries (unlike other institutions) and has been successful through the use of SAPs.	Small budget which is vastly outweighed by private investment. For example, the U.S. gave $900 billion to China and India in 2001, while the World Bank only reached $8 billion in the same year.
Budget not wholly insignificant (the bank had an active portfolio in Africa of 618 projects totaling $73 billion).	Criticism of being too Western-centric as it is always under U.S. leadership.
Gives direct grants (unconditionally so countries do not go further into debt). Its role has shifted to increasingly focus on poorer states.	Critics argue the bank has outlived its usefulness due to the increase in private capital flows available to developing countries. For example, the Asian Infrastructure Investment Bank (AIIB) and China's Belt and Road Initiative demonstrate rising alternatives for developing states.
Gives fewer unconditional loans so that the money is going to the countries that need it most.	The World Bank attempts to rapidly impose free markets on developing countries in the 1980s and 1990s, known as 'economic shock therapy,' which produced a "record of failure" in Latin America and former Soviet countries.
It has contributed to the success of MDG 1 (Millennium Development Goal 1) to reduce world poverty.	The imbalance of voting powers is outdated in an increasingly globalized world, where rising powers like Brazil, India, and China have less than 1/3 of the voting power compared to the U.S.
	The creation of BRIC's new development bank and the China-led Asian Infrastructure Investment Bank (AIIB) presents developing countries with alternatives to the World Bank.