The Evolution and Challenges of the IMF and World Bank

December 20, 2024

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The International Monetary Fund (IMF) and the World Bank were established in the aftermath of World War II to bring financial stability to a world recovering from two devastating conflicts. However, while the world has changed exponentially over the past 79 years, these institutions have evolved only incrementally.

 

Origins and Evolution of the IMF and World Bank

After World War II, the United States emerged with the only intact industrial, manufacturing, and logistical supply chains. Despite the growth of the American economy, its share of global GDP has declined over time. Technological advancements have transformed the global landscape, but political inertia has persisted. For instance, the leadership of these institutions is still governed by a "gentlemen's agreement" that places an American at the helm of the World Bank and a European in charge of the IMF. This arrangement, which caters to Anglo-European assumptions and interests, has become increasingly outdated.

 

The World Bank and the IMF were established in 1945 after the Bretton Woods Conference in New Hampshire, US. Their aim was to facilitate international economic recovery post-World War II. The IMF was tasked with promoting international monetary cooperation, facilitating trade, fostering sustainable economic growth, and addressing balance of payment issues. Initially composed of 29 countries, the IMF now includes 191 members.

 

The World Bank, originally the International Bank for Reconstruction and Development, was responsible for rebuilding infrastructure in Europe and Japan. Behind the scenes, there was a sentiment in Washington that Europeans could not be trusted to manage global affairs, leading to a US-dominated economic apparatus despite the "gentlemen's agreement."

 

Institutional Shortcomings and the Rise of New Groups

The inadequacies of the IMF and World Bank became evident during various financial crises, where these institutions were more reactive rather than proactive. In response, new groups such as the Group of Seven (G7) and later the Group of 20 (G20) were created to address severe international crises. However, these groups often revert to political discussions once their immediate economic focus is addressed.

 

The G7 was formed to tackle the 1970s oil shock and the collapse of the Bretton Woods fixed exchange rate system. Initially composed of the world's major economic powers, the G7 has now been overshadowed by the G20 and BRICS+. The G20, established in the late 1990s as a technical group for finance ministers, became the central organization for responding to the 2008 financial crisis. Today, the G20 struggles to find consensus on major issues, often focusing on political discussions rather than coordinated economic responses.

 

Conditionality of Loans

The main criticisms of the IMF and World Bank revolve around their lack of representation and accountability. These institutions are seen as Western-centric holdovers that fail to adequately represent the Global South. Specific critiques include governance issues, biased decision-making, and an inability to learn from past mistakes. The conditionality of loans, often referred to as the Washington Consensus, imposed austerity measures and economic policies that prioritized American and European ideologies over the needs of desperate developing countries.

 

Conditions for structural adjustment include:

●Cutting expenditures or raising revenues (austerity)
●Focusing economic output on exports and resource extraction
●Devaluing currencies
●Liberalizing trade
●Increasing investment stability
●Balancing budgets
●Removing price controls and state subsidies
●Privatizing state-owned enterprises
●Enhancing foreign investor rights
●Improving governance and fighting corruption

 

These conditions often led to economic pain without discernible gain, as seen in countries like Argentina.

 

Funding and Voting Power

IMF funding is based on a quota system, where each member country's contribution reflects its relative size in the global economy. This system also determines voting power, following a corporate logic where wealthier countries have more control.

 

From its inception, the IMF's policies have been influenced by ideological and departmental rivalries. The desire to implement a one-size-fits-all solution using financial leverage in diverse economic and political contexts has often been misinformed. Without a clear mandate and adequate funding, the IMF and World Bank risk becoming little more than talk shops. Institutional change must come from the top to address these long-standing issues.

 

Uncertainty, Sustainable Development, and Change

As the world faces uncertainty in a vacuum created by Washington, Chinese President Xi Jinping presented an eight-point plan at the G20 Rio Summit on November 18-19, 2024, addressing the changes needed to prevent the world from fragmenting into less efficient regional divisions. This plan, while not a definitive roadmap, highlights crucial issues that need to be addressed.

 

The significance of the eight points lies in Beijing's attachment of resources to specific areas: 780 billion CNY (108 billion USD) for Belt and Road cooperation, 140 billion CNY (20 billion USD) for Global Development Initiative with 1,100 projects, and 360 billion CNY (50 billion USD) for African Development through 10 modernization projects. China would also join the Global Alliance Against Hunger and Poverty championed by Brazilian President Luiz Inacio Lula da Silva. And China, as Xi said, joined Brazil, South Africa, and the African Union in proposing an Initiative on International Cooperation in Open Science to share and jointly develop technology. Additionally, China supports the G20 green energy, entrepreneurship, and digital development and transition efforts, as well as the implementation of the G20 Anti-Corruption Plan. China also pledges to open its doors to least developed nations by eliminating tariffs. This approach, which focuses on collaboration within the group to increase development, address global challenges, share and co-develop new technologies, assist in the digital transition, and eliminate tariffs, is in stark contrast to existing US policies. Moreover, it underscores Beijing's commitment to these global issues, regardless of who is in the White House.

 

During the meeting between Xi Jinping and Joe Biden in Lima, Peru on November 16, Xi asserted that the Chinese people's right to development cannot be deprived. He emphasized that great power competition should not dominate the era; instead, unity and cooperation are needed to face global challenges. Decoupling and breaking chains are not solutions; mutually beneficial cooperation is the path to common development.

 

The message from Xi was clear: China is not willing to engage in hypocritical accusations and word games. The US must decide whether to facilitate or forestall change. If the US, under Donald Trump, decides to leave international institutions like the UN, IMF, World Bank, APEC, G20, G7, and NATO, frankly these institutions may have a better chance of adapting to global needs and adopting better policies. With or without Washington, the humanitarian, economic, political, and security issues remain the same, and responsible governments have no choice other than to try to deal with them.

 

Economic Justice and Resource Equity

While financial instruments can always be created, a significant challenge lies in differing investment horizons. For instance, investment in education has proven to bring positive change to a country, but it takes 30 to 40 years to yield returns. In contrast, investors typically seek assets and/or sovereign guarantees with a 5 to 10-year return horizon.

 

The Sustainable Development Goals (SDGs) face a similar issue. Institutional banks could logically address this challenge, but not under the current "conditionality" clauses. Additionally, there are complexities in the sources and flow of funds, further complicated by the political considerations of those making the loans.

 

One potential solution is for development banks to shift their focus from debt to revenues. For centuries, colonial powers have extracted resources from developing countries at undervalued prices. Take Mali, for example, which has sold Uranium Yellow Cake to France for 20 cents per kilo, only for it to be resold at 200 euros per kilo. Even more shockingly, Haiti was forced to compensate France for the value of freed slaves.

 

The time has come for resource-rich countries to unite and establish fair pricing, akin to OPEC's approach to oil. Fair prices would enable these countries to pay living wages to their workers, develop their economies, and reduce reliance on unfulfilled promises of aid for environmental issues. With equitable pricing, they would generate the revenues needed to foster development and address climate change.

 

The political ramifications of reversing the one-sided flow of funds that has persisted for over 600 years would be significant. However, as the saying goes, "Winter is coming." A multipolar world must find solutions or face revolutions.

 

The IMF and World Bank face a stark choice: be marginalized as part of the problem, or move forward as part of the solution. Both institutions possess the sophistication to assist countries in forming OPEC-like groupings around their natural resources. Consider the coffee industry: while coffee is grown in more than 70 countries, nearly 70% of the world's coffee is produced by just four - Brazil, Vietnam, Colombia, and Indonesia. However, the global coffee market is dominated by four multinational corporations: Kraft General Foods, Nestle, Procter & Gamble, and Sara Lee. They and distributors like Starbucks are the ones who reap the vast majority of profits.

 

If the IMF and World Bank were to use their expertise to help the growing countries establish a trading platform where they could set fair coffee prices, it would be a beacon for other resource countries to do the same. Given three quarters of the World Bank's members are developing countries and the banks stand by their belief in democracy, this would logically follow. In reality, though, it won't, as the banks are controlled by those who made them and democracy only applies to their needs. In essence, the end of WWII marked a shift from physical to economic colonialism, a period that is at its end as multipolarity takes hold.

 

To balance this approach to economic development, an untapped source that has matured due to digital transformation could be used: connecting the world's micro, small, and medium-sized enterprises (MSMEs) to new markets. This approach could democratize development and support countries in unprecedented ways.

 

Empowering MSMEs Through Digital Transformation

Connecting global MSMEs would unleash the most powerful economic force in the world.

●MSMEs account for over 70% of employment worldwide. They are more likely to hire young people, older workers, and less-skilled workers, thereby enhancing economic and social inclusion and cohesion.
●MSMEs contribute 50% of the world's GDP. In most OECD countries, MSMEs account for more than 50% of GDP.
●MSMEs are the most fertile engines of innovation and resilience, the acorns from which mighty economic oaks grow. They are agile, market-driven entities powered by human ingenuity, capable of quickly filling niche markets and responding to opportunities in a constantly evolving economy.

 

Unleashing them with digitization would foster an inclusive, sustainable, and resilient global economy for the next century and beyond. By connecting MSMEs to other MSMEs and customers through internet apps, AI, digital currency, trade settlement, smart contracts, and logistics, the cost and complexity barriers that have historically favored large businesses can be eliminated. The result will be an interconnected international economy that fosters innovation and competition for the largest untapped economic force in the world.

 

Redefining the Role of IMF and World Bank

The IMF and World Bank can play a crucial role in developing these new market forces, but only if they expand their vision beyond their current roles. The same approaches and tools used to create resource platforms could also be used to integrate MSME trade.

 

Global problems and solutions do not depend on one man or country, but on global cooperation that maintains the security, development, and sovereignty of all peoples and nations. It is time to put the zero-sum colonial period to rest and start a more inclusive and dynamic win-win multipolar shared future for mankind. 

 

 

This article is from the November issue of TI Observer (TIO), which focuses on recent multilateral meetings, examining the pivotal role of the Global South in redefining global cooperation, and exploring how this emerging force is shaping new consensus and balance in the global landscape through regional and global platforms. If you are interested in knowing more about the November issue, please click here:

http://en.taiheinstitute.org/UpLoadFile/files/2024/11/29/1856267882f43abf9-2.pdf

 

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