CRITISIM ABOUT IMF AND WORLD BANK (0)

TALLINNA ÜLIKOOL

POLITICAL SCIENCE AND GOVERNMENT INSTITUTE
ANNELI PALM
CRITISIM ABOUT IMF AND WORLD BANK
INTERNATIONAL POLITICAL ECONOMY (RIR6032/RIR6004)
ESSAY
2014

Contents

TALLINNA ÜLIKOOL 1
Introduction . 3
Basic of liberalism 4
International Monetary Fund and World Bank 4
IMF(International Monetary Fund) 4
WB(World Bank) 5
Criticism 5
Ecuador 6
Summary 8
Bibliography 10

Introduction.

Years ago countries didn’t depend so much on imports and also on export. World has so many organizations controlling countries economics like WTO, The European Union, OPEC , NAFTA, ASEAN , APEC, MERCOSUR , CEEAC, IMF, World Bank and so on. Nowadays because of globalization there are large corporations like Apple, Gazprom and Allianz who rules the world and control the economic outcome with big organizations that are roled by influencial countries like China and USA.
This essay is about criticism to IMF and World Bank. Critics of the World Bank and the IMF are concerned about the ‘conditionalities’ imposed on borrower countries. 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. As a example author is using Ecuador that is a small country in South America. In 1968- 1998 IMF and World Bank interviened with large loans to help the country but the growth of poverty increased form 50% to 70%, under or unemployment 15%to 70% and the public debt grew from 240 million to 16 billion ( Perkins , 2004, lk 239). This essay is going to explore how this kind of thing could have happened ? The idea is not to blame well- known organizations. The idea is to observe and explain what happened to Ecuador and discuss if the criticism about this matter is grounded.
In this essay author is going to use a book “ Confessions of an Economic Hitman“ by John Perkins that spent a year on New York Times bestseller list in 2004 and caused lot of discussion all over the world. Author also uses other sources what you can find from literature .
In the first part author is going to write about the basics of liberalism. In the second part writer is going to give a brief overview of IMF and World Bank and the criticism about these organizations. In the third part essay explores the Ecuador case and looks it through the realism . To understand this essay better, author has divided it into chapters . Work conclusions and future research opportunities are presented in the summary.

Basic of liberalism

Liberalism is one of the oldest theories and it contrasts to realism that has rather pessimistic approach not like liberalism that tries to be optimistic. The theory emerged to show the futility of war and the idea of ​​creating a better future. You can find four types of liberalism ( Jackson , 2010) but in this essay we are foucused more on institutional liberalism whereby the role of international institutions lies in transnational cooperation . Liberalists belive that international relations are based on collaborative work. Liberalism also belives that humans are naturally good . This theory is mostly influenced by Locke , Bentham and Kant (Jackson, 2010).
Liberals want to remove the influence of the state in commercial relations between businesses and individuals, and the decline of national economic sovereignty is an indication that the corrupting influence of the state is rapidly diminishing (Burchill, 2005, lk 82). According to realism in life there is a zeo-sum gam but liberalits say that life is a plus - sum game and in the end everyone wins. That’s rather naive but again liberalis tries to see the good.

International Monetary Fund and World Bank

IMF(International Monetary Fund)

With its near - global membership of 188 countries, the IMF is uniquely placed to help member governments take advantage of the opportunities—and manage the challenges—posed by globalization and economic development more generally. IMF is a specialized agency of the United Nations but has its own charter , governing structure, and finances . Its members are represented through a quota system broadly based on their relative size in the global economy. The IMF tracks global economic trends and performance , alerts its member countries when it sees problems on the horizon , provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties. (IMF)
The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.
The IMF supports its membership by providing (IMF)

• policy advice to governments and central banks based on analysis of economic trends and cross -country experiences ;
  
• research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets ;
  
• loans to help countries overcome economic difficulties;
  
• concessional loans to help fight poverty in developing countries; and
  
• technical assistance and training to help countries improve the management of their economies
  

WB(World Bank)

World bank was created on 1944 and finance development projects .
The World Bank Group has set two goals for the world to achieve by 2030 (Bank W. ):

• End extreme poverty by decreasing the percentage of people living on less than $1.25 a day to no more than 3%
  
• Promote shared prosperity by fostering the income growth of the bottom 40% for every country
  

The World Bank is a vital source of financial and technical assistance to developing countries around the world. We are not a bank in the ordinary sense but a unique partnership to reduce poverty and support development. The World Bank Group comprises five institutions managed by their member countries (IMF).
World Bank offers support to developing countries through policy advice, research and analysis, and technical assistance. World Bank financing helps inform developing countries’ own investments. Organization supports capacity development in the countries they serve . Organization also sponsor, host , or participate in many conferences and forums on issues of development, often in collaboration with partners (IMF).

Criticism

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 ( Project , 2005).
With the World Bank, there are concerns about the types of development projects funded. Many infrastructure projects financed by the World Bank Group have social and environmental implications for the populations in the affected areas (Project, 2005). The question is if it is ethical to fund these kind of projects.
There is also criticism about global climate change , people find the Bank unfit to finance climate change. 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. 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. (Project, 2005)
From all the criticism the most important one for the essay is that they don’t consider countries’ individual circumstances that can lead to borrowers banckrupcy or cause huge debt for the country. Also when a country is in debt the organization gives new loans what leads to even bigger debt so it’s quite hard to crawl out of that vicious circle . Also the issue of working together with the private sector that gives corporations the chance to gain profit and power over the borrower or the needy country.

Ecuador

Ecuador is a small country in Latin American with the population of 14.6 million people (News) according to UN in 2011. This country exports oil but still many people live in poverty and indigenous groups are oppose of free trade policies (News).
Ecuador is a victicm of international organizations and corporations. According to John Perkins who was Economic hit man borrowed billions of dollars to Ecuador or to be precise he talked the country into taking loans form World Bank and USAID. Money that country could hire engineering and construction companies to carry out projects that would only benefit rich people. Because of that poverty rate increased form 50% to 70%, unemployment form 15% to 70% and the share of natural resources that was for helping the poor ones decreased from 20% to 6% (Perkins, 2004). Because of the down fall, country has taken quite big economic measures to keep the country floating. What happend to the country was not a consipracy against it, but a process where were involved international banks, corporations and foreign aid organizations. People who were working for those banks, organizations or so on didn’t get directly bribed but inderectly it means that the brieb was really the sallery, bonus, pension or insurance.
Ecuador was in debt in start of 2003 when organizations and corporations started to claimant their share (Perkins, 2004). But what can offer a country thats it debt? Their only solution was to take a loan again or find somekind of compromise with the borrowers. Ecuador was convinced or rather forced to allow oil comapnies to the country and sell oil cheaply to the borrowers. That kind of destruction was immeasurable for the nature and people of that country. IMF and World Bank who “help“ developing countries speak us still about the progress they are making and how hard they are working for it. The goal of these organizations that have helped to develop this kind of situation are doing something wrong and it effects those who aren ’t so strong to protect themselves. On the criticism topic I pinted out that IMF and World Bank don’t consider countries inidvidual circumstances setting conditions.
Liberalism is all about teamwork/ cooperation. If we look at the Ecuador case, then we can see that they accepted other countries and orgnaizations help from where they did not win but lose . According to liberalism life is a plus- sum game but not in this case, in this case we can see zero -sum game from what one side wins and other loses. In the economic world liberalism is good to one point when it harms others. From trade liberalization the one that wins are usually companies or international organization and from there prehaps some countries that how the things work in a globalized world.
Now when few years have past Ecuador has elegantly managed to buy back a very large chunk of its debt at just 35 cents on the dollar . Old Ecuador hand Hans Humes, of Greylock Capital, summed up how spectacularly successful the Ecuador strategy was, calling it “one of the most elegant restructurings that I’ve seen ” . Countires next clever step was to pay cash for its defaulted bonds, rather than trying to do a bond exchange (Salmon, 2009). Ecuador, country that is the first debtor with the ability to pay, disregarded that the external debt service as a percentage of Ecuador's government revenues used to be extremely high. Since the debt default in 2008, Ecuador has relied mostly on credits from China for financing needs. Ecuador's Finance Minister Fausto Herrera announced in early July that Ecuador is seeking as much as $ U.S. 1.4 billion in order to bankroll this year's budget. The Ecuadorian government created the Programa de Finanzas Populares in 2008. A program that is supposed to expand the popular financial sector that is supposed to focus lending to smaller financial institutions that in return will lend to small businesses. "In January 2007 co-op loans stood at 11.1 percent of private bank lending; by July 2012 this percentage had nearly doubled, to 19.6 percent. Co-op loans have also seen a large increase in the absolute total amount , tripling in real (inflation-adjusted) terms during this period ." Conclusively, the authors explain, "Ecuador is a relatively small, middle income developing country with an open economy that does not even have its own currency , yet in five years it has accomplished some of the most comprehensive financial reforms of any country in the 21st century" (Maiello, 2013). Ecuador economic growth has been inclusive, which has directly reduced poverty and inequality levels and increased the middle class. Between 2006 and 2012, income poverty (using the national poverty line) fell from 37.6% to 27.3% whereas extreme poverty declined from 16.9% to 11.2%.Public investment has increased, from 21% of GDP in 2006 to nearly 42% in 2012 (Bank T. W.).
Ecuador is a small but strong country that did fight with big difficulties and now is getting stronger and stronger, and that because of political changes but also because of the help off other countries and organizations. According to liberalism cooperation is the key to success . If we look back to Ecuadors economic problems, then I think we can say that in some way World Bank, corporations and USAID did benefit from Ecuador but also gave also something back even if it was a lesson from what they have learned now. But it seems that life is zero-sum game not plus-sum game as liberalits love to think.

Summary

Liberalism is an old theory witch opposes to realism. According to liberalism life is a plus-zum game from what everyone can gain. You can find four types of liberalism but this essay is foucused on institutional liberalism whereby the role of international institutions lies in transnational cooperation. So liberalism is quite positive and tries to find good in people.
IMF and World Bank are quite similar organizations. World Bank works out finance development projects, IMF again stabilize currencies and exchange rates. Both have a goal to make life better . These to organizations are known as good organizations but everything has a downside so have these organizations. Mostly they are criticised by conditionalities that they imposed on borrower countries, and that because they don’t consider countries individual circumstances. 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. There are also criticisms against the World Bank and IMF governance structures which are dominated by industrialised countries. What leaves us with the question how makes the decisions?
Ecuador is a small country in Latin American with the population of 14.6 million. From 1968- 1998 country went through a rough time poverty increased form 50% to 70%, unemployment 15%to 70% and the public debt grew from 240 million to 16 billion. What happend to that country was not a consipracy against it, but a process where were involved international banks, corporations and foreign aid organizations. Country borrowed billions of dollars from World Bank and USAID. Ecuador was in debt in start of 2003 when organizations and corporations started to claimant their share. But what can offer a country thats it debt? Their only solution was to take a loan again or find somekind of compromise with the borrowers. Ecuador was convinced or rather forced to allow oil comapnies to the country and sell oil cheaply to the borrowers. According to liberalism life is a plus- sum game but not in this case, in this case we can see zero-sum game from what one side wins and other loses. In the economic world liberalism is good to one point when it harms others. Ecuador is a relatively small, middle income developing country with an open economy that does not even have its own currency, yet in five years it has accomplished some of the most comprehensive financial reforms of any country in the 21st century. Country is doing a lot better, between 2006 and 2012, income poverty fell from 37.6% to 27.3% whereas extreme poverty declined from 16.9% to 11.2%, public investment has increased, from 21% of GDP in 2006 to nearly 42% in 2012. All the signs show that country is the first debtor with the ability to pay and to come out of debt with scratches but stronger than ever. For conclusion international organizations can bring happiness and misery and in life there is a zero-sum game until we have countires who want to controll the world.

Bibliography

Bank, T. W. (kuupäev puudub). Ecuador Overview. Kasutamise kuupäev: 10. 01 2014. a., allikas http://www.worldbank.org/en/country/ecuador/overview
Bank, W. (kuupäev puudub). What We Do. Kasutamise kuupäev: 09. 01 2014. a., allikas http://www.worldbank.org/en/about/what-we-do
Burchill, S. (2005). Theories of international relations. New York: Palgrave Macmillian.
IMF. (kuupäev puudub). What we do. Kasutamise kuupäev: 09. 01 2014. a., allikas http://www.imf.org/external/about/whatwedo.ht m
Jackson, R. (2010). Introduction to international relations: theories and approaches. New York: Oxford University Press.
Maiello, L. P. (18. 07 2013. a.). Ecuador Applies the Concept of Self-Determination or 'The Spirits That I've Cited...'. Kasutamise kuupäev: 11. 01 2014. a., allikas http://www.huffingtonpost.com/lia-petridis/ecuador-applies-the-conce_b_3599442.html
News, B. (kuupäev puudub). Ecuador country profile . Kasutamise kuupäev: 10. 01 2014. a., allikas http://news.bbc.co.uk/2/hi/americas/country_profiles/1212882.st m
Perkins, J. (2004). Majandusmõrvavri pihtimus.
Project, B. (23. 08 2005. a.). What are the main concerns and criticism about the World Bank and IMF? Kasutamise kuupäev: 11. 01 2014. a., allikas http://www.brettonwoodsproject.org/2005/08/art-320869/
Salmon, F. (29. 05 2009. a.). Lessons from Ecuador’s bond default. Kasutamise kuupäev: 10. 01 2014. a., allikas http://blogs.reuters.com/felix-salmon/2009/05/29/lessons-from-ecuadors-bond-default/