International Monetary Fund and World Bank
Francis J. Gavin
If the success of institutions were judged by the breadth and passion of their critics, then both the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank) would count among the most effective multilateral organizations in the world. Beginning in the late 1990s it became an annual ritual for tens of thousands of anti-globalization protesters to descend upon Washington, D.C., in late September to disrupt their annual meetings. But the left has had no monopoly on criticism of the IMF and World Bank. Republican U.S. congressmen and free-market economists have long derided both entities as misguided and even corrupt. Furthermore, these protests were nothing new: both the left and the right in the United States vehemently objected to the Bretton Woods agreements that created the IMF and World Bank near the end of World War II.
Do the arguments made against the Bretton Woods institutions, both now and in the past, have any merit? And why do these multilateral institutions, created for the noble goals of preventing international monetary turmoil and alleviating global poverty, incite such heated responses, both in the United States and abroad? Finally, are the IMF and World Bank simply tools of American foreign policy, as is often claimed? At first glance these criticisms are puzzling, especially since protesters have vastly overestimated the power and effect these institutions have had on the world economy. The second half of the twentieth century witnessed tremendous changes in all parts of the domestic and global economy, including in those areas that are the responsibility of the two Bretton Woods institutions: international monetary relations and economic development. But a strong case could be made that other forces—the Cold War, macroeconomic reform, technology, the massive increase in capital and trade flows—were far more crucial to unleashing and sustaining these changes than either the IMF or the World Bank.
In fact, in order to understand the influence and development of these organizations during their first few decades, it is more useful to talk about a "Bretton Woods system" rather than dissecting the specific institutional histories of the IMF and World Bank. The agencies themselves were both anemic and ineffective during their early years. For example, the World Bank was established in order to aid postwar European reconstruction but was quickly supplanted when the United States established the European Recovery Plan and the Marshall Plan. Only later did it embrace the mission of funding development, infrastructure, and anti-poverty programs in the underdeveloped countries of the world. The IMF was similarly pushed to the side during its early years, as bilateral negotiations, currency blocs (like those for sterling and the franc), or Marshall Plan institutions such as the European Payments Union drove postwar international monetary relations.
Still, while the IMF and World Bank were moribund for some time, and are not particularly influential in the early twenty-first century, the Bretton Woods agreements did set down certain "rules of the game" that, if not always enforced by the IMF and World Bank, certainly have animated much of the spirit of international economic activity since World War II. Furthermore, in spite of their weaknesses, it is important to remember that at the time of their inception, the idea of creating such multilateral economic institutions was truly revolutionary. The logic behind these organizations and their mission emerged from a powerful if sometimes flawed causal and historical logic. After the economic collapse of the 1930s and destructive war of the 1940s, the conventional wisdom held that unfettered capitalism was unstable, prone to crisis, and unfair in its international distribution of wealth. Just as the U.S. federal government intervened in the domestic economy through the New Deal to eliminate the extremes of market capitalism while maintaining the benefits, so too were the newly formed global organizations formed to regulate, but not stifle, the global economy.
Depression and war had ushered in a profound shift in the relationship between governments, national economies, and the global economic order by the time representatives of forty-four nations met at Bretton Woods, New Hampshire, in July 1944. Before World War I, international monetary relations were not considered the province of national governments. Rarely did any entity intervene in foreign exchange markets, and when one did, it was nongovernmental banks such as the House of Morgan or the still private Bank of England. There were several attempts at monetary cooperation and collaboration among international private bankers during the late nineteenth century, but it was sporadic. And while the idea of providing aid to rebuild the devastated, war-torn economies had been considered after World War I, the notion of a permanent international bank to guide global efforts to increase living standards and eliminate global poverty was truly remarkable.
One criticism is, however, quite justified. Both the World Bank and especially the IMF have often been tools for U.S. foreign policy and foreign economic goals. Part of this has to do with the nature of constituent power within these organizations. Unlike the United Nations, where each state has an equal vote, representation within the Bretton Woods institutions is established by the size of the financial contribution. Since the United States is by far the largest contributor, it has the principal voice in determining the policies and procedures of both institutions. Furthermore, the United States is able to pressure many of the other large contributors, like Japan, Germany, Saudi Arabia, and Kuwait, into following their policy preferences.
In fact, it is fair to say that America has dominated both of these institutions since their founding. To give just a few examples: in the 1940s, it was the United States bypassing these institutions through the Marshall Plan and regional aid schemes. In the 1950s and 1960s, the United States used the IMF to bail out sterling, the currency of its close ally Great Britain, and the World Bank to promote its modernization schemes. During the 1990s the relationship between the IMF and the Clinton administration's Treasury Department was downright incestuous, as both institutions forged the now controversial "Washington consensus" in its aid and economic reform packages. Rarely has either Bretton Woods institution pursued policies at odds with U.S. foreign policy goals.
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