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History
The Bretton Woods institutions were set-up in 1944 after the 2nd World War. The 2nd World War saw massive economic and infrastructural damage to Europe. To help Europe recover from this difficult situation, the Bretton Woods institutions were created. These institutions basically consisted of two major bodies the IMF and World Bank and had the strong arm of the American economy behind their creation Another reason fortheir creation was that it was also recognized after the Great Depression of the late 20’s that if one major national economy was suffering it would hurt the global economy in general.
World Bank/International Bank of Reconstruction and Development
The World Bank as it is known now was created as the International Bank of Reconstruction and Development. The major purpose of this institution was to help finance the development of infrastructural projects like dams, roads and highways amongst others. This was very important for Europe after all the damage caused by the war. However as time passed by and Europe recovered it no longer had need of such massive investment in infrastructural projects from external sources. Therefore around the 60’s and 70’s the focus of the World Bank(it changed it name to reflect this new trend in its development) came upon the developing world. These countries were generally products of a colonial past and had constant financial and economic problems. Even now however the World Bank retained the focus that it had acquired as far as assistance went. The World Bank financed huge projects such as dams, roads and buildings. The World Bank also provided an opportunity to America and most of the European world( who financed the World Bank) to acquire influence over the developing world to serve as a deterrent from them following the communist path that Russia was following. Basically it became an important tool in the cold war between America and Russia. It was mostly under Robert McNamara in the 1970’s that the World Bank grew in size and during the debt crisis of the 1980’s the World Bank’s role became even more key to the developing world( East Asian Crisis.) The Western world was able to acquire considerable influence over these developing countries, because they were times when the World Bank was lending loans which were nearly worth 50% of the country’s GDP. On top of all that these programs came with a series of regulations which were known as the SAP (Structural Adjustment Program). These included regulations on trade liberalization to privatization amongst others and as discussed earlier were mostly capitalist in orientation. The World Bank is still playing a dominating role in financing of projects for developing nations. For example World Bank is still financing a number of large projects in Afghanistan. The question however arises how beneficial the role of the World Bank has been in improving the lives of most individuals in developing nations. This report will discuss that later on combining this discussion with a discussion on the IMF-International Monetary Fund
The basic objectives of the IMF include the promotion of international money cooperation, facilitating international trade and maintaining exchange rate stability.
It is important to recognize the role that the IMF played in the debt crises in the 1980’s. The reality was that rather then actually dealing with the core financial problem, it deferred the impact of the debt crisis actually managing to exacerbate the issue. An example of the IMF’s role in the modern world, is its recent role in helping Pakistan recover from the balance of payment crisis it had gotten into. Pakistan is a typical example of what role the IMF can play and how productive it can be. Due to the global crisis and many local issues (like a huge current account deficit) Pakistan came dangerously close to running out of forex reserves. Basically when a country reaches this amount and has lost too much credibility to accept loans from other sources it is forces to go the IMF to stave off bankruptcy. The IMF intervened in November 2008 and along with an installment of the promised amount committed Pakistan to a series of structural adjustment’s. In the 80’s and 90’s these were known as the Structural Adjustment Programs and included strict economic regulation. However the recent loans that the IMF has given out include regulations which are slightly more relaxed and in which the IMF has become more flexible in its expectations, in recognition of the needs of developing nations and the problems they experience.(In 1980’s and 1990’s IMF shut off funding to countries who were unable to meet their targets-An example is Pakistan). Other then the Structural Adjustment Programs other programs that the IMF gives to developing nations with different regulations such as Poverty Reduction Growth Fund and Stand By Arrangements.
Problems with the World Bank and International Monetary Friend
Although on the surface the World Bank and IMF claim that their policies are designed to improve the economies and therefore the lives of the people living in those countries. However the reality is much different, unfortunately there are many ways in which the IMF and World Bank has failed the nations it has tried to help. One of the main reasons for this is a failure to recognize the uniqueness of issues affecting each nation and offering a standard solution for all their problems. However today economists recognize the failure of these institutions as they existed in the 80’s and 90’s and even officials within these banks admit the need for flexibility and customization. One of the constant complaints against the World Banks has been that the projects that it has invested in have actually made life harder for the locals, by causing displacement and environmental pollution. The problem with the IMF is considered to be that the policies it implements on nations when for example it comes to solve their balance of payment problems offer only short term solutions and fail to address the real issue.
Solutions
One of the moves made to help developing nations specifically is the creation of the MIGA—Multilateral Investment Guarantee Agency and the International Finance Corporation. The Multilateral Investment Guarantee Agency is designed to encourage investment in developing investment. A lot of bodies are reluctant to invest in developing nations because of the large amount of financial risk associated. For example the MIGA provides some kind of insurance if a company loses money due to sudden changes in state policy. Around half of the money they invest is in projects which are considered to be high-risk and a large part of this is focused in Africa. The IFC also part of the World Bank Group or one of the Bretton Woods Institutions is basically designed to provide financing to projects all over the world. The IFC analyzes each entrepreneur and project, and invest if the application is approved by their Board. Eventually they with draw
funding (by selling their equity share) when the business has been established.
The st develpoing of thum of all this is that Bretton Woods Institutes have played a major role in the global economy and still are. However what is important to recognize that the environment of the developed world is very different from that of the developing world and these institutions need to recognize these issues.
References
‘The World Bank’(n.d.) 2009. Web.
‘Competitiveness Strategy’ (n.d.) 2009. Web.
‘Anti-globalization movement’(n.d.) 2009. Web.
‘International Monetary Fund’ (n.d.). 2009. Web.
‘Multilateral investment guarantee agency’ (n.d.) in the MIGA. 2009. Web.
‘What are the main concerns and criticism about the World Bank and IMF?’ (n.d.) in Bretton Woods project. Web.
Pakistan and the IMF ‘( 2009’). Web.
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