What Are the IMF and the World Bank?

To close this chapter, let us look at two very controversial global institutions, the International Monetary Fund and the International Bank for Reconstruction and Development, more commonly known as the World Bank. These institutions have occasioned protests, the throwing of bricks, conspiracy theories, and political T-shirts. What is up? Are they noxious carriers of evil global forces, benevolent do-gooders, or something else altogether?

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For the most part, these agencies are bureaucracies. They do some good, some bad, but they are not as important—for better or worse—as many people think.

International Monetary Fund

Today the International Monetary Fund (IMF) serves as an international lender of last resort. That is, when countries experience financial troubles, the IMF steps in to organize a rescue package, lend money, and monitor the economic situation. Often the loans are tied to a country’s willingness to take the IMF’s economic advice.

The IMF, created after the end of World War II, is located in Washington, D.C., but it is a “multilateral” institution. It is set up by the world’s governments and is independent of any single government. It receives a monetary allocation from each government and also may earn income from its loans. Historically, the director of the IMF is a European. The director reports to a board, and board membership is roughly proportional to how much money a country puts into the institution. The United States, Western Europe, and Japan exercise a dominant influence in this regard, but its staff is drawn from around the world.

The IMF was very active in the Asian currency crises of the 1990s (in Indonesia, Thailand, and South Korea), the Argentine financial crisis starting in 2001, and the recent financial crisis in Greece. Critics of the IMF, such as Nobel Laureate Joseph Stiglitz, charge that it forces borrowing governments to cut government spending, tighten monetary policy, and raise interest rates. In other words, the claim is that the IMF has encouraged contractionary macroeconomic policies when (perhaps) expansionary policies were called for. Defenders of the IMF have argued that the advice is more subtle than is often portrayed, that tough fiscal reforms are sometimes needed, or that borrowing countries do not in fact follow the advice, regardless of whether or not it is good advice.

The World Bank

The World Bank also dates from the immediate aftermath of World War II. It was designed to facilitate the flow of capital to poor countries, especially those parts of the world not being served by private capital markets. Its full-time staff of about 10,000 employees is headquartered in Washington, D.C., right next to the IMF. The Bank is ruled by a board, whose members are drawn from supporting nations, and a president who has historically been an American.

Mostly the World Bank lends money for specific projects in developing countries. This includes loans for water projects, roads, dams, health care, and environmental projects, among other activities. World Bank loans are tied to the use of Bank expertise and the understanding that the borrowing country will work cooperatively with the Bank.

In a typical year, the World Bank lends $25-$30 billion to developing nation governments. Overall, the Bank’s largest borrower, by far, is China. Other top borrowers are India, Brazil, Mexico, and Turkey. This has led to debate over the Bank’s proper mission. China receives at least $70 billion in foreign investment per year, while it is sitting on over $1 trillion in foreign currency reserves. So why is the World Bank lending to China? Defenders of the Bank note that much of China remains poor, and the Chinese loans turn a profit and help the Bank carry out its mission in poorer places like Africa. In addition, in 2010, World Bank lending increased to $44 billion in response to the financial crisis when many governments had trouble raising funds from private markets.

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The World Bank also gives away money, lends it out at very low rates of interest, or makes loans that it does not expect will be repaid. This is the aid side of the Bank, which is separate from the Bank’s loans. To an increasing extent, the Bank’s aid is flowing to sub-Saharan Africa.

Critics claim that the Bank does not pay enough attention to results. The commercial incentive is for the Bank to make many loans. The lent funds first go to governments and then they often are used to purchase goods and services from Western companies. For instance, a World Bank loan to Senegal might help finance a contract with a French company for the supply of urban water. This benefits commercial interests in the countries that control the Bank. Accountability is often low, since each year another round of loans will be made in any case. The World Bank makes money off its loans, so perhaps not enough attention is paid to whether those projects deliver their promised benefits. Defenders note that the Bank has responded to criticism in the past, improved its environmental record, and avoided many previous mistakes. Foreign aid is a difficult business to succeed at, and many people believe that the World Bank is overall a force for good.

The IMF and the World Bank attract so much attention because they are seen as icons of global capitalism. Furthermore, both groups hire many technocrats, and neither is subject to direct accountability through democratic rule. They seem to stand above national borders and make decisions, while reporting to no one. They encourage poor countries to borrow money and those debts cannot always be repaid. Such are the charges, but the reality is more prosaic. Both agencies are highly constrained in what they can accomplish, if only because their resources are limited and they deal frequently with contrary governments. At the margin, they make a difference, but they are not the driving forces behind global capitalism.