The World Bank and the IMF

The IMF’s usual prescription is budgetary belt tightening to countries who are much too poor to own belts
Jeffrey D Sachs

In simple terms, the World Bank lends money to countries for major development projects, the IMF lends money to countries when they get into financial difficulty, and both are supposed to be reducing poverty. The IMF’s main purpose is actually to maintain global financial stability, but its record here has been woeful, with financial crises a regular occurrence.

I say supposed to be reducing poverty because these institutions have often worked together to maintain poverty in developing countries, not reduce it. In some cases they have acted in a manner that appears to be fraudulent.

When Davison Budhoo, an economist who worked at the IMF for 12 years, resigned he unleashed a scathing attack on the institution, accusing it of manufacturing data so as to impose a neoliberal agenda on the countries it dealt with. Budhoo claimed that when the IMF assessed Trinidad and Tobago’s developing oil industry it doubled labour cost estimates, making it appear non-viable. When investment dried up the IMF offered to loan the country the money it needed to revive the industry, but only on the condition it adopted neoliberal policy reforms. Trinidad and Tobago commissioned two independent investigations into Budhoo’s accusations, and both found them to be true. This was not an isolated incident, and this type of skullduggery from both the IMF and the World Bank appears to have been common practice.¹

When the World Bank loans money to developing nations for large-scale projects, such as dams and power stations, they are made with the assurance that the projects will stimulate economic growth enough to allow the country to pay off the loan. This has often not turned out to be the case, and instead the country has been saddled with an unmanageable debt. A key reason for this is the firms that conduct the feasibility studies into the projects have deliberately exaggerated their potential to stimulate the economy, with projected annual GDP growth of 15–20% not unusual. According to John Perkins, who worked for a consulting firm where his job was to provide these inflated growth estimates, this was done with the full knowledge of the consulting firms, the US Government, the World Bank, and the IMF.²

When the recipient nation fails to meet its repayment obligations it has to turn to the IMF for assistance, because the IMF has a virtual monopoly in providing assistance to poor nations experiencing a financial crisis. Debt relief is then used as leverage to force it to accept neoliberal economic policies that are beneficial to western banks and companies.³

This Machiavellian behaviour of the World Bank and the IMF does nothing to achieve their stated goal of reducing poverty, although to be fair to the World Bank, it did a reasonable job of reducing poverty before the neoliberal agenda undermined its work.

The fundamental reason the World Bank and the IMF have failed to reduce poverty and maintain financial stability is that they are controlled by the US government, and the US government is controlled by the ultra-rich. The result of this is that they have been designed to shift wealth from low- and middle-income countries to the rich.

US control of these institutions is not a recent development. The World Bank has been promoting US foreign policy since the first loan the World Bank made. The recipient was France, which was granted $250 million in 1947 for post-war reconstruction. The US government initially blocked the loan, demanding France remove all communist members from its Cabinet before it could receive the money. The French complied and the loan was approved the following day.⁴

This contravened Article IV, section 10, of the World Bank Charter, which stipulates that ‘The Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the members concerned. Only economic considerations shall be relevant to their decisions, and these considerations shall be weighed impartially in order to achieve the purposes stated in Article I’ (namely promoting economic growth and reducing poverty).⁴

This set the precedent for these institutions, and from 1947 to the collapse of the Soviet bloc, World Bank and IMF decisions were determined in large part by the following criteria:⁵

• Decline to help regimes seen as a threat to the US government or its allies.
• Obstruct relations between developing countries and the Soviet bloc or China: for example, by distancing the USSR from India and Sukarno-era Indonesia.
• Modify the policies of left-wing governments so as to weaken the cohesion of the Soviet bloc (e.g. support was granted to Yugoslavia after it left the Soviet bloc in 1948, and to Romania from the 1970s when Ceausescu was attempting to distance the country from the Warsaw Pact).
• Support strategic allies of the US and the Western capitalist bloc (e.g. Suharto in Indonesia, Mobutu in Zaire, Marcos in the Philippines, Brazil’s dictators after the 1964 coup, Somoza in Nicaragua, and Apartheid South Africa).

US domination of these organizations may best be seen by the fact that, until 2012, all the Presidents of the World Bank were Americans. And to date, all the Managing Directors of the IMF have been Europeans, while their deputies have been Americans.⁶

The President of the World Bank is appointed from candidates nominated by the US President, who selects the nominees without having to consult anybody, not even the US Congress. In two cases the appointee has had little experience in international banking, both being former defence secretaries associated with discredited wars—Vietnam and Iraq.⁷

Ultimate control of the IMF and the World Bank rests with the US because both institutions require an 85% vote for key decisions to be passed. The number of votes a country gets allocated depends on its respective financial contribution, and the US has 16.5% of the vote at the IMF and 15.85% of the vote at the World Bank, giving it a power of veto in both institutions (which no other country has).⁸

There is clearly a conflict of interest with the USA’s control of the IMF and the World Bank. The stated purpose of these institutions is to reduce poverty by assisting poor countries to develop their economies, but if they did that then they would be able to compete with the US and other developed countries for market share in manufactured goods, rather than being a source of cheap labour and raw materials.

The World Bank and the IMF insist countries commit to good governance and transparency before they receive loans, yet their dealings and decisions are shrouded in secrecy. They also insist on being granted legal immunity by the countries they deal with, which exempts them from liability for the negative impacts of their actions. This has allowed them to operate freely with despotic dictators safe in the knowledge that there will be no legal repercussions.⁹

The World Bank and the IMF defend their dealings with dictators by claiming economic stability is a precursor to democracy, but the fact is they have often rejected the loan applications of democratically elected governments, then granted loans to the pro-US dictatorships that replaced them.

For example, they supported Brazil’s military dictator Castelo Branco with billions of dollars in loans that had been denied the democratically elected government that preceded him, and continued to support Branco’s regime even after it proved to be economically disastrous and extremely repressive.

In the first year of Branco’s regime Brazil’s GDP fell by 7%, thousands of businesses declared bankruptcy, and wages fell dramatically. To stem the public backlash strikes were outlawed and trade unions disbanded, direct ballot voting was abolished, and Branco’s regime employed the systematic use of torture to deal with dissenters.¹⁰

Other notable cases include Chile and Pinochet, Nicaragua and Somoza, and Zaire and Mobutu.

References

1. https://en.wikipedia.org/wiki/Enough_Is_Enough_(letter) – David Badhoo. Weissman, R. ‘Playing with Numbers: The IMF’s Fraud in Trinidad and Tobago’ Multinational Monitor, vol. 11, No. 6, June 1990.
2. Perkins, J. ‘Confessions of an Economic Hit Man’ Berrett-Koehler Publishers, San Francisco, 2004.
3. https://onlinelibrary.wiley.com/doi/10.1111/ajps.12531 – WB preference for UN votes.
4. www.worldbank.org/en/archive/history/exhibits/Digitized-Records-World-Bank-First-Loan – WB $250M France. www.cvce.eu/en/education/unit-content/-/unit/02bb76df-d066-4c08-a58a-d4686a3e68ff/84c940fe-a82b-4fe8-ad53-63144bfe30b1 – Marshal plan politicised against communism in Europe.
5. www.cadtm.org/spip.php?page=imprimer&id_article=2204#nh4 – WB and IMF support of right-wing dictators.
6. https://en.wikipedia.org/wiki/World_Bank_Group#Presidency; https://en.wikipedia.org/wiki/International_Monetary_Fund#Managing_Director – WB and IMF boss.
7. https://en.wikipedia.org/wiki/World_Bank_Group#Presidents – WB presidents RM, PW.
8. https://en.wikipedia.org/wiki/World_Bank_Group#Voting_power; https://en.wikipedia.org/wiki/International_Monetary_Fund#Voting_power – US power of veto.
9. Stiglitz, J. ‘Making Globalization Work’ Penguin Books, London, 2006, p. 13. https://en.wikipedia.org/wiki/World_Bank_Group#Sovereign_immunity – WB immunity.
10. www.cambridge.org/core/journals/financial-history-review/article/friends-or-foes-brazil-the-imf-and-the-world-bank-19611967/64D21F886048070FEB133C844C1F4486 – WB and IMF support dictatorship in Brazil.