Driving The Global Economy

IMF HQ Building, Washington, D.C.

Driving the Global Economy

PAGE CONTENTS:

The World Bank

The IMF (International Monetary Fund)

The WTO (World Trade Organization)

The World Bank

In July 1944, delegates from 44 countries met in Bretton Woods, New Hampshire, to lay the groundwork for international financial relations after World War II. They created both the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now called the World Bank.

As its original name suggests, the World Bank's first purpose was to help reconstruct a shattered Europe. Later, it began providing loans and financial services to developing countries, to support their economic development projects.

These days, when people talk about the World Bank, they usually mean the World Bank Group, which includes the old IBRD and four other institutions: the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Center for the Settlement of Investment Disputes (ICSID).

Each institution is partly self-governing and has a slightly different purpose, but all five answer to the World Bank's board of governors in Washington, DC. And all share the stated goal of reducing poverty in less-developed nations by facilitating economic growth.

Each of the World Bank's more than 180 member nations is represented on the bank's board, but voting rights are based on how much money members have contributed to the bank. The United States contributes the most money and so has the most votes. As the bank's critics point out, these rules ensure that representatives from the world's richest nations control the bank's decision making--if they vote together.

The World Bank is the world's largest public development institution, lending some $25 billion per year to developing nations. That may sound like a decent enough thing to do, but both the bank and the IMF (which has also become a big lender) are frequently criticized for their development work.

Much of the criticism focuses on the "conditionalities" of the loans. To get a loan from the World Bank, a needy nation might have to agree to privatize its industries, deregulate its markets, or liberalize its trade policies. Such policy prescriptions follow the so-called "Washington Consensus," according to which open markets and liberal trade policies are crucial to a nation's long-term economic development.

Some critics say the Washington Consensus is wrong. Others agree that "free trade" is the right long-term goal, but take issue with how the Bretton Woods institutions have pursued it. Either way, it's clear that some of the world's poorest nations now owe huge sums of money to the World Bank--and can't afford to pay it back anytime soon.

Steve Sampson

The IMF (International Monetary Fund)

The IMF is a $317 billion pool of money and the Washington, DC-based institution that manages it. And it is a political lightning rod.

The IMF's money comes mainly from more than 180 member nations. Each member nation contributes to the fund on a sliding scale based on wealth--so that the United States contributes the most. Member nations are then allowed to borrow money from the fund under certain conditions.

Executive directors run the IMF day to day but answer to a board of governors. Each member nation has one governor on the board, usually its finance minister or central bank chief. But it's not a one-nation, one-vote system. Rather, the governors' votes match their countries' contributions. The United States contributes about 17 percent of the money, so it gets about 17 percent of the votes.

The IMF's overarching goal is to foster world trade by promoting international monetary cooperation. From the start, one of its primary missions has been to help stabilize currency exchange rates. Yet the IMF stirs up the most news--and the most controversy--when it makes loans to help member nations with "balance of payment" problems.

If you've ever been broke, you know about balance of payment problems. Nations that import more than they export are in roughly the same position as people who spend more than they make. A monetarily unbalanced nation has to cover the difference either by drawing on its savings or by borrowing money. The IMF lends money to member nations to help them deal with these balance of payment deficits.

That sounds like a good deal for borrowing nations, but there's a catch. IMF money comes with strings attached. Loan recipients have to sign letters of intent promising structural reforms to their economies to fix their balance of payment problems. Often these reforms include privatizing industries, balancing budgets, loosening tariffs, and reducing state subsidies.

Such "structural adjustment programs" (SAPs) are supposed to make for freer markets, which the IMF holds to be more productive in the long run. In the short run, though, problems often follow. Balanced budgets can mean cuts to education, health care, and other social services. Privatization can increase unemployment. And changes to import and export restrictions can devastate local industries.

In fact, anti-globalization critics charge that--far from helping nations in trouble--IMF programs actually aggravate social problems and redistribute wealth from the poor to the rich. IMF supporters counter that borrowing nations generally don't come to the IMF until they're in dire straits, and that blaming the IMF for belt-tightening at that point is like blaming the bank when you run out of money.

Mark Diller

The WTO (World Trade Organization)

When representatives from the world's industrialized nations met at Bretton Woods, New Hampshire, in 1944, they envisioned all three as part of a plan for the post-war world.

Despite that, the WTO wasn't born until January 1, 1995. Now, it's the governing body for nearly all international trade. It's a forum where 150 member nations negotiate trade agreements and work out the disputes that arise around them. And it's the agency that polices those agreements and approves punishments for members who break their word.

But don't think of the WTO as some new kid on the international power block--because it's actually the reincarnation of an old agreement called GATT. And you need to know a little about GATT to know a little about the WTO--or, for that matter, the world trade that fills today's stores.

That's General Agreement on Tariffs and Trade. In 1947, twenty-three nations signed a multilateral agreement designed to lower trade barriers and reignite the world's war-ravaged economy. They assumed the agreement was provisional--soon to be replaced by an "International Trade Organization" that would take its place beside the newly created World Bank and International Monetary Fund.

But that organization failed to hatch, and GATT was all there was. Over the next five decades, GATT grew from a tariff agreement into a de facto international institution, housing the multilaterally negotiated treaties, rules, and regulations that governed much of the world's rapidly expanding trade.

The basic premise behind GATT was simple. Nations that signed GATT agreements would treat each other as "most favored" nations for trading purposes, giving each the best available access to all the nations' markets. Barriers to international trade would come down, and--in theory at least--everyone would be better off.

To deal with the inevitable issues that arose, and to further advance world trade, GATT nations periodically held new rounds of trade talks. The Kennedy Round (1964-67) added a GATT section on development. The Tokyo Round (1973-79) struggled with the issue of non-tariff trade barriers. Finally, the Uruguay Round (1986-94) retired GATT and replaced it with the World Trade Organization.

The WTO absorbed the existing GATT agreements--which mostly covered trade in industrial goods--and added new agreements on services and intellectual property. It built on the dispute resolution process already in place, adding new authority to enforce agreements through trade sanctions. And it absorbed, formalized, and expanded the bureaucracy that had grown up around GATT.

It is GATT remade as a more formal, more powerful entity. And that has made it a bigger target for critics of globalization. Some say it helps multinational corporations at the expense of local businesses, workers, and the environment. Others say it empowers rich nations at the expense of poor ones. Still others say its enforcement authority undermines national sovereignty.

WTO supporters counter that freer trade is ultimately good for all, that barriers to trade don't provide effective protection for workers or the environment, and that the WTO's member nations drive the organization, not vice versa. Ambassadors from those nations make up the WTO's general council, which runs the show day to day.

Every two years, the general council reports to a ministerial conference, also made up of members' representatives. These ministerial conferences drive new rounds of trade talks. But there's plenty to do the rest of the time. The WTO's member nations conduct more than 90 percent of the world's trade. Like it or not, that's a lot to watch over.

Steve Sampson

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