3 The World Bank and IMF The International Bank of Reconstruction and Development (the World Bank) and IMF

Box 9.3 The World Bank and IMF The International Bank of Reconstruction and Development (the World Bank) and IMF

were born at the Bretton Woods conference in the USA in 1944. Their purpose was to provide an order to the global economy to prevent the collapse of international trade and the development of isolationist economic policies, which it was believed had led to the Depression of the 1930s and the rise of fascism. The conference rejected the proposals of John Maynard Keynes to establish a world reserve currency administered by a central bank. Instead, it ‘opted for a system based on the free movement of capital and goods with the US dollar as the international currency’ (New Internationalist, July 1994: 14).

Initially, a more specific purpose was to provide funds to assist in the rebuilding of 13111

war-torn Europe. The European countries objected to the severe loan conditions, so the World Bank worked through the Marshall Plan which provided US finance to re-build Europe mainly through grants rather than loans. Third World countries did not receive the same treatment. Instead, they were pressured to keep their economies completely open to foreign goods and capital; and in exchange for financial assistance, countries were expected to adopt structural adjustment policies (see Box 9.4).

Partly as a result of the debt crisis of the 1970s and 1980s, both institutions now exer- cise enormous leverage over the policies pursued by most governments which require financial assistance. ‘That influence is enhanced by donor insistence upon an IMF and World Bank seal of approval as a condition for aid and debt relief’ (Oxfam, 1995: 8).

As Duncan Green points out, the two organisations are not democratically run: ‘deci- sions at the IMF and World Bank are taken on the basis of “one dollar, one vote”, guar- anteeing the dominance of both by the US government’ (1995: 34). In 1995, for instance, the USA had 17.18 per cent of the total vote at the World Bank while the total vote for

23 of the poorest African countries together amounted to 1.58 per cent of the total.

national economic policy through policy regulation and/or money-lending activities. The three most powerful and dominant of these are the International Bank for Reconstruction and Development (known as the World Bank), the IMF and the World Trade Organisation (WTO/OMC), although regional finance and development organisations, such as the European Bank for Reconstruction and Development (EBRD), the Inter- American Development Bank (IDB), USAID and increasingly other bilateral aid programmes also wield very considerable power over the policies pursued by Third World countries. Given the significance of the World Bank and IMF, a brief background to their formation and role is given in Box 9.3.

The economic system promoted by these institutions is based on the free movement of capital and goods with the US dollar as the international currency. In such a system, tourism can be seen as much the same as any other cash crop, and pressure exerted by the development banks upon the government of a country to increase its export earn- ings by boosting production of export crops is as applicable to tourism as it is to sugar, coffee, cotton, bauxite, or other products. Foreign exchange earnings can be boosted by attracting more international tourists and the foreign exchange which they bring with them.

The debt crisis of the 1980s and the First World’s reaction to it increased the power of the IMF and the World Bank. Spurred on by the prevailing ideology of President Reagan and Prime Minister Thatcher, the two institutions of the World Bank and IMF

11111 embarked on a mission to structurally adjust Third World economies so that they could

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meet debt obligations and fall into line with the right-wing economic orthodoxy sweep- ing the globe.

The origins of the debt crisis can be traced back to the huge profit made by members of the Organisation of Petroleum Exporting Countries (OPEC) in the early 1970s. These profits were surplus to requirements within the OPEC countries and much of the money was therefore banked and invested in the commercial banks of the First World. Awash with petro-dollars, the banks sought to make the most profitable use of this money. One of the ways in which they recycled it was by financing development projects in Third World countries, including tourist resort schemes.

In the rush for ‘development’, many of the projects financed were ill-considered and poorly planned. Some of the money was spirited away by Third World elites with access to power brokers and decision-makers, and more was paid direct to First World compa- nies taking part in the projects. A proportion of it therefore found its way back into the same First World banks that lent it in the first place.

In the late 1970s and the first half of the 1980s, interest rates on these loans rose sharply, an event that had not been anticipated by the lenders or borrowers in the early 1970s. Many borrowing countries found themselves unable to pay back even the interest on the loans, quite apart from the principal loan itself. First World bankers and politi- cians became concerned ‘that the sheer volume of unpayable loans would undermine the world financial system. They turned to the World Bank and the IMF, who were to restructure Third World economies so they could meet their debt obligations’ (New Internationalist, 1994: 15); hence, the rise of structural adjustment programmes (SAPs), which since 2000 have become known as poverty reduction strategy papers (PRSPs), and which are produced by national governments themselves. It should be pointed out, however, that they are produced with substantial input from IMF and World Bank officials and the two organisations retain the power of veto over PRSPs. Critics such as the World Development Movement believe that PRSPs are merely SAPs containing language about poverty reduction.

From the point of view of our analysis, what is crucial here is that SAPs/PRSPs imposed by the IMF and World Bank on Third World governments effectively force those governments to pursue specific policies not of their own design, although it was precisely in anticipation of such criticism that their means of production and title were changed. These policies make living conditions for the population harsher and more difficult while supposedly enabling the government to increase its foreign exchange earn- ings and thereby pay off its debt. The kind of policies associated with SAPs/PRSPs are listed in Box 9.4. It is worth noting, however, that most Third World countries already had little effective control over the direction of their policies before the debt crisis began. Colonial powers of the First World and transnational corporations (TNCs) dictated the main thrust of economic policy throughout the Third World. The IMF, World Bank and other supranational lending agencies along with the TNCs took over the mechanism of power from the former colonial powers. Moreover, proponents of SAPs/PRSPs point out that once the debt had become a reality, there were no policies other than those given in Box 9.4 which could realistically be imposed to support global capital accumulation.

The loans which form part of the SAPs/PRSPs are made only on strict condition that the national economy is restructured according to these policies (see Box 9.4). And this conditionality has meant that the economic and fiscal policies of most African and Latin American countries are now dictated from Washington. In the words of Green:

In the aftermath of the debt crisis, the IMF and later World Bank’s use of condi- tionality allowed the powerful industrialised nations to revamp one Third World

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