Were the World Bank and IMF created to perpetuate the economic dominance of the North over the South?

Word count: 3289

To appropriately address the question, one must be clear about what is meant by the term 'economic dominance' and who exactly is referred to by the terms 'North' and 'South'. Hence, the beginning of this essay explores definitions of these terms with regard to different theories of development, namely dependency and new international division of labour theorists.

This essay then moves on to investigate the organisational structure of the IMF and World Bank and the implications that this has had with regard to the perpetuation of economic dominance. By addressing the power structure within both the Fund and the Bank, we are able to draw conclusions on which actors are able to use these institutions for their own purposes.

A considerable proportion of the essay is then spent investigating the implications of the use of the U.S. dollar as a dominant currency in international trade, with particular focus on the role it played during the debt crisis.

Attention is then drawn to the consequences of the debt crisis and the changing role of both the Fund and the Bank, exploring both defence and criticism of the institutions' use of structural adjustment programmes.

With a focus throughout this essay on the IMF, the final section will explore the more recent contradictions in the logic of the institution. Using the theories of Max Weber (2001) the essay shall conclude that the IMF attempts to serve the interest of the financial community whilst maintaining its stated aim and raison d'etre, and this irrationality can be explained by the Weberian 'iron cage'.

Both the IMF and the World Bank were born out of the Bretton Woods Conference in 1944 which was attended by forty-five different countries. Along with the General Agreement on Tariffs and Trade (GATT) the three became known as the Bretton Woods Trio, with complimentary but different aims.

The IMF's original aim was to remove barriers to international trade by increasing currency convertibility (i.e. by attaining stable exchange rates) as well as providing a pool of foreign currencies to allow member states to deal with short-term balance of payments difficulties. It simultaneously advocated national independence in economic policy in order for members states to pursue policies of full employment (Kenwood and Lougheed, 1983).

The World Bank was originally named the International Bank for Reconstruction and Development and its mandate was to finance post-war reconstruction in Europe. It was intended that it would provide loans for specific projects and it also had the power to loan to private companies. The Bank's mandate changed significantly after the European economies had been fully re-established in the 1960s. I will return to address this shift later on in the essay.

For dependency theorists such as Andre Gunder Frank (2007) and Christobal Kay (1989) the term 'North' (in the context of this question) would refer to advanced capitalist societies which exploit poor (i.e. Southern) countries for their own advantage. In this context, 'economic dominance' would refer to 'exploits... [of] cheap labour, raw materials, and larger markets [which] they need to increase their own wealth' (Roberts and Hite, 2007 p.71). As both the IMF and the World Bank 'were the fruits of wartime collaboration between the United States and the United Kingdom' (Williams, 1994 p.53) they would be regarded by these theorists as an extension of Northern dominance. To dependency theorists who regard this process as an historical one these institutions would be viewed as the latest manifestation of this problem, clearly for them 'perpetuating' would be a fitting word.

New international division of labour theorists such as Frobel, Heinrichs and Kreye (2007) are less inclined to attribute economic dominance, which they would define as the international division of labour and international alienation through foreign trade, to purely nation-state actors as the term 'North' often suggests. Instead they attribute this dominance to the new bourgeoisie i.e. the exploitative elites among these traditional actors:

Foreign trade is not just simply an exchange of commodities between two national economies, but more precisely, a concrete manifestation of the international division of labour, consciously planned and utilised by individual companies (2007, p.165).

Clearly from this point of view an institution such as the IMF with a stated aim of facilitating international trade, would be regarded as perpetuating economic dominance.

If, as Marx and Engels suggest, the 'lower strata of the middle class... sink gradually into the proletariat' (2004 p.13) then those who perpetuate economic dominance would be better defined as the financial elites and the owners of multinational corporations in both the North and the South (although clearly the number in the South would be comparatively very low), rather than the average Northern consumer of a product born from the international division of labour. Hence, these theorists would not necessarily define the 'North' as a geographically situated nation-state but instead as the multinationals and presumably the financial elite, i.e. the new bourgeoisie, who are largely concentrated in the global North.

Here both new international division of labour theorists and dependency theorists would agree that the IMF and the World Bank were created to perpetuate a system of economic dominance that has 'been determined by five centuries of development of the world economy' (Frobel, Heinrichs and Kreye, 2007 p.168). However, their respective definitions of economic domination differ along with the precise definitions of the actors involved.

Conversely, there are those (Keynes, 1980; Kenwood and Lougheed, 1983; Stiglitz, 2002; Goddard, 2003; Ritzen, 2005) who saw the establishment of the IMF (and the World Bank) as a necessity to prevent further conflict by guarding against competitive devaluations and an unstable international economy (typical of the 1930s), which had been seen as an important factor in the lead up to the war. They state definitively and without undertones of intentional economic domination that the 'IMF's immediate postwar objective was to restore exchange rate stability' (Goddard, 2003 p.242).

Goddard notes that the organisational structure of the Fund 'has remained largely the same to this day' (ibid). This allows us to apply any conclusions regarding the nature of the Fund's structure upon its creation to its continuing role. A Dennis and Robert Leech (2006) study of voting power within both the World Bank and the IMF revealed them to be 'even more undemocratic than they are intended to be because the USA turns out to have much more voting power than its weight at the expense of other members' (p.29). This leaves those such as Chomsky (2005) to assert that 'the IMF and World Bank, [are] virtually U.S.-run' (p.132). This revelation appears to justify the accusation of economic domination, but it can not act as proof for the more general notion of 'Northern' dominance, rather as an extension of U.S. hegemony (Chomsky, 2005). However, some argue (Chang, 2010; Williams, 1994; Swedberg, 1986) that there is an inherent injustice in any 'weighted' voting system in favour of all richer countries over the poorer ones.

Contrary to the proposal advocated by John Maynard Keynes (1980) for a world reserve currency administered by a central bank, instead, the IMF was born. As a result, the dollar became tied to gold and most currencies became tied to the dollar. 'In effect the US dollar became 'as-good-as-gold' and in this one act became the dominant currency of international trading exchange' (Ellwood, 2006 p.30).

Although developing countries were present at Bretton woods, Williams (1994) points out that they 'exerted minimal influence' (p.55) and were tied politically to colonial nations. He notes that 'American hegemony' (ibid) ensured that American objectives were met rather than those of both the British and the underdeveloped countries. From this point of view, again, the institutions could have been said to perpetuate the American agenda rather than that of the whole global north (Williams, 1996 George and Sabelli, 1994; Chomsky, 2005).

However, more pragmatic writers such as Kenwood and Lougheed (1983) who write with a much less normative view of the history of the IMF and World Bank, regard this choice as as simply practical, due to the fact that 'only the U.S. dollar was available as a major convertible currency at the time' (p.256).

The period up to the early 1960s saw the fund take a 'limited role... because of the continuing use of exchange rate controls' (ibid p.255) and achieve 'moderate success' in its stated goals. In 1958 the U.S. recorded its first payment deficit, and these deficits continued into the 1960s. In the 1960s and early 1970s countries contracted loans (or debt) mostly from private banks with no-strings-attached and hence both private banks and the Fund had little leverage over countries.

The World Bank on the other hand had shifted its mandate from 'reconstruction' of Europe (which had been largely achieved by the 1960s) to that of 'development' of the global South. Unlike the Fund during this time, the Bank was able to exert relative pressure on governments, as it was the loaning institution for various projects such as roads, hospitals and education (Ritzen, 2005).

If we follow Stiglitz' logic that:

we cannot talk meaningfully about the motivations and intentions of any institution, only of those who constitute and govern it. Even then, we often cannot ascertain true motivations. As social scientists, we can, however, attempt to describe the behaviour of an institution in terms of what it appears to be doing (2002, p.207).

Then, if we are able to conclude that the institutions, by their very nature are dominated by the global North, particularly by the policies of the U.S. (as argued above), then the intentions of these countries become those of the IMF and World Bank.

To address the question again using Stiglitz' logic, in order to make any kind of conclusion about these institutions we must also look to their actions and their repercussions. I shall focus here on the repercussions of the 'dominant-dollar'.

In 1973 OPEC moved to increase the price of oil, with devastating effects for net oil-importers who went into huge balance of payments deficits whilst the oil-exporting states conversely went into balance of payments surpluses. Much of this new revenue was saved in Northern banks and came to be known as 'petrol-dollars'. The banks had an imperative to shift this money (to meet their interest obligations on deposits) and hence high-risk loans were readily given to the South (Perkins et, al., 2006; Stiglitz, 2002; Ellwood, 2006).

In the late 1960s and early 1970s speculation had begun that the U.S. did not have the reserves in gold to back up its currency and this caused large speculative flows away from the dollar. This caused President Nixon, in 1971, to move unilaterally to devalue the dollar and de-link it from gold. This 'effectively reduced the debt it owed to the rest of the world... As interest rates shot up, those countries reeling under OPEC oil-price hikes had the cost of their eurodollar loans double and even triple. Almost overnight' (Ellwood, 2006 p.48).

Susan George suggests that the IMF 'cannot be held responsible for the circumstances that brought heavily indebted countries to its doorstep in the first place' (1988 p.47). However, I believe that it was in the legacy of the Bretton Woods Conference (and the creation of the World Bank and the IMF), in allowing the dollar to dominate international trade exchange, that the institutions played their part in debt crisis (Perkins et, al., 2006). In allowing the U.S. a virtual dominance in the IMF (George, 1988; Williams, 1994; Chomsky, 2005; Leech and Leech, 2006) the institution had allowed for a circumstance in which a change in the monetary policy of the U.S. had huge repercussions to those indebted to the dollar, primarily the global South. Benjamin Cohen (2003) states explicitly the benefit of having a dominant currency as 'the political power that derives from [the] monetary dependence of others' (pp. 226 – 227).

The cumulative effects of the move to a floating exchange rate system (after 1972), the oil crises and their subsequent loans, as well as the debt owed to the World Bank as a result of its shift in the 1960s to 'development', had by 1982 constituted the debt crisis that substantially changed the remit of the IMF (and World Bank):

As a financial crisis the debt crisis threatened the stability of the international banking system. The fear of widespread Third World debt default and the potentially devastating consequences of such actions on Western economies led the United States and other Western nations actively to intervene in the debt rescheduling process. The IMF was viewed as the appropriate institutional mechanism through which debt rescheduling would take place' (Williams, 1994 p.62)

This period marked a shift in the World Bank and IMF as both began to attach greater conditionality to loans, a significant change in the policy particularly of the World Bank (Kapur, 2005; Killick, 2006). This 'took the Bank closer to the Fund' (Kapur, 2005 p.34) and this collaboration in the approach taken between the Fund and the Bank on the terms of conditionality fitted with the ideology of the United States and subsequently became known as the 'Washington Consensus'.

Supporters here argue (cited in Buira, 2003 and Goddard, 2003) that the banks could not be allowed to fail, and that the consequential structural adjustment programs (SAPs) associated with the new loans were necessary to improve confidence in the countries' ability to repay their debt (Marchesi and Thomas, 1999). Kapur (2005) concludes that some form of conditionality is always 'inevitable' between lenders and borrowers.

Critics such as Susan George (1988) note that:

it allows the major industrialized countries and their banks to off-load the consequences of their own shortsighted policies and financial recklessness onto the Fund's shoulders. The IMF helps them to consolidate their power over poor nations (p.48).

To follow the arguments and methodology stated earlier in this essay, it comes as no surprise to find the consensus between the IMF and the World bank to be in line with rich nations, primarily the U.S., as historically and structurally they can be viewed as an extension of their power.

Stiglitz produces a critique of the IMF that reaches the core of its logic and values. He claims that, by not allowing banks that make 'bad' loans to fail, the Fund 'keeps the speculators in business' (Stiglitz, 2002 p.199) by providing 'free insurance'. He asserts that in a market that is really free, the banks should be allowed to fail and that this is the exact logic that the IMF pertains to follow. Of course if we accept that speculation produces instability (Tobin, 1978; Shiller, 1999; Rasiah, 2000; Patomaki, 2001; Palley, 2003; Cassidy, 2010), then there appears to be a conflict in the aims of the bank and its actions, which Patomaki calls a 'catch-22' (Patomaki, 2001 p.24).

Though Stiglitz does not agree that the IMF and World Bank were created to perpetuate a pre-existing dominance, he asserts instead that there has been a 'quiet' shift in the objectives of the Fund, and hence explains this phenomenon in stating explicitly that the IMF 'is also pursuing the interests of the financial community' (2002 p.206). He concludes that this leaves the Fund in a conflict of interests between its stated and its unspoken agenda. George (1988) interprets this irrationality by stating that the Fund lives in 'never-never land' and Chang (2010) hypothesises that the problem may be that 'the economics taught in the university classrooms is too detached from reality to be of practical use' (p.244).

Though I agree with Stiglitz' conclusion as to where the interests of the bank lie (i.e. with the financial elite, which is based in the rich nations, particularly the U.S.), I would disagree with the intentionality implied by him and various other authors (George, 1988; Chomsky, 2005) that the response to the debt crisis was to the advantage of the financial community and U.S. alone. If the debt crisis had caused an economic meltdown (as projected above by Williams (1994)) then the IMF would have failed in its raison d'etre, clearly an event that the Fund could not allow. However, the only option that the Fund saw as being available to it was one which Stiglitz points out would only harm its longer term interests.

In order to explain the apparent irrationality of the Fund, it is useful here to turn to Weber:

Where the fulfilment of the calling cannot directly be related to the highest spiritual and cultural values, or when, on the other hand, it need not be felt simply as economic compulsion, the individual generally abandons the attempt to justify it at all (2001, p.124).

After the criticisms levied against both the Bank and the Fund after the repercussions of the SAPs became widely know. The Fund distanced itself from the morality of its decisions, and instead labelled itself as purely striving for economic growth – it became a bank purely about growth and stability. Its means had become its ends. Ritzen (2005) points out that 'markets are useful instruments, not goals in themselves' (p.67). The problem for the Fund is that they have indeed become goals. The IMF is trapped in a Weberian Iron cage, for which it is partly to blame, and from which by its very nature, it can not escape. For to curtail its support for the destabilising effects of the 'financial community' would to induce further destabilization and hence curtail its own existence.

Since the 1990s, partly in response to the moralistic critique applied to the Washington Consensus by the Southern Consensus (Gore, 2003), both institutions have moved towards 'development with a human face' showing an interest in the value of poverty reduction (e.g. Poverty Reduction Strategy Papers). The 1980s had proved the rationality of the Fund towards the irrational in a Weberian sense, i.e. using free markets to achieve economic growth, as opposed to its original intention to achieve economic growth for the purpose of peace and stability. The recent development within the institutions to a more moralistic approach does not negate this argument. For as George points out 'if the Fund believed... that economic growth can also result from greater social equality... it would perfectly well make such objectives part of its programmes' (George, 1988 p.53). With the work of those such as Rodrik (1999) who argue that economies with more equal income distribution develop faster economically, and the 'growing concern among IMF member nations, rich and poor, that increasing income disparity will destabilize political systems and undermine national support for the international capitalist system' (Goddard, 2003:264), along with the failure of the wholly free-market approach to actually deliver results (Chang, 2010; Stiglitz, 2002), it becomes rational for the Fund to include human development in its logic.

In conclusion, we have shown that both dependency and new international division of labour theorists would view the creation of the IMF and the World Bank, and their continued existence, as a further perpetuation of the historical economic dominance of the North over the South.

Having assessed the power structure in the institutions, the study by Leech and Leech (2006) shows us that the U.S. has a hegemonic position in the institutions, and this has affected the policies which it pursues, particularly with the advent of the Washington Consensus. It has also been shown that this hegemonic position of the U.S. and the legacy of the Fund has had direct and adverse consequences on the global South (e.g. the repercussions of devaluing the dollar and also the repercussions of supporting speculation) and that this has perpetuated the divide between rich and poor countries that exists today.

Finally, we have seen how the Fund has been forced through its own logic and raison d'etre to reconcile its interests with those of the financial community (which is largely based in the global North, particularly the U.S.). This leads to a conflict of interests which ultimately results in a Weberian iron-cage.

Bibliography

Buira, A. (2003). An Analysis of IMF Conditionality. In: A. Buira, ed. Challenges to the World Bank and IMF: Developing Country Perspectives. London: Anthem Press. pp. 55 – 91.

Cassidy, J. (2010). How Markets Fail: The Logic of Economic Calamities. London:

Penguin Books.

Chang, H-J. (2010). 23 Things they Don't Tell you about Capitalism. London: Allen Lane.

Chomsky, N. (2005). World Orders, Old and New. Oxford: Oxford University Press.

Cohen, B. J. (2003). Monetary Governance in a Globalized World. In: C. R. Goddard, and Cronin. P, and Dash. K. C, eds. International Political Economy: State - Market Relations in a Changing Global Order. Baskingstoke: Palgrave Macmillan. pp. 215 – 241.

Ellwood, W. (2006). The No-Nonsense Guide to Globalization. Oxford: New Internationalist Publications Ltd.

Frank, A. G. (2007). The Development of Underdevelopment (1969). In: J. T. Roberts and A. B. Hite. eds. The Globalization and Development Reader: Perspectives on Development and Global Change. Oxford: Blackwell Publishing. pp. 76 – 85.

Frobel, F. and J, Heinrich. and O, Kreye. (2007). The New International Division of Labour in the World Economy (1980). In: J. T. Roberts, and Hite, A. B, eds. The Globalization and Development Reader: Perspectives on Development and Global Change. Oxford:

Blackwell Publishing. pp. 160 – 175.

George, S. (1988). A Fate Worse than Debt. London: Penguin Books.

George, S. and Sabelli, F. (1994). Faith and Credit: The World Bank's Secular Empire. London: Penguin Books.

Goddard, C. R. (2003). The International Monetary Fund. In: C. R. Goddard, and Cronin. P, and Dash. K. C, eds. International Political Economy: State - Market Relations in a Changing Global Order. Baskingstoke: Palgrave Macmillan. pp. 241 – 269.

Gore, C. (2003). The Rise and Fall of the Washington Consensus as a Paradigm for Developing Countries. In: C. R. Goddard, and Cronin. P, and Dash. K. C, eds.

International Political Economy: State -Market Relations in a Changing Global Order. Baskingstoke: Palgrave Macmillan. pp. 317 – 341.

Kapur, D. (2005). Conditionality and Its Alternatives. In: A. Buira, ed. The IMF and the World Bank at Sixty. London: Anthem Press. pp. 31 – 59.

Kay, C. (1989). Latin American Theories of Development and Underdevelopment. London: Routledge.

Kenwood, A. G. and A. L, Lougheed. (1983). The Growth of the International Economy 1820 – 1980. London: George Allen and Unwin.

Keynes, J. (1980). The Collected Writings of John Maynard Keynes. In: D. Moggridge, ed. Actvities 1940 – 1944: shaping the post-war world, the Clearing Union. Volume 25. London: Macmillan Press Ltd. for the Royal Economic Society

Killick, T. (2006). Conditionality and IMF Flexibility. In: A, Paloni, and Zanardi. M, eds. The IMF, World Bank and Policy Reform. Oxon: Routledge. pp. 253 – 265.

Leech, D. and R, Leech. (2006). Voting Power in the Bretton Woods Institutions. In: A. Paloni, and Zanardi. M, eds. The IMF, World Bank and Policy Reform. Oxon: Routledge. pp. 29 – 49.

Marchesi, S. and J. P, Thomas. (Mar. 1999). 'IMF Conditionality as a Screening Device'. In: Conference Papers. The Economic Journal. 109(454). Oxford: Blackwell Publishing for the Royal Economic Society. pp. 111 – 125.

Marx, K. and F, Engels. (2004). The Communist Manifesto. London: Penguin Books.

Palley, T. I. (2003). The Economic Case for the Tobin Tax. In: J, Weaver, and Dodd. R, and Baker. J, eds. Debating the Tobin Tax: New Rules for Global Finance. Washington DC: New Rules for Global Finance Coalition. pp. 5 – 27.

Patomaki, H. (2001). Democratising Globalisation: The Leverage of the Tobin Tax. London: Zed Books.

Perkins, D. H and S, Radelet and D. L. Lindauer. (2006). Economics of Development (Sixth edition). London: W. W. Norton and Company.

Rasiah, R. (2000). ‘Globalization and private capital movements’. Third World Quarterly. 21(6) pp. 943 – 961.

Ritzen, J. (2005). A Chance for the World Bank. London: Anthem Press.

Roberts, J. T. and A. R, Hite. (2007). Part II: Dependency and Beyond: Introduction. In: J. T. Roberts and Hite. A.B, eds. The Globalization and Development Reader: Perspectives on Development and Global Change. Oxford: Blackwell Publishing. pp.71 – 75.

Shiller, R. (Dec. 1999) ‘The ET Interview: Professor James Tobin’. Econometric Theory. 15(6) pp. 867 – 900.

Stiglitz, J. (2002). Globalization and its discontents. London: Penguin Books.

Swedberg, R. (Dec. 1986). 'The Doctrine of Economic Neutrality of the IMF and the World Bank'. Journal of Peace Research. 23(4). pp. 337 - 390.

Tobin, J (1978). ‘A Proposal for Monetary Reform’. Eastern Economic Journal. 4(3/4) pp. 153 – 159.

Weber, M. (2001). The Protestant Ethic and the Spirit of Capitalism. London: Routledge. Williams, M. (1994). International Economic Organisations and the Third World.

Hertfordshire: Harvester Wheatsheaf.