The Process of Economic Development

By James M. Cypher; James L. Dietz | Go to book overview

17

International institutional linkages

The International Monetary Fund, the World Bank, and foreign aid
After studying this chapter you should understand:
the functions and evolution of the International Monetary Fund and the World Bank and their lending programs;
what an IMF stand-by loan is and its purpose;
the theory supporting, and the purpose of, IMF austerity and adjustment programs;
the effectiveness of IMF austerity and adjustment programs;
the difference between World Bank project loans and structural adjustment loans (SALs);
the focus and limitations of foreign aid; and
the nature of donor bias in aid giving.

Introduction

As we have seen in the previous chapters, developing nations have to make a wide range of choices regarding their development strategies. For sustainable development, we have seen that, in the final analysis, countries must draw primarily upon their own resources and capabilities. However, since virtually all less-developed nations are members of the IMF and the World Bank (IBRD, the International Bank for Reconstruction and Development), and since almost all of the poorest and some of the not-so-poor nations draw significant supplements to their savings and production capabilities from foreign aid, it is necessary for every student of economic development to acquire a basic understanding of the role of these institutions in the development process. 1

When sovereign nations turn to the multilateral institutions such as the IMF and the World Bank, or when they accept foreign aid, they then are able to extend their production capabilities by supplementing domestic savings and investment with foreign resources. But while such access creates an opportunity, it also presents a challenge to the developing nations, since the international institutions never lend or grant funds without also attempting to influence the course of events and the economic dynamics of the less-developed nations. When international institutional linkages improve on the overall developmental potential of the recipient nation, there is little reason for concern. Unfortunately, in the opinion of virtually all observers of aid, including the lending institutions themselves, this fortuitous outcome has too

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