Not out of the Woods

By Chote, Robert | The Independent (London, England), September 28, 1994 | Go to article overview
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Not out of the Woods

Chote, Robert, The Independent (London, England)

BUREAUCRACIES are by their nature unlovable. The 50th birthday of the World Bank and the International Monetary Fund is proving as much an occasion for critical scrutiny as for a celebration of their longevity.

The IMF and the World Bank were spawned in 1944 by the Bretton Woods monetary conference, at which the representatives of 44 countries met in a New Hampshire hotel and laid out a blueprint for the post-war international economic order. But the economic environment has changed out of all recognition since then, forcing the Bretton Woods institutions to evolve in ways that their founders could not have anticipated.

The IMF was created to police a system of fixed but adjustable exchange rates, averting pressures for protectionism by providing short- term loans to countries with balance of payments difficulties. But the exchange rate regime collapsed in the early 1970s when Richard Nixon floated the US dollar. Since then the IMF has spent more time telling developing countries and those making the transition from communism to capitalism how to run their economies.

"The IMF still has an authoritative voice; through a variety of channels, most significantly the Group of Seven leading industrial nations, it can express views on major policy concerns," argues Bahram Nowzad, former head of the IMF's external finance division. "But in reality the IMF's impact and influence on the policy decisions of major industrial countries is faint, its role emasculated."

This has blurred the distinction between the IMF and World Bank, which was set up to narrow the gap between rich and poor countries through large-scale investment projects, often public sector schemes like dams. Now, like the IMF, the bank helps to fund "structural adjustment" in developing nations, offering loans often with strings attached.

Before their annual meetings, which take place in Madrid next week, the organisations are sponsoring a two-day navel-gazing conference. Critics will not be in short supply. One camp - including campaigning charities like Christian Aid - deplores the prescriptions the IMF and the World Bank apply to the countries they claim to help. It says they damage the economy, exacerbate poverty and harm the environment. Another camp - well represented in the industrial countries that finance the institutions - believes they are bloated and inefficient bureaucracies.

The accusation that the Bretton Woods institutions exacerbate the very problems they aspire to solve is fundamental. Their traditional policy recommendation combines currency devaluation to improve the balance of payments, with tight interest rate and budgetary policy to bear down on inflation and reduce need for credit. The institutions also advocate privatisation to improve economic efficiency. But critics argue that the Asian "tigers" became successful by allowing the state a greater role in creating and protecting fragile new industries.

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Not out of the Woods


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