In Focus

The Bretton Woods Institutions

At the center of the globalization debate, the World Bank and International Monetary Fund (IMF) are complex institutions, rich in controversy and history. From a 1944 meeting of forty-four United Nations member-countries in Bretton Woods, New Hampshire, the institutions were created to correct past policy mistakes leading up to World War II, and ensure international economic cooperation and stability in the aftermath of the war. Both organizations have weathered considerable change in the global economic environment - from the evolution of the post-war system of fixed currencies, to today's virtually free-flowing capital markets. However, it remains to be seen how they will adapt in the 21st century amidst a backdrop of economic crisis and reform in developing and industrial countries. This guide-page focuses on the role the Bretton Woods institutions play in the global economy and provides an objective view of the contention their policies have provoked.

Key Facts

World Bank: Toward a Noble Goal

The World Bank is a large and complex institution comprised of five different organizations, each with separate functions, ultimately working toward the same goal of alleviating poverty. In an effort to educate the public about their efforts, they have created a colorful web-site with facts about their involvement in education, AIDS relief, and more.

(World Bank)

The Role of the IMF

Pick up any major newspaper and you are bound to run across an article relating to the IMF. But who knows what this seemingly omnipresent organization really does? What is an SDR? And where does the money they lend come from? A good place to start finding answers is right from the IMF's website.

(IMF)

IMF at the Center of the Globalization Debate

One of the most vocal critics of the IMF is Joseph Stiglitz, a Nobel laureate and former World Bank chief economist. His book, Globalization and its Discontents, is thoroughly reviewed in the New York Review of Books.

(New York Review of Books)

IMF Proposal on Sovereign Debt Restructuring Mechanism (SDRM)

Amidst a backdrop of crisis and defaults in developing countries, the IMF and other organizations have sought to find an effective approach to crisis management. This is the IMF's controversial proposal on resolving sovereign debt issues.
(IMF)

Private Sector Response to the SDRM Proposal

The Institute of International Finance, a financial institution trade group, released a discussion paper on the IMF's proposal with critical comments on the viability of such a mechanism.

(Institute of International Finance)

Reforming the World Bank and IMF

The U.S. Congress established the International Financial Advisory Commission (IFIAC, or the Meltzer commission), headed by Professor Allan Meltzer of Carnegie Mellon University. In its report of March 2000, this committee of eleven experts sharply criticized the Bretton Woods Institutions for overstepping their mandate and failing to direct resources to the poorest developing countries. The Bank Information Center's web-site has a link to the report and provides links to other related articles.

(Bank Information Center)

News Updates

Report Concludes IMF Too Lenient on Argentina Leading up to Crisis

A new report by the IMF's Independent Evaluation Office concludes that the IMF supported Argentina's exchange rate peg for too long among lenience in other areas such as budget deficits. The report, however, lays ultimate blame with the Argentine government.

IMF Warns on Oil Prices - Cuts '05 Global Growth Forecast

A 30% rise in oil prices since their spring forecast has caused the IMF to temper forecasts for GDP growth next year in their quarterly World Economic Outlook.

Oil prices, among other factors cited in the report, such as overvalued housing markets and a potential hard landing in China, puts their '05 global growth forecast at 4.3%, down from 5% growth this year.

The full report is available at the IMF website.

IMF may take Radical Steps to Avert Debt Crises in Emerging Markets

From the Financial Times: The International Monetary Fund is being pressed to step up its efforts to avert debt crises in emerging market economies, including closer surveillance of countries' economic rate policies and debt profiles to provide early warnings.

But there have been more mixed reviews for more radical proposal now being discussed by the IMF to make emerging markets less vulnerable by linking debt payments to a country's gross domestic product. Economists tend to see growth-indexed debt as a sensible way to reduce a country's vulnerability to external shocks, to insure against low growth in return for slightly higher interest payments in good times.

Countries Need to Increase Aid to Meet Goal of Cutting Poverty in Half by 2015

The UN's Millennium Development Goal hopes to cut poverty in half by 2015. Last year, rich countries pledged to increase aid by $16 billion per year to meet that goal, but the World Bank claims they are $50 billion short of what's needed. So, the World Bank released a report to show countries that the absorption of aid in low-income countries is improving and lays out details about how those funds could be effectively spent.

IMF says US Needs Tax Hikes to Deal with Fiscal Problems

From the Financial Times: The International Monetary Fund has said that the Bush administration's plans to halve the US fiscal deficit over four years are too modest and called for tax increases to tackle longer term fiscal problems.

In its annual report on the US economy, the IMF said that even if the administration's target of halving the deficit over four years was achieved, the deficit and government debt would still be too high in the face of the added burden on Social Security and Medicare created as “baby boomers” start to retire.

Report on the Economic Impact of the Israel-Palestine Conflict

Since the intifada of September 2000, the Palestinian territory has undergone economic devastation with wide ranging repercussions. The World Bank will issue an updated assessment of the conflict's economic impact.

IMF Responds to Critics in Foreign Policy Magazine

Kenneth Rogoff, the IMF's economic counselor and director of research, retorts against his institution's critics. See commentary below.

Commentary

Wither the Washington Consensus?

Over the course of the last decade, the expression “Washington Consensus” came to symbolize power politics unjustly favoring the rich over the poor people of developing countries. The term seemingly bridges the gap between two sides of a chorus of dissenters. Economists, such as Joe Stiglitz, the former World Bank Chief Economist, uses it in reference to the policies and technocrats at the International Monetary Fund (IMF), and activists use it, like “McDonalds” or “Starbucks,” as a representation of the evils of globalization. Now, some analysts claim we are in a “post-Washington Consensus” era.

However, the Washington Consensus was initially a far more technical term than what it represents to many today. A product of its time, the term was coined in 1989 by John Williamson, a senior fellow at the Institute for International Economics, to denote a general set of advice addressed by the international financial institutions and the US administration. The Washington Consensus reflected a set of policy prescriptions designed to move Latin American countries from their failed habits of running large budget deficits, which nearly always result in hyperinflation and poverty, to a path of growth and stability.

As originally conceived, the Washington Consensus called for the following policies:

(As summarized from several of William's papers and published works).

1. Fiscal Discipline: Budget deficits should be kept small as a percentage of GDP.

   
   
   

2. Public Expenditures: Priorities should be shifted to fields offering high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure.

   
   
   

3. Tax Reform: Broaden the tax base and cut marginal tax rates.

   
   
   

4. Financial Liberalization: Toward a goal of market determined interest rates with a possible interim objective of the abolition of preferential interest rates for privileged borrowers and a moderately positive real (nominal rate minus the inflation rate) interest rate.

   
   
   

5. Exchange Rates: A competitive and unified exchange rate. Set at a sufficiently competitive rate to induce rapid growth in non-traditional (typically manufactured or higher value-added goods) exports; managed so as to allow exporters to make business plans based upon a more certain and stable rate. Unified to achieve one rate for everyone (at least in trade transactions).

   
   
   

6. Trade Liberalization: Reduce trade restrictions to tariffs of 10% to 20% maximum over a period of 3-10 years, the speed of which depends on macroeconomic conditions.

   
   
   

7. Foreign Direct Investment (FDI): Barriers impeding the entry of foreign firms should be abolished; foreign and domestic firms should be allowed to compete on equal terms.

   
   
   

8. Privatization: State owned enterprises should be sold into private hands.

   
   
   

9. Deregulation: Governments should abolish regulations that impede the entry of new firms to restrict competition, and ensure that all regulations are justified by such criteria as safety, environmental protection, or prudential supervision of financial institutions.

   
   
   

10. Property Rights: The legal system should provide secure property rights without excessive costs, and make these available to the informal sector.

The ‘consensus' in Washington Consensus is really a bit of a misnomer. Most of the elements in the list above are rarely a matter of agreement among economists or policy-makers, but more like points for argument. For example, Mr. Williams is a proponent of managed exchange rates (alluded to in number five, above), while other economists insist that more flexible regimes are best, where the market, not the government, determines the appropriate exchange rate.

Indeed, Mr. Williamson left absent from the list particular policies that eventually became attached to the Washington Consensus, most notably, the liberalization of the capital account (i.e. allowing the relative free flow of capital in to and out of a country). However, the list does incorporate three broad orthodox themes of liberalization that are embraced, at least in general terms, by most in the economic field: fiscal discipline, a market economy, and openness to the world (at least in terms of trade and FDI). In time, these broad concepts morphed into a mantra of neo-liberalism, embodying the policies of the IMF, World Bank and US Treasury Department in the 1990s and became the Washington Consensus.

According to their critics, the Washington institutions pushed neo-liberal policies indiscreetly down the throats of developing countries' governments, with little thought to each country's readiness for such reforms. And in many cases, the promise of reform was not fulfilled under real conditions. For instance, privatization, which in concept seems like a worthy goal - transferring businesses from the sclerotic hands of government to motivated private owners - was often conducted poorly, resulting in unpredictable outcomes from country to country. Schemes designed to sell off shares equitably often ended up transferring assets to a privileged elite for a fraction of their true value, ultimately creating more problems than benefits. The classic example was the failure of the Russian privatization scheme between 1992 and 1994, which infamously put control of thousands of enterprises into the hands of oligarchic businessmen or the “nomenklatura” at the expense of ordinary citizens.

Capital account liberalization was also put into question after financial crises spread throughout the developing world. The 1994 currency crisis in Mexico caused a harsh economic reversal and resulted in a previously unprecedented $51.6 billion bailout led by the IMF and the Clinton administration. And this was only the beginning; over the course of a decade there were major crises in Russia, Turkey, Argentina, and Brazil. The 1997 Asian contagion, which spread through Malaysia, Korea, Thailand, Indonesia, and the Philippines, left only countries with relatively closed capital accounts out of harms way. These crises demonstrated to government leaders how punishing the free flow of capital could be to those who don't closely follow the rules.

After so many tragic and dramatic crises, the policies represented by the so-called Washington Consensus came under serious fire. The former World Bank Chief Economist, Joe Stiglitz, turned into one of the most vocal critics when he wrote Globalization and its Discontents (the title is a takeoff on a Freud's Civilization and its Discontents ) heatedly disparaging the International Monetary Fund's leadership and policies. While Stiglitz's book may be the most public indictment of what the Washington Consensus represents, it is far from the only criticism - the US Congress questions the viability of the IMF and World Bank, and anti-globalization protesters plague their annual meetings.

The IMF and World Bank have thus far responded to their detractors with increased oversight and efforts toward improving policy. To that end, the IMF recently issued a “sobering” paper called: Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, which admits that “the process of capital account liberalization appears to have been accompanied in some cases by increased vulnerability to crises.” Confirming the complaints of many of their critics the paper empirically demonstrates that the pace of liberalization policies must be tailored to the institutional sophistication of each individual country. While, the release of this paper suggests that change is indeed at hand, it is doubtful any transformation will be dramatic. One outside analyst speculated euphemistically that future policy shifts would be “nuanced.”

Change could come from other sources as well. With the new century came a new administration in Washington and with it a new way of handling economic crisis: the Bush administration's hands-off approach to the unfolding economic emergency in Argentina in 2001 contrasted to a great degree with the bailout of Mexico during the Clinton administration. But despite a more laissez-faire approach to handling crises, the Bush administration is committed to, as William Finnegan posits in a Harpers Magazine article, The Economics of Empire, market fundamentalism as a core element of its strategy against terrorism.

If indeed we are in a “post-Washington Consensus” world, that some claim, it would not seem much different than where we've been. For example, just last October, Brazilians replaced their former free-market oriented President with an outspoken critic of neo-liberalism. But, perhaps to the surprise of his constituents, Luiz Inácio Lula da Silva (known as Lula), the socialist, ex-metalworker President is leading the way as Brazil's new government continues to pragmatically embrace pro-market policies. The markets are reacting positively; Brazil's main stock market index, the BOVESPA, has rallied this year, due, according to the Institute of International Finance, to the fact the government seems to be playing by the free-market rules by pushing through reforms.

So, call it post-Washington consensus, or market fundamentalism, or neo-liberalism or any moniker you wish, the principles behind the Washington Consensus are here to stay. As Juliet says, in Romeo and Juliet , “What 's in a name? That which we call a rose, by any other name would smell as sweet” - and so it may be for the Washington Consensus.

- Bud Parr

Resources

World Bank

International Monetary Fund

Bretton Woods Project

A group of UK-based NGOs providing a critical voice on IMF and World Bank activities.

Bretton Woods

A bipartisan, non-profit group organized to increase public understanding of international financial and development issues and the role of the Bretton Woods institutions.

Economist Magazine: World Bank and IMF articles

Past Commentary

SDR Wars

In Focus Archive »