The Unbalanced Equation
More than one billion people still live in deep poverty despite today’s better resources and technology.
The prime purpose behind the creation of multilateral financial institutions was reconstruction in the aftermath of World War II by providing funds and technical assistance to war-affected countries. The objective for the creation of the International Bank for Reconstruction and Development (IBRD) – the original institution of the World Bank Group – was to reduce poverty in middle-income and creditworthy poor countries by promoting sustainable development through loans, guarantees, risk management products and analytical and advisory services.
The World Bank is a vital source of financial and technical assistance to developing countries around the world. It is not a bank in the ordinary sense as it enjoys partnership with almost every country for reducing poverty and support development. The World Bank Group comprises five institutions which are: 1) International Bank for Reconstruction and Development, 2) International Development Association (IDA), 3) International Finance Corporation (IFC), 4) Multilateral Investment Guarantee Agency ( MEDA) and 5) International Centre for Settlement of Investment Disputes (ISID). Together, the IBRD and the IDA make up the World Bank.
The World Bank Group has set two goals to be achieved by 2030: to end extreme poverty by decreasing the percentage of people living on less than US$1.25 a day to no more than 3 percent and to promote shared prosperity by fostering the income growth of the bottom 40 percent of every country. However, the real concern is that although poverty has declined rapidly over the past three decades – even according to the World Bank itself – humanity continues to face urgent and complex challenges. More than one billion people still live in deep poverty, a state of affairs that is morally unacceptable given the resources and technology available today. At the same time, rising inequality and social exclusion seems to accompany rising prosperity in many countries. Under these circumstances, the World Bank's overarching mission of a world free of poverty is as relevant today as it has ever been.
The International Monetary Fund (IMF) is also an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world. The IMF was conceived in July 1944, when representatives of 45 countries agreed on a framework for international economic cooperation to be established after the Second World War. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression. The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF.
The IMF has played a part in shaping the global economy since the end of World War II. Broadly speaking, its history can be divided into the long years of cooperation and reconstruction (1944-71), the end of the Bretton Woods System starting in 1972–81, the debt and painful reforms (1982–89), the societal change for Eastern Europe and Asian upheaval (1990–2004) and globalization and the crisis that started in 2005, which continues till today.
The job of rebuilding national economies began at the end of the Second World War. The IMF was assigned the responsibility for overseeing the international monetary system to ensure exchange rate stability and encourage members to eliminate exchange restrictions that hinder trade. During the Great Depression of the 1930s, countries raised barriers to foreign trade, devaluing their currencies to compete against each
other for export markets and curtailing their citizens' freedom to hold foreign exchange. These attempts proved self-defeating. World trade declined sharply while employment and living standards plummeted in many countries.
The breakdown in international monetary cooperation led the IMF's founders to plan an institution charged with overseeing the international monetary system – the system of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other. The new global entity was assigned the mandate to ensure exchange rate stability and encourage its member countries to eliminate exchange restrictions that hindered trade.
The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates (the value of their currencies in terms of the U.S. dollar and, in the case of the United States, the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. This system, known as the Bretton Woods system, prevailed until 1971, when the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.
In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system. An attempt to revive the fixed exchange rates failed, and by March 1973, all major currencies began to float against each other. Since the collapse of the Bretton Woods system, IMF members are free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc or forming a part of a monetary union.
The IMF responded to the crisis emerging from the oil price shock of the 1970s by adapting its lending instruments. To help oil importers deal with the anticipated current account deficits and inflation in the face of higher oil prices, it set up the first of two oil facilities. From the mid-1970s, the IMF respond to the balance of payments difficulties confronting many of the world's poorest countries by providing concessional financing through what was known as the Trust Fund. In March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December 1987.
The fall of the Berlin Wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF to become a (nearly) universal institution. In three years, membership increased from 152 countries to 172. The IMF played a central role in helping the countries of the former Soviet bloc in their transition from central planning
to market-driven economies. This kind of economic transformation was never attempted before and the process was less than smooth at times. For most of the 1990s, these countries worked closely with the IMF, benefiting from its policy advice, technical assistance and financial support. By the end of the decade, most economies in transition had successfully graduated to market economy status after several years of intense reforms, with many joining the European Union in 2004.
In 1997, a wave of financial crises swept over East Asia, from Thailand to Indonesia to Korea and beyond. Almost every affected country asked the IMF for both financial assistance and for help in reforming economic policies. Conflicts arose on how best to cope with the crisis, and the IMF came under criticism that was more intense and widespread than at any other time in its history.
From this experience, the IMF drew several lessons that altered its responses to future events. First, it realized that it would have to pay more attention to weaknesses in the banking sector of different countries. In 1999, the IMF – together with the World Bank – launched the Financial Sector Assessment Program and began conducting national assessments on a voluntary basis. Second, the Fund realized that the institutional prerequisites for a successful liberalization of international capital flows were more daunting than it had previously thought. Along with the economics profession generally, the IMF dampened its enthusiasm for capital account liberalization. Third, the severity of the contraction in economic activity that accompanied the Asian crisis necessitated a reevaluation of how fiscal policy should be adjusted when a crisis was precipitated by a sudden stop in financial inflows.
The implications of the continued rise of capital flows for economic policy and the stability of the international financial system are still not entirely clear. The current credit crisis and the food and oil price shock are clear signs that new challenges for the IMF are waiting just around the corner. For a long time international capital flows fueled a global expansion that enabled many countries to repay money they had borrowed from the IMF and other official creditors and to accumulate foreign exchange reserves.
The founders of the Bretton Woods system had taken it for granted that private capital flows would never again resume the prominent role they had in the 19th and early 20th century and the IMF had traditionally lent to members facing current account difficulties. The latest global crisis uncovered fragility in the advanced financial markets that soon led to the worst global downturn since the Great Depression. Suddenly, the IMF was inundated with requests for standby arrangements and other forms of financial and policy support.
With broad support from creditor countries, the Fund’s lending capacity was tripled to around U.S.$750 billion. To use those funds effectively, the IMF overhauled its lending policies, including by creating a flexible credit line for countries with strong economic fundamentals and a track record of successful policy implementation. Other reforms, including ones tailored to help lowincome countries, enabled the IMF to disburse very large sums quickly, based on the needs of borrowing countries and not tightly constrained by quotas, as in the past.
If one reviews the stated objectives and actual performance of the IMF, there is a wide difference. This disparity could be attributed to changing foreign policy objectives of the developed nations and their greed to control the global economy and productive resources, particularly energy resources. This could be best understood if one examines the prevailing situation in South Asia, Middle East and North Africa (MENA) in the aftermath of 9/11, especially attacks on Afghanistan and Iraq with the consent of the UN. The recent agreement arrived by 5+1 developed countries with Iran created hopes for easing tensions but the disputes remain there.
To understand the role played by the World Bank and the International Monetary Fund ( IMF) with specific reference to Pakistan, which has remained the focus of the U.S. foreign policy starting from the Cold War era to the ongoing war on terror being fought in Afghanistan for more than a decade, one has to consider a few important points.
The developed countries that talk about promotion of democracy and at times participate in ‘regime change’ exercises supported two military rulers General Zia-ul-Haq and General Pervez Musharraf in Pakistan. The country was facing economic sanctions at the time Pervez Musharraf dismissed the elected government of Nawaz Sharif.
As the UN approved the NATO attacks on Afghanistan, Pakistan was assigned the role of a ‘frontline partner in the war on terror’ and most of the sanctions were removed. It was not surprising because the jihad in Afghanistan was fought from Pakistan with the help of religious parties that parented the Taliban, which later became the worst foe. Pakistan was then asked to eradicate the Taliban.
Another military ruler Field Marshal Mohammad Ayub Khan ruled Pakistan for nearly ten years and celebrated ‘the decade of reforms’ because during his regime almost all the multilateral donors extended aid, grants and soft-term loans to Pakistan. In that period, Pakistan’s GDP size and its growth rate was even better than some of the most prosperous countries.
Against that time, the 1990s is often termed as the lost decade because Pakistan went through the worst economic crisis during this period. Each elected government of Benazir Bhutto and Nawaz Sharif was dismissed twice. These dismissals refreshed the memories of the dismissal of Zulfikar Ali Bhutto’s government in the 1970s and his subsequent hanging. During the rule of Zulfikar Ali Bhutto, the Muslim world witnessed the rise of the Organization of Islamic Conference, which was not approved and two of its founders, King Faisal of Saudi Arabia and Zulfikar Ali Bhutto met unfortunate deaths.
This raised the suspicion that the global and regional superpowers certainly didn’t approve of the emergence of new economic powers, particularly in South Asia, the Arabian Peninsula and North Africa. Yet another victim that has been enduring economic sanctions for the last three decades is Iran. The bottom line is that financial assistance is driven by the foreign policy of the global and regional superpowers.