Essay on BWIs: Key to Global Economic Growth & Prosperity

Introduction

The World Bank and the International Monetary Fund (IMF), also called Bretton Woods Institutions (BWIs), are essential entities in the United Nations System. IMF monitors currencies and exchange rates to foster the stability of the international monetary systems. World Bank, on the other hand, enhance shared prosperity by working with developing countries to eradicate poverty. Bretton Woods Institutions are essential because they play complementary roles that hasten economic growth by shaping the structure of the international financial order.

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The Creation and the Relationship Between the IMF and the World Bank

BWIs were both created in July 1944 during an international conference held in New Hampshire (IMF, 2016). The goal of the two institutions, as agreed during the conference, is to create a stable and prosperous global economy through a framework for economic cooperation (IMF, 2016). To date, this goal remains central to BWIs. However, the scope of their work has continuously evolved because of the economic developments and challenges across the world.

The Bank and IMF rely on each other for specialized expertise. The staff of the two institutions collaborates closely on policy issues to eradicate poverty, especially in developing countries, and also hasten economic growth. BWIs often conduct a country mission in parallel (IMF, 2016). Each institution has special expertise, and they allow their staff to work in each other's mission since its goals converge. IMF assessment of the members' monetary policies provides input that the Bank uses to determine potential development projects. Similarly, the World Bank's advice on structural reforms is the basis of the IMF's policy advice to its members.

The two entities collaborate in alleviating debt crises in developing countries. In this regard, BWIs have established the Multilateral Debt Relief Initiative (MDRI) and the Poorly Indebted Countries (HIPC) program to mitigate the debt crisis in emerging economies (IMF, 2016). The goal of BWIs through the two initiatives is to support developing nations to achieve their development goals while managing their debt burden. Also, the staff of BWIs jointly prepare debt reports, implying that the two financial institutions have close relationships. Lizarzaburu, Moysidis, and Salquero (2012) said that the bedrock of the relationship between BWIs is the interaction between their loan officers and economists working in the same country.

Criticisms of the World Bank and the IMF

BWIs have faced criticism for their conditional financial support. These institutions require member countries to implement certain economic policies to benefit from their financial services. These conditions tend to involve structural adjustments. There is evidence that the IMF, in particular, tend to impose as many conditions as possible as a way to increase its organizational slack, budget, and prestige (Lizarzaburu et al., 2012). Such conditions adversely impact developing countries since most of them have a heavy dependence on BWIs.

The second criticism is about a lack of transparency, biased and inconsistent decision making. Historically, developing nations have raised concerns that BWIs are instruments of Western countries' economic and political power. Developed economies like the US have higher weight politically and can influence policies initiated by the IMF and the World Bank. Besides, these organizations tend to impose policies with little or no consultation when addressing economic and development issues in developing countries because of political influence.

The third criticism is that the two entities provide financial support, mainly to countries with access to private capital. The argument is that BWIs does not support nations based on their humanitarian grounds (Dreher, 2004). The World Bank, in particular, prefers to give loans to middle-income countries whose income from exports exceeds the amount needed to service their foreign debts (Dreher, 2004). There are concerns that countries that deserve humanitarian assistance cannot easily access the World Bank's credit facilities. This situation has raised criticism because the purpose of establishing BWIs was to create a prosperous world economy.

Criticism of Rigid Economic Models

The BWIs rely on GNI per capita to analyze the size of an economy. This model is the basis of determining the operational lending policy, especially by the World Bank. This methodology has come under criticism because it does not summarize the level of economic development and the level of welfare in a country. It also underestimates the size of the emerging economies that have more informal, substantive activities.

Critics have also criticized BWIs for using the "one-size-fits-all" economic models without understanding the distinct characteristics of individual countries. The IMF, in particular, has been using approaches that are unrealistic to some economies (Garcia, 2013). Moreover, the methods of analyzing economies are rigid because they are based on the Washington Consensus. Such models do not provide for adjustments to reflect conditions under which governments operate and how their real-life economies work.

Econometric models of the BWIs do not forecast problems when used to analyze countries. The reason, according to Garcia (2013), is that the methods assume that free markets are efficient, which is not applicable in emerging economies. Despite the existence of the evidence of symmetric information in different countries, the BWIs still use methods that are inappropriate to some nations. In analyzing countries, the existing models require economists to apply uniform deregulation, devaluation, and fiscal austerity measures (Garcia, 2013). In the 1990s, nonetheless, IMF initiated reforms that would improve its economic models and, more importantly, make them useful in forecasting problems (Garcia, 2013).

Criticisms of the Governance Structure

One of the major criticism of the BWIs is the structural under-representation of the Global South. The two financial institutions have political power imbalances in their systems of governance. More specifically, the voting shares of BWIs are based on the openness and the size of the countries' economies. Consequently, most countries that receive financial support from BWIs are structurally under-represented, particularly in the decision-making. Criticism arises because the current governance structure favors developed nations. Most Western countries have their executive-directors in both entities. Conversely, only one executive-director represents other economies collectively grouped as constituencies (Woods, 2003).

The second concern is that the current governance structure does not enhance accountability. In the two institutions, the structure of accountability works through representatives of governments from different countries. Boards of Governors are at the top of the system, and they are supposed to control the institutions (Woods, 2003). Critics have argued that the Board of Governors, which ought to maintain the overall oversight of these entities, meet only once per year. Representatives of member states and executive-directors also sit at the Executive Boards. The issue with this governance structure is that it allows the representatives of governments to play dual roles, yet they ought to oversee the everyday work of these institutions.

Another trenchant criticism is that BMIs have inadequate oversight of staff and management because of an effective governance structure. Several practical impediments, according to Woods (2003), complicate the role of the Executive Boards, although they oversee senior managers. Critics have argued that the system of administration in both institutions weakens the Executive Boards because they only approve decisions and proposals made by management and staff in consultation with the most powerful countries (Woods, 2003). This aspect suggests that the structure of governance results in inadequate oversight of management.

References

Dreher, A. (2004). A Public Choice Perspective of IMF and World Bank Lending and Conditionality. Public Choice, 119 (3/4), 445-464. doi: 10.1023/b:puch.0000033326.19804.52

Garcia, G. H. (2013). International Monetary Fund. In the handbook of safeguarding global financial stability (pp. 419-434). Cambridge, Massachusetts: Academic Press. Retrieved January 19, 2020, from https://www.sciencedirect.com/topics/economics-econometrics-and-finance/imf-lending/url/

IMF. (2016, March). Fact sheet: The World Bank and IMF framework of cooperation. Retrieved January 19, 2020, from https://www.imf.org/external/np/exr/facts/pdf/imfwb.pdf/url/

Lizarzaburu, E., Moysidis, A., & Salquero, J. Q. (2012). A Discussion Paper for Emerging Markets: The Role of the IMF and the World Bank. Journal of Governance and Regulation, 1(3). doi: 10.22495/jgr_v1_i3_c1_p2

Woods, N. (2003). Unelected Government: Making the IMF and the World Bank More Accountable. The Brookings Review, 21(2), 9. doi: 10.2307/20081096