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Chapter Pages 159-174

SOSC 1430 Chapter Notes - Chapter Pages 159-174: International Financial Institutions, Bretton Woods Conference, Structural Adjustment


Department
Social Science
Course Code
SOSC 1430
Professor
Miguel Gonzalez
Chapter
Pages 159-174

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SOSC 1430
Wednesday, January 13th, 2016
The International Financial Institutions
Marcus Taylor Reading
-IMF and WB - objectives - ensuring global economic stability and promoting poverty reduction
-Considerable criticism from social movements and political groups
-Left of political spectrum - claimed that IMF and WB policies serve to entrench global poverty
and exacerbate inequalities
-Conservative voices - argue the institutions are overly bureaucratic and irrelevant in today’s
globalized world - expanding role of multinational corporations and global financial markets
has lessened the need for the IMF and WB and therefore, they should be streamlined or
disbanded
-Bretton Woods Conference - 1944
The Origins of the IMF and World Bank
-With WWII ending, the US and Britain began to plan a new international order for the post-
war era - forefront of concerns was the creation of an international economic system to
promote trade and provide rules for economic relations between countries
-1930s - economic conflicts between major European powers contributed to outbreak of war
-During earlier period, the international monetary order was characterized by a system of
flexible exchange rates, which allowed countries to manipulate their currency in order to gain
economic advantages - when faced with economic problems countries might respond by
devaluing their currency - cheapen and therefore boost exports - short-term gain, at expense
of other countries - led to spiral of currency devaluations that interrupted the stability of
international trade and investment
-Economic and military power of US - blueprint proposal, designed by Harold Dexter White -
superiority of US’s industrial base, sought a system in which international trade could proceed
unhindered - help America’s economic expansion, but also fuel global prosperity and mutual
development
-Bretton Woods system - fixed exchange rates between national currencies
-IMF - when facing severe economic problems, countries would be permitted to draw
temporarily on the reserves of the IMF to pay international debts - provides a country with
time to stabilize its economy without resorting to measures such as currency devaluation that
would cause international monetary instability
-International Bank for Reconstruction and Development (IBRD) - later known as the World
Bank - to make loans at preferential rates of interest to European countries devastated by war
-Role in Europe was diminished with US Marshall Plan in 1947 - lent large sums of money to
European nations to accelerate reconstruction process
-IMF INITIAL FUNCTION - to provide financial resources to allow countries to solve balance-
of-payments crises without devaluing their currencies - help maintain system of stable
exchange rates established at Bretton Woods that facilitated stable international trade
-WB INITIAL FUNCTION - to provide financing for post-war reconstruction and development
projects; from 1950 on, the Bank focused on providing loans to developing-world countries at
lower rates of interest than those of private international banks - directed mainly towards
building infrastructure for development
-Accelerating process of decolonization, however, created a new and expanding clientele
-Truman - considered to have launched the project of international development in 1949 -
suggested decolonization was creating a new “underdeveloped world” - in need of a program
of development based on democratic fair dealing - IBRD important element of this
development project
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SOSC 1430
Wednesday, January 13th, 2016
-New countries emerged from collapse of colonialism - considered to be on natural path
towards development, advancing through a sequence of structural transformations from
traditional agrarian societies to modern industrial ones
-Rate of development was limited by the stock of capital a country could draw upon for
productive investment
-Post-colonial period - capital was scarce for most developing countries
-UBRD - intermediary between private international banks and developing-world governments
- was able to finance itself through loans from private international banks at low interest rates
- could then lend money to governments in developing world to finance development projects
at rates of interest that such governments could not obtain with private banks
-Initially, building physical infrastructure - highways, airports, electricity grids, hydroelectric
dams - criteria established by the Bank to ensure project would generate sufficient revenue to
repay the loan - tended to exclude many poorer nations - could not guarantee rate of return
-International Development Association (IDA) - formed in 1960 within World Bank to address
this issue - loans funded large-scale infrastructure projects at virtually interest-free status over
long periods of repayment
Governance Structures
-Unlike the United Nations General Assembly, where each country has one vote, voting rights
in IMF and WB are weighted according to the size of country’s economy - advanced industrial
countries have held majority of voting power
-Voting power translates into direct representation at board meetings
-US influence over decision making
-Cold War period - disproportionate amount of financing channelled to strategically crucial US
allies
The Turbulent 1970s
-1970s - instability and crisis in global economy, which prompted a dramatic transformation of
both IMF and WB
-US withdrew support for the Bretton Woods system in early 1970s - rupture within the IMF
-Concerned with escalating trade deficit and the growing amount of dollars held by countries
abroad, President Nixon abolished the system by suspending the convertibility of dollars into
gold - broke principal tenet of the Bretton Woods system and undermined the stability of
exchange rates
-Currencies of industrial countries were allowed to float freely, which undermined the official
role of the IMF to provide temporary loans to maintain currency stability
-Countries that needed short-term injections of money to pay international debts could turn to
the IMF without needing to maintain the value of their exchange rate - IMF now
recommended countries devalue their currencies to strengthen their exporting sectors, which
was opposite of original purpose
-Began to expand the number of conditions attached to its loans and increase its surveillance
of the policies pursued by borrowing countries
-‘Stand-by arrangements’ - austerity measures reducing government spending and lowering
consumption within the economy so as to decrease imports and increase funds available for
repaying international debts
-Growing numbers of developing world countries found it necessary borrow money from IMF -
entrenched the power of the institution in developing world
-Austerity programs the IMF insisted on - adverse effects on poorer segments of society
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SOSC 1430
Wednesday, January 13th, 2016
-In many countries, the financial solvency of the state was often restored through cutting
subsidies on basic consumption goods and reducing expenditures on social services
-WB - institution dramatically expanded operations
-McNamara - increase lending, including making loans to countries untouched by WB
-Bank’s lending shifted away from large-scale infrastructural projects to target wider range of
development objectives
-Emphasized need for the Bank to fund direct anti-poverty efforts through social programs and
projects aimed at modernizing the agricultural sector
-By focusing on health and education programs, McNamara’s approach became known as the
‘basic needs’ approach
-Robert McNamara’s Call for a “Basic Needs” Approach - nations need to give greater priority
to establishing growth in terms of human needs - nutrition, housing, health, literacy and
employment - even if it be at the cost of some reduction in the pace of advance in certain
narrow and highly privileged sectors whose benefits accrue to the few
-Two important changes from McNamara as head of World Bank
-1) Bank became more active and powerful on global level - actively propagate projects in
developing world as part of a broader mission to spread capitalist development
-2) In emphasizing need to focus on social objections, WB opened up debate about its own
purpose and that of development finance in general
-Approach well received by some members of international development community - also
powerful conservative reaction that suggested the Bank should focus on promoting economic
growth
The Debt Crisis, Structural Adjustment, and Conditionality
-End of 1970s - many developing countries faced with burden of high oil prices and falling
prices for their primary exports - began to borrow heavily from private international banks
-Banks had accumulated surplus holdings of dollars - actively seeking to make loans to the
developing world, often without regard for long-term sustainability
-Left countries across developing world heavily indebted to European and North American
banks
-1982 - US raise interest rates - deepened the debt burden
-A number of US and international banks faced collapse, which raised spectre of a financial
crash engulfing the entire Western financial system
-In response, IMF and WB began to pipe-line billions of dollars to debt-stricken countries to
facilitate continued payments on old debt
-IMF and WB proposed dramatic reforms for developing countries
-Post-war period - institutions of the state had major role to play in promoting modernization
through industrialization - reflected in policies such as credits to industry and trade
protectionism to block foreign competition
-IMF and WB - policies had created inefficient industrial sectors that were a drain on natural
resources and over-inflated state bureaucracies that distorted markets while breeding
corruption
-Not enough to stabilize economies of developing world through standard austerity programs -
more profound process of transformation necessary to open countries to foreign trade and a
greater focus on producing export goods
-Structural adjustment - shift from ‘project lending’ (funding specific project such as building a
dam) - to ‘program lending’ - less funding to support specific projects, more emphasis on
countries’ adopting structural adjustment programs
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