By Antony Mutunga
After the gruesome Second World War, the world was left in shambles. Then, more than ever, there was a need for new rules concerning the global monetary system. In 1944, a group of delegates representing 44 countries met at Bretton Woods, New Hampshire, to come up with new rules in what is today referred to as the United Nations Monetary and Financial Conference, or the Bretton Woods Conference. After three weeks in the conference, the delegates were able to draw up an agreement that they all identified with.
The end result of the conference was that under the Bretton Woods system two of the most powerful global institutions in the world were created; the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). When IBRD was combined together with another institution referred to as the International Development Association (IDA), they made up the World Bank. When the two are combined with three other institutions – the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID) – they make up the World Bank Group.
The two institutions created were both given their own mandate to help the world grow during the post WWII era. The IMF had the duty to monitor the exchange rates and lend reserve currencies to countries that had trade deficits. On the other hand, the IBRD was created to provide the underdeveloped nations with the capital they needed to grow. The idea was to promote free international trade and to fund post-war reconstruction in order to revitalise the global economy.
However, as years went by, the role of the institutions changed. Today, the institutions that were once created to help the global economy are now coming under heavy criticism for failing in their intended roles. The presence of the global institutions seems to be doing less to help the global economy, which keeps running deeper and deeper into trouble.
The main problem of the global institutions is believed to have started back in 1944 during the Bretton Woods Conference. The crises that the world is facing today seem to have begun as a result of the guidelines that were put when creating the global institutions. Even though many people know that the conference was responsible for the birth of the IMF and the IBRD, not many know about the initial plan that was drafted by the British economist John Maynard Keynes.
Unlike the global institutions in place now, Keynes had drafted a different plan that would ensure that the agreement was fair to all the countries. Having recognised the imbalance of trade between countries as one of the reasons some countries could not generate trade surplus, he suggested that instead of debtor countries being the only ones to feel the burden, creditor countries should also have constraints as well. He proposed a system that would ensure that creditor countries, with trade surplus, would spend the surplus to pump money into the economies of debtor countries in order to help their economies.
Keynes went ahead to suggest that a global bank, which he referred to as International Clearing Union, should be established. It would have its own currency, the bancor, which would be exchanged with the national currencies at fixed exchange rates. In doing so, the bancor would become the unit of account between countries, making it the measure of a country’s trade deficit or surplus.
His plan was strongly argued against especially by his American counterpart, Harry Dexter White. White being from a creditor country with a trade surplus, believed that if Keynes had his way then instead of the US receiving dollars in exchange for their exports they would be receiving the “crazy money” suggested. Gunning more support from the rest of the delegates, White was able to win the argument against Keynes.
In doing so, the system saw all currencies linked to the US dollar, which was then linked to gold. The system was able to bring about rapid economic growth but it did not last. As a result, in 1971, US President Richard Nixon abandoned the link to gold, causing the fixed exchange rate system to weaken.
Even though the two global institutions survived this, it was just the beginning of their problems. For starters, the IMF has been heavily criticized for its conditions, which are based on what is referred to as the ‘Washington Consensus’, that come with the financial assistance they provide. The conditions are usually never considerate of the borrower country’s situation thus many governments feel the loss of autonomy because if they are to get the financial assistance they would have to adhere by the conditions given by the IMF.
The conditions also highlight the institution as one that is usually more concerned about the rights of the creditors than the welfare of the less fortunate nations. This has been seen as a result of most of the developed countries having a bigger share of quota in the institution thus giving them an edge on the decisions made. This has seen many emerging and developing countries feel that the institution is unfair in its duties.
On the other hand, the World Bank, which is linked with IBRD, has also faced many criticisms. The main one is its failure to give its full attention towards the social and environmental implications that arise from the development projects it funds. The World Bank has previously funded projects that have seen populations of the affected areas get displaced thus creating more harm than good. An example would be the displacement of thousands of Kenyans from their homes in ancestral forests, without compensation, in the name of conservation by groups funded by the World Bank.
In addition, the continued partnership of the institution and the private sector has seen some governments feel their role as the primary provider is being undermined which has seen a reduction in services such as education and health services in many developing countries.
The failures of these two global institutions have seen other countries exit it to form their own institutions. For instance, the BRICS – Brazil, Russia, India, China and South Africa – established the New Development Bank and Contingency Reserve Arrangement (CRA), which are to act, as counters to the IMF and World Bank. To ensure that they do not go down the same path the emerging markets ensured that all members have equal rights and that no conditions were put in place.
Even though these new institutions are not as financially equipped as the IMF and the World Bank, they are sure to make the two global institutions reconsider their roles. It is time global institutions made reforms to incorporate present realities. If not, they stand the risk of collapsing in the near future and being replaced by new ones. ^