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Before one gets in dipper discussion it should realize that neither institution was set up to solve the financial problems of developing countries; nevertheless, today virtually all financial disbursements from the World Bank are to LDCs, and the IMF is the lender of last resort for LDCs with international payments crises. The World Bank is well-established borrower in international capital markets, issuing bonds denominated in U.S. dollars, but guaranteeing a minimal Swiss franc value when the dollar depreciates. In the early 1990s, the Bank, which is the largest source of long-term development finance for LDCs, provided about 40 percent of the total net resources to LDCs. It lent more than $30 billion to LDC governments annually, including funds for social in Indonesia, a hydroelectric plant in Columbia, a mass rail transit system in Brazil, port facilities in Slovenia, a water supply system in Thailand, and a college of fisheries in the Philippines. The IMF provides ready credit to a LDC with balance of payments problems equal to the reserve tranche -the country’s original contribution of gold – or 25 percent of its initial contribution or quota. The financial intermediation is also available through the IMF. To illustrate, the financial intermediation of the IMF enabled India to borrow $2.85 billion from Saudi Arabia in 1981 at an interest rate of 11 percent, compared to 18 percent in the commercial markets. Yet between 1983 and 1985, most special funding beyond direct IMF credits dried up, with net lending to LDCs falling from $11.4 billion to $0.2 billion, reducing IMF leverage to persuade LDCs to undertake austerity in the face of internal political opposition. In 1975, the World Bank established an interest subsidy account (a “third window”) for discount loans for poorest countries facing oil price increases.PG562/1 In 1979 to 1983, structural adjustment loans accounted only 9 percent of Bank landing and had little impact on the most highly indebted countries. Although the World Bank set up a Special Program of Assistance (SPA) in 1983 to ease the debt crises, by the late 1980’s critics, including some U.S. economists and members of Congress, voiced dissatisfaction with the World Bank’s minimal financial contribution to debt relief arrangements. The leadership of the World Bank, while pointing out that 45 percent of its loans were to heavily indebted countries, argued, however, that the World Bank’s primary role was development lending to poor countries, not financial guarantees for commercial bank loans to middle-income countries.PG563/2 After 1987, the World Bank group (included its self-loan window, the International Development Association or IDA) the IMF (Structural Adjustment Facility), and bilateral donors concentrated the SPA on low-income debt-distressed Sub-Saharan Africa. The SPA increased confinancing of adjustment with other donors, and provided greater debt relief, including cancellation of debt from aid and concessional rescheduling for commercial debt from creditor governments. According to Harvard University ‘s Jeffrey D. Sachs, advisor to Latin American and Eastern European economies, LDCS facing a substantial debt overhang might be better off defaulting on a portion of the debt than undertaking austere domestic adjustment or timely debt servicing. In 1998 in Toronto, Canada, G7- Group of Seven major industrialized countries agreed to reschedule concessional debt, canceling it at least in part, with the balance to be repaid with a 25-year maturity including 14 grace years. Toronto terms included a “menu” of three supposedly equivalent rescheduling options for low-income debt-distressed countries (primary in Africa) with an acceptable ongoing World Bank/IMF Adjustment program. Most of the G7 countries took second option of longer terms (rescheduling eligible debt service at market interest rates, but with a 25-year maturity)pg 881, that is in reality inferior option, including the United States as main contributor to the borrowing funds of the World Bank and IMF. A balance of payments equilibrium refers to an international balance of the goods and services balance over the business cycle, with no undue inflation unemployment, tariffs, and exchange controls. Countries with chronic balance of payments deficit eventually need to borrow abroad, often from the IMF as lender of last resort. In practice a member borrowing from the IMF, in excess of the reserve of tranche, agrees to certain performance criteria, with emphasis on a long-run international balance and price stability. IMF standby arrangements assure members of ability to borrow foreign exchange during a specific period up to a specified amount it they abide by arrangement’s terms. These policies may require that the government reduce budget deficits through increasing tax revenues and cutting back social spending, limiting credit creation, achieving market-clearing prices, liberalizing trade, devaluating currency, eliminating price controls, or restraining public sector employment and wage rates. The Fund monitors domestic credit, exchange rate, debt targets and other policy instruments closely for effectiveness. Even though the quantitative signicance of IMF loans for LDC external deficits has been small, the seal of approval of the IMF is required before the World Bank, regional development banks, bilateral and multilateral lenders, and commercial banks provide funds. Policies generally shift internal relative prices from nontradable to tradable goods, promoting exports and “efficient” import substitutes. PHILLipines farmers While policies generally move purchasing power from urban to rural areas, consumer to investors, and labor to capital, subgroups within these categories may be affected very differently; moreover, government functionaries who oversee and administer programs still posses discretion in distributing rewards and sanctions. Conditions attached to IMF credits sometimes provoke member discontent, as in Nigeria’s antistrucutral adjustment “riots” in mid-1989. The DC’s collective vote, based on members quotas, is 60 percent. And LDCs often support DCs in laying down conditions for borrowers so as not to jeopardize the IMF’s financial base. Still many African and Latin America borrowers say that IMF conditionally is excessively intrusive. Thus, for example, in 1988, in exchange for IMF lending to finance a shortfall in exporting earnings from cocoa, coffee, palm products, and peanuts, Togo relinquished much policy discretion, agreeing to reduce its fiscal deficit, to restrain current expenditures, to select investment projects rigorously, to privatize sundry public enterprise, and to liberalize trade. Critics form LDCs, supported by the Brandt Commission charged that IMF presumes that international payments problems can be solved only by reducing social programs, cutting subsidies, depreciation currency, and restructuring similar to Togo’s 1988 program. According to the Brandt report, the IMF’s insistence on drastic measures in short time periods imposes unnecessary burdens on low-income countries that not only reduce basic-needs attainment but occasionally lead to “IMF riots” and downfall of governments. These critics prefer that the IMF concentrate on results rather than means. 4 Despite a decline in funds from 1970s to the 1980s, the IMF maintained or even increased its leverage for enforcing conditions on the borrowers in the 1980s. For during 1980s and early 1990s, World Bank loans consolidated conditions set by the IMF. The IMF became gatekeeper and watchdog for the international financial system, as IMF standby approval served as necessary condition for loans or aid by others.5 Moreover, the world Bank and IMF, increased their external leverage. Many low-income recipients, especially from Africa, lacked personnel, abdicating responsibility for coordinating external aid, and increasing the influence of the Bank, IMF, and other donors. It is very interesting to compare the increasing role of IMF and the amount of the loans “given” and approved by the same organization with “aid” given by the Organization for the Economic Cooperation and Development (OECD). During the 1980s, OECD countries contributed four-fifths of the world’s bilateral (and almost three-fifths of all) official development assistance to LDCs. However, in the early 1990s, after the collapse of centralized socialism and a decade or so of falling surpluses in the Organization of Petroleum Exporting Countries, the OECD aid contributed 98 percent of all aid. PG438/10. Although annual U.S. foreign aid in the 1960s, 1970s, and 1980s was larger than that of any other country, in the early 1990s, Japan gave more foreign aid than any other country. In 1993, Japan’s foreign aid was $11.3 billion, compared to the second ranking US’s $9.7 billion. But as percentage of GNP (0.15 percent), foreign aid in the United States ranks last among OECD members. The U.S. citizens spend more on participant sporting activities and supplies in a year than their government spends annually on foreign aid. Furthermore, aid as a percentage of GNP in the United States has generally declined steadily with 0.5 percent in 1965 and 0.15 percent in 1993.PG 439/12. In the United States, even some liberals, churches, and humanitarian organizations traditionally in favor of economic aid stopped supporting it in the 1980s and 1990s because they increasingly perceived it as benefiting large U.S. corporations and conservative countries suppressing human rights. The post-1970 and 1980 U.S. Congress, and at times the president, were increasingly skeptical about aid’s value in straightening allies, influencing international behavior, improving U.S. access to markets and raw materials, promoting capitalism, maintaining global stability, and building a world order consistent with U.S. preference. Furthermore, the United States and other OECD countries have achieved many of their goals through means other than aid-specifically through their dominant shares in two major international financial institutions, the International Monetary Fund and World Bank. The conditions set by these lending institutions have ensured that LDCs and Eastern Europe undertake many of the market reforms, stabilization, privatization, and external adjustment that high-income OECD countries want. The overwhelming share of IMF resources is for loans at the bankers’ standards. However, IMF concessional funds include member contribution (but rarely the United States) for structural adjustment facilities and a trust fund from sale of IMF gold. Donor counties and agencies often from a funding consortia, frequently under World Bank auspices; a fractional share for concessional aid can soften the overall payment terms of the financial package. Congress members sometimes object to U.S. loss of donor control over aid channeled through multilateral agencies and consortia. Other OECD members, however, perceive the United States as dominant in shaping the Washington consensus that establishes policies for multilateral agencies and consortia. The United States, as larger shareholder, can veto loan or concessional funds from IMF or World Bank. Some LDCs think the United States and other DCs use external resources to set conditions for LDCs domestic countries, their commercial banks, or multilateral agencies will loan, aid or arrange rescheduling and write-offs. Many LDC critics feel the IMF focuses only on demand while ignoring productive capacity and long-term structural changes. These critics argue that the preceding model of the two balances show the cost of using austerity programs – contractionary monetary and fiscal policies – prescribed by the IMF. Additionally these governments object to the Fund’s market ideology and neglect of external determinants of stagnation and instability. Moreover, IMF austerity curtails programs to reduce role as providing international monetary stability and liquidity, not development, the concessional component of its structural adjustment loans, which began in 1986, emphasized development more. However, in their Declaration of Uruguay, October 27-29, 1988, the seven largest Latin American countries contented that “the conditionally of adjustment programs, sector lending, and restructuring agreements often entails measures that are inadequate and contradictory, making the economic policies more difficult in an extremely harsh climate.” PG567/7 Beginning in the 1950s, structural economists form United Nations Economic Commission for Latin America (ECLA) criticized IMF orthodox premises that external equilibrium was short-term, generated excess demand, requiring primarily contractionary monetary and fiscal policies and currency devaluation. ECLA economists emphasized the necessity for long-run institutional and structural economic changes – accelerating the growth of export earnings, improving the external terms of trade, increasing the supply elasticity of food output through land reform, reducing income inequality and anti-monopoly measures before short-run financial and exchange-rate policies would be effective. New structuralist critque of 1980s and 1990s also stress the long –run transformation of the economy. Critics viewed the Latin America payments crises as a resulting from long-term structural crisis in export supply and wanted IMF programs to stress these long-run changes and avoid austerity programs.PG567/8 To avoid heavy social costs, the United Nations Children’s Fund (UNICEF) urges adjustment with the human face, including IMF and World Bank adjustment programs emphasizing the restoration of LDC growth while protecting the most vulnerable groups, as well as growth-oriented adjustment, such as expansionist monetary and fiscal policies and World Bank/IMF loans sufficient to avoid a depressed economy. According to UNICEF, the empowerment and participation of vulnerable groups – landless, the urban poor, and women – are essential to improve policies and protect these groups and children, especially undernourished. PG567/9 Bibliography: Word Count: 2109
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