Commentary on the World Bank – Government (300 Level Course)
Commentary on the IMF:
According to the Meltzer Report
As the Meltzer Report was released, the world continued to turn, and with these continuing revolutions new problems arose. Problems that will hopefully be dealt with more appropriately because of the work of the Congressional Commission assigned to come up with new and better ways for the financial institutions of the world to solve them. Arguably the two most important players in this field are the World Bank and the International Monetary Fund (IMF).
In the following commentary both will be addressed in a number of ways. Their histories and purposes will be briefly addressed. Their main goals will be presented. The affect that they have had in the past will be brought into play. Lastly, the future of these two institutions will be contemplated. Using this wide array of information it will be decided here if in fact these institutions are serving any real purpose and if their future existence is either needed or at least worthwhile.
The World Bank:
The World Bank was established post World War II in an effort to attack issues of national rates and their possible fixations while at the same time attempting to bring some stability to the post war international markets. Lurking just beneath the surface was the fact that the World Bank, which was largely under the control of Westerners with Western sympathies, was also taking on the responsibility of rebuilding Europe. Thus nearly all of the loans given in the years immediately following the war were to reconstruct European national economies that had been destroyed during the war. Relatively few loans were given to developing countries. The World Bank would come to be known as a European controlled entity. Thus helping to answer the question of why these European countries are helped back on their feet immediately. This may also be attributed to the fact that the World Bank features weighted voting in which the more wealthy countries receive the larger amount of votes. Then the countries that are in fact developed and quite wealthy will have more of a say in what the bank will do. Therefore the World Bank will ultimately favor the rich over the poor.
The headquarters of the World Bank feature a large sign that reads: “Our dream is a world without poverty.” The Meltzer Commission has said that it shares in this view. Unfortunately the World Bank and its sister development banks are not moving toward dealing with this problem and rectifying any of the issues that help keep the poorest countries at the bottom of the economic spectrum. Yet the Meltzer Commission, while agreeing in theory to the World Bank also agrees in doing next to nothing to be the one to step up to the forefront with a solution.
The Meltzer Report goes on to state that the World Bank employ’s over 17,000 people in 170 offices around the world and have obtained $500 billion dollars in capital and extend some $50 billion in loans to developing countries. Still the World Bank is far from staying true to its word in the fact that despite they claim to be in existence to help out the poor nations of the world, some 70% of the World Bank non-aid resources flow to 11 countries that enjoy easy access to the capital markets.
The World Bank came about to serve a universal view of the future as described at Bretton Woods in 1944; to maintain the gold-based standard, capital controls, trade barriers in former colonies and less-developed economies. While these were the original ideas of the bank, as times changed and crisis arose new steps had to be taken. At the same time the main goal of the World Bank was arguably neglected. In the past seven years, the World Bank provided $18 billion to developing countries. Yet in the same seven years, the private sector has donated $1,450 billion to the same developing countries. If the World Bank is supposed to serve the purpose of ending world poverty, and this is their main goal, what in the world are they looking at? The statistics were available to show the Meltzer Commission how little the World Bank has contributed in comparison to others. Do the leaders of the World Bank not have access to the same data or are they simply too naïve to see that they are not serving the purpose for which they were intended at their inception. Furthermore, if they are not serving the poor countries of the world and helping them to gain a footing in the economic world just exactly what are they doing?
The World Bank has thus been thrust into the present day trying to find an identity for itself in the global economic structure. It has become evident that the World Bank is not a key player as it had been intended to be. Instead it is more realistic for the bank to share responsibility with other organizations such as the UN and the IMF. In doing so the World Bank has been forced to create new ideas and plans for action. Included in them is the loaning of money to places where there is a good chance that the bank gets its money back. These are safe loans for the World Bank to take on, as they will hopefully be two-fold in their intention. First they will allow the bank to avoid continually debt with deferment or even defaulting of loans, and they will also impose necessary sanctions against borrowing countries in order to receive the loans at all. It is the intention of all parties that this final step will eventually lead to the extinction of poor performing economies and perhaps even the “third world status.”
Yet today the status of the World Bank is still unclear. They say that performance is the number one concern of the World Bank and the Meltzer Commission. But their performance has been poor and even as the Commission comments on this, they offer no solution except to say that ending or reducing poverty is not easy. So as the Commission is quick to point out these shortcomings and back them with excessive data, they stop there. The report tells us that the World Bank considers the title of “marginally satisfactory” as a success in policy. Using these criteria, which are shaky at best, the World Bank has had a failure rate of 59% from 1990-1999. And in the remaining 41% of cases, considered successes, the vast majority were concentrated in upper-income countries that have domestic resources and access to private-sector funding.
In conclusion, the World Bank has an important role in reducing poverty and promoting growth, despite the fact that today their resources are a small part of the global capital flow. The use of more effective resources can raise the contribution of the Bank significantly. So what does the Meltzer Commission have to say in response? They say that this will only happen if the Banks gain a better understanding of their comparative advantage, where and how they can most effectively use their limited resources.
So it is clear that the Meltzer report has come to the same conclusion, but in looking for advice that the Commission has to give, the reader finds little. The Commission says that the Bank can improve their performance by asking themselves three questions: Will the private sector perform this function, Will the local public sector perform this function, and will the Bank provide resources not otherwise available? Does the Commission give any answers to these queries? No they do not, they say one thing in a great, enlightened moment of political prowess. The World Bank should not continue to devote half its finding to projects of this kind. This does little for anyone concerned with the plight of the countries that need the assistance of any international bank or organization. While the World Bank apparently has a number of problems, the Meltzer Commission does little more than just point them out. They provide no concrete answers and they leave the future of the Bank up in the air, just where it does not need to be.
The International Monetary Fund:
The International Monetary Fund, also known as the IMF was created at around the same time as the World Bank. It was intended to prevent a reoccurrence of monetary and financial instability. It is considered to be the “American” sister to the World Bank because as the World Bank is largely controlled by European countries the IMF is mostly ran under the direction of the United States. Over time many critics of the IMF will argue that the strings of the organization are pulled by the American government and also that the IMF will become synonymous with Washington D.C. While the IMF was set up with similar intentions as those of the World Bank, in helping the international markets to avoid collapses and to provide economies with overall stability the IMF differs slightly. One of the main goals of the IMF was to create “fixed but adjustable rates.” These rates were to be “pegged,” which means set to a certain unit of measurement. This unit was to be the American dollar. The “peg” became the conversion of all member countries currencies to within 1% of the American dollar. The rate became adjustable if and only if it became unsustainable or if an economic crisis were to arise. These are just a few of the goals that were in mind of the early leaders of the IMF in 1944. But in the last half a century, the world has changed so dramatically that the IMF has had to deal with new challenges and ask itself what purpose it serves as the 21st century dawns.
The IMF was established with two assumptions, both of which are no long valid. The fixed but adjustable rates ended in August of 1971 when President Richard Nixon closed the gold window, ending the U.S.’s commitment to keep the dollar price of gold at $35 per ounce. IN 1973, major countries agreed that the fixed exchange-rate system would not be restored. Oil problems and shocks of the 1970’s also created a new problem for the IMF. A problem surrounded by other problems that the IMF was never prepared to deal with.
With the end of the gold standard the IMF had to reevaluate its role in the financial world. Thus the IMF decided to take on the responsibility for dealing with financial and economic problems affecting developing countries or the international economy. The 1990’s brought new challenges and financial crises, among them were the Mexican financial crisis, the East Asian crisis, and the crisis that arose as the former Soviet Union devalued it’s currency. The IMF heroically stepped up to the challenge and tried to fight these problems head on. They took funds from private lenders and investors and gave it to private firms and banks in developing countries. This transformed the institution from a short-term lender to a source of long-term, conditional lending.
Yet as the IMF entered this fight with all of its guns blazing, they inadvertently sent the world the wrong message. They sent the message that if local banks and other institutions incurred large foreign liabilities and debts that the IMF would provide the foreign exchange needed to honor their guarantees. This became known as the “moral hazard.” The importance of this hazard cannot be overstated, as the IMF created a system of relief that would never require countries to repay their debt if the knowledge of IMF assistance was always in the back of their minds. Barry Eichengreen argues that countries that borrow from the IMF should be required to take specific steps to bring domestic arrangements into line. This requirement would create concessions to the IMF, as the countries implemented changes, they would most likely bounce back on their feet and the IMF would have a very good chance of getting their money back. Yet critics such as the Meltzer Commission are quick to point out that the downward spiral will only worsen if steps are not taken.
The Meltzer report is in fact helpful in this area as it clearly points out some of the real criticisms that plague the IMF. The unlimited external supply of funds forestalls debtors from making concessions, the IMF wields far too much power over the economies of developing countries, and most importantly, the IMF has at times encouraged countries to adopt pegged exchange-rate systems even when it was more than evident that these countries economies would be unsustainable with the pegged rate. This is just a sample of the list of responsibilities that the “new IMF” has taken on since the 1980’s. The report is earnest in pointing out that the IMF has not always failed but that often the successful projects are lost somewhere in the shuffle of the enormous amount of projects that may be of no-win status.
Yet finally the Meltzer Report is helpful in one area, as it seems that it takes a genuine interest in providing some insightful recommendations for the IMF and its future. Eichengreen states that the IMF is not a government and lacks the authority that a government has. It has no way to aggressively create change or to manipulate factors in such a way that they will get their money back. He also states that the IMF has done little in the last few years to create change and achieve such things as enhanced transparency, liberalized capital account, and reform in the financial and private sectors. The Meltzer Commission deals with these and other preexisting conditions and attacks them with advice. They believe that the IMF should restructure itself as a smaller institution, make all future loans short-term and not extend loans that are not being paid back regardless of reason. The Commission is not afraid to make examples of countries that are not able to repay loans and are doing nothing but riding on the coattails of the IMF. They believe in restructured IMF loans with short maturity rates with only one rollover and that a penalty rate be administered if the loans are not repaid properly. While these are just some examples of what is actually an exhaustive list of potential solutions, they are helpful, efficient, well thought out and potentially successful. The implementation of these measures is something all together different. And the future holds their fate.
In conclusion, the Meltzer Commission Report is largely a great example of what our government does best. They come together in a giant meeting of the minds and have someone record every magical thing they say. In this grand tradition the Meltzer Report is a classic. For the most part it is simply the re-hashing of histories and events and problems, much of which has most likely been the basis for who knows how many books or papers or god help us, reports.
The Commission does little more than nitpick the World Bank and while it offers a number of stark criticisms it delivers little in the area of reforms. The IMF is a different story however, as the Commission clearly asserts more energy in understanding and sympathizing with this organization. Therefore saving the reader from thinking that the report itself was just barely above a waste of paper, time, and energies. This may be the result of the realization that the IMF is in a unique position to do a number of productive things to help the world today and in the future. Perhaps also they have given up on the World Bank, and relegated it to a status that it appears comfortable or at least complacent with: to be a second rate player who pitches its hand but does little to help the world in the long run. So it seems that the IMF is in fact the “prized calf” of the Meltzer Commission, the one with all of the potential, who only lacks a little coaching. Hopefully the IMF will heed some of this advice and come to the forefront of international monetary relief as it has in the past, only this time better equipped for the fight at hand.