The Globalizers

The IMF, the World Bank, and Their Borrowers

Ngaire Woods

• Publisher: Cornell University Press
• Year: 2014
• Print ISBN: 9780801444241
• eBook ISBN: 9780801456015
• Topic: Politics & International Relations
• Subtopic: Globalisation
• Index: Politics & International Relations

"The IMF and the World Bank have integrated a large number of countries into the world economy by requiring governments to open up to global trade, investment, and capital. They have not done this out of pure economic zeal. Politics and their own rules and habits explain much of why they have presented globalization as a solution to challenges they have faced in the world economy."—from the IntroductionThe greatest success of the International Monetary Fund and the World Bank has been as globalizers. But at whose cost? Would borrowing countries be better off without the IMF and World Bank? This book takes readers inside these institutions and the governments they work with. Ngaire Woods brilliantly decodes what they do and why they do it, using original research, extensive interviews carried out across many countries and institutions, and scholarship from the fields of economics, law, and politics.The Globalizers focuses on both the political context of IMF and World Bank actions and their impact on the countries in which they intervene. After describing the important debates between U.S. planners and the Allies in the 1944 foundation at Bretton Woods, she analyzes understandings of their missions over the last quarter century. She traces the impact of the Bank and the Fund in the recent economic history of Mexico, of post-Soviet Russia, and in the independent states of Africa. Woods concludes by proposing a range of reforms that would make the World Bank and the IMF more effective, equitable, and just.

Chapter 1

WHOSE INSTITUTIONS?

Within the IMF and World Bank several thousand economists do their best to collect, analyze, and interpret data in a professional way. Their training and qualifications in economics and finance are deemed essential to the task of advising, lending, and giving technical assistance to countries. The managers and staff in each organization take seriously their job of guiding and educating member governments in an impartial way, using their expertise to enhance the scope for every country to benefit from a more integrated world economy. Furthermore, each institution was created with a degree of independence from any form of political control or influence. So why have the IMF and World Bank long been depicted as a “US-serving control instrument over the economic and financial policies of other countries, especially the so-called under-developed countries” (Furtado 1959)?

It is easy to see the U.S. influence in the institutions. They were created within the United States mainly by that country and that is where they are headquartered. In general their policies have reflected U.S. economic and strategic interests, particularly in opening up markets in all parts of the world. Yet it would be wrong to assume that there is one set of U.S. interests shared by all parts of the U.S. government and translated into official policy, which in turn determines what the IMF and World Bank do in member countries. One can almost hear U.S. officials who have worked with the agencies crying “if only.” More important, if we stop at the observation that in general the United States dominates the institutions, we write off the possibility that other countries or views might in some way influence the work of the IMF and World Bank.

This chapter examines the actual influence of the United States in creating the IMF and the World Bank and in shaping their subsequent evolution. Doubtless, the United States has had an enormous influence over both institutions. But as this chapter reveals, competing views within the United States are an important factor in understanding that influence. So too, as later chapters will elaborate, competing ideas within other governments and within the institutions themselves affect what they do. In small but significant ways, within the political parameters set down by the United States, the IMF and World Bank are influenced by factors other than U.S. mercantilism.

U.S. Power and the Creation of the IMF and World Bank

Two serious problems faced policymakers in the last stages of the Second World War. First, Europe had been devastated by war and needed to be reconstructed. Second, the “beggar thy neighbor” economic policies of the interwar years had led to disastrous outcomes. Countries tried to devalue their way out of crisis, strangling production in other countries through cheap exports and trade protectionism. The result was catastrophic. The challenge for economic officials meeting at Bretton Woods in 1944 was to gain agreement among states about how to finance postwar reconstruction, stabilize exchange rates, foster trade, and prevent balance of payments crises from unraveling the system. This was expressed at the time by U.S. official Harry Dexter White:

No matter how long the war lasts nor how it is won, we shall be faced with three inescapable problems: to prevent the disruption of foreign exchanges and the collapse of monetary and credit systems; to assure the restoration of growing trade; and to supply the huge volume of capital that will be needed virtually throughout the world for reconstruction, for relief, and for economic recovery. (IMF Records Office April 1942, cited in Mason and Asher 1973, 15)

Two rather different plans for the postwar economic institutions were tabled at Bretton Woods.¹ On the one hand, the British plan was for an agency to which states would clearly delegate monetary powers. It would be an automatic clearing union to which all countries would contribute and in which no currency had a special place. A new supranational unit of account would be created. Transfers to countries in deficit would be virtually automatic. No policy conditions would be attached. This would apportion burdens of adjustment equally on deficit and surplus countries (Keynes 1971 - 89, vol. 25; Block 1977; Van Dor-mael 1978).

By contrast the Americans planned an agency over which the United States would retain considerable control and from which it would derive considerable benefit. The new international institution would use the U.S. dollar and gold as its core unit of account. Transfers would be made among countries on a discretionary basis. Indeed, ultimately the institution would have the power to set down conditions for loans from the institution. Although formal authority would be delegated to the new institution, discretionary powers would permit the United States to influence exercises of that authority (Gardner 1969).

The two plans shared similar economic reasoning but differed along the lines of the political preferences and needs of their promulgators (Gardner 1980, Hirsch 1969, Boughton 2002). Britain was a debtor wanting to protect itself from the impact of U.S.-imposed trade liberalization and to place some costs on longterm surplus creditor states (James 1996, 39). The U.S. was determined to liberalize trade, thereby opening up the closed markets of European empires, to proscribe manipulated exchange rates, and to lay down conditions for U.S. investment in West European reconstruction (U.S. commentary in Horsefield 1969, 136). As a capital-exporter unlikely to need to borrow from the IMF, the United States was keen to lay down conditions on any country wishing to use the IMF (Dell 1981).

The United States prevailed on a number of issues at Bretton Woods. This was unsurprising. The United States was in a classic hegemonic position. It emerged from the Second World War with greater economic, political, industrial, and military strength than any other country. Its exports dominated world trade. Rudimentary national income accounting, which was just beginning at the time, highlighted the extraordinary fraction of global real income being earned by the United States. Furthermore, the timing of Bretton Woods minimized the input of other states. As one economic historian writes, “The United States required an international agreement and wished to secure it even while hostilities in Europe prevented enemy nations from taking part in negotiations and minimized the involvement of the allies on whose territory the war was fought” (Eichengreen 1989).

On one theory the United States was able to prevail because it alone among Western allies could propose and design new supranational institutions. Other weaker states in the system would “acquiesce because they know that the winners are in a position to proceed without them” (Gruber 2000). The choice faced by weaker states in this theory is a simple one: whether they want to be “in” or “out” of the new club. Their desire to keep the old regime becomes irrelevant since it is no longer available. For this reason even where cooperation is not in their interests, weaker states will bow to the agenda set by a hegemon, whose agenda is in turn shaped by domestic political calculations (Gruber 2000).

In reality, once the Bretton Woods regime was established, at some level it is true that all other states had the choice to opt into a powerful new economic bloc or to be excluded from it. At one point in negotiations, UK representative John Maynard Keynes wrote that the Americans “plainly intend to force their own conceptions through regardless of the rest of us. The result is that the institutions look like becoming American concerns, run by gigantic American staffs, with the rest of us very much on the side-lines” (Keynes 1971-89, vol. 26, 217). However, this statement does not capture Keynes’ broader view, nor does it capture the way American policymakers themselves perceived their power.

In the above quotation, Keynes was commenting on news he had just received from U.S. Secretary of Treasury Vinson that the United States wanted to situate the IMF and World Bank in Washington D.C. Keynes was extremely vexed by this decision and later wrote that it “appeared that it was primarily a personal decision of Mr Vinson supported only by the Federal Reserve Board (which would find itself strengthened against the New York Federal Reserve Bank by the Washington location), and not supported on its merits by the rest of the American Delegation” (Keynes 1971-89, vol. 26, 222). More generally, the private and public papers of Keynes highlight the opposite: that Keynes believed there was give and take on the U.S. side in negotiations on the structure and role of the IMF and the World Bank.

United States policymakers did not uniformly perceive their own position as all-powerful. Their papers and records show that they believed they had to negotiate and concede issues (Van Dormael 1978, Gardner 1969, Block 1977). For example, the United States proposed a scarce currency measure that could have forced it to take actions not in its interest when running a surplus (see article VII [3] of the Articles of Agreement of the IMF). In a memorandum written in February 1944 Keynes described this action as “a signal mark of their courage, of their fair-mindedness and of their sense of responsibility to the other nations of the world” (Keynes 1971-89, vol. 26, 402). More broadly the structure and scope of the institutions produced by the Bretton Woods negotiations reflect the U.S. desire to compromise and negotiate. As will be discussed below, in both the IMF and World Bank all member states have some voice, and as technical agencies the institutions possess a significant degree of autonomy from member states, including the United States.

The question posed is why the United States, faced with a number of self-interested options, agreed to the Bretton Woods proposals? The fact that the United States was in the position of a fairly unbridled self-interested hegemon does not help us to sort out what John Ikenberry documents as the “range of postwar orders that were surely compatible with an American interest in an open world economy” (Ikenberry 1992, 290; Kindleberger 1977). Indeed, the United States could easily have produced and promulgated a much more modest postwar pact that involved no international clearing union, no contributions by members, and no issue of new currencies. In other words no supranationalism and no delegation to international agencies. Such a plan was proposed by other countries at the time (James 1996, 43; and Horsefield 1969, 97-102). Yet in the final Bret-ton Woods agreements, the United States agreed to delegate a limited degree of authority to the IMF and World Bank.

For institutionalist theorists delegation to new institutions should be expected. States construct and shape institutions to advance their own goals (Keohane 1984; Koremenos, Lipson, and Snidal 2001a and 2001b), but these goals are defined in an enlightened way. A hegemon will agree to some constraints because international institutions enlarge its choices and the possibilities for mutual advantage among states (Haggard and Simmons 1987). For this reason cooperation results in delegation to multilateral institutions that can prescribe, proscribe, or authorize behavior even of the hegemon. In negotiations creating such institutions even the most powerful states will cede some ground in order to ensure the participation of other states. These realities will be traceable in the design of the institutions, their voting and decision-making structures, their financial arrangements, and their degree of discretion in the exercise of their functions.

But not all features of institutional design are due to concessions to other states. Liberal theorists focus instead on domestic political constraints faced by states creating institutions (Moravcsik 1998). In this respect, the go-it-alone theory discussed above is a liberal one. It proposes that a powerful state will delegate power to international organizations as a response to domestic political exigencies. In essence, U.S. negotiators would use their go-it-alone power to create institutions the design of which would reflect their need to ensure domestic approval and lock in a particular set of preferences. Certainly there were domestic advantages for the U.S. Treasury and State Department in creating the IMF and World Bank—to some degree in so doing they could wrest control from other agencies over international issues, or as Keynes wrote during the negotiations, they could use the Fund and the Bank to “pass on their impending headaches to be treated by the new institutions” (Keynes 1971-89, vol. 26, 229). However, the liberal explanation is not without problems.

More generally the liberal argument would be that the U.S. Treasury needed to ensure a regime that would bind or persuade domestic detractors and successors, present and future, including the U.S. Congress. Here the evidence is not so clear. As historians Mason and Asher document, when the Articles of Agreement for the Fund and Bank came before the U.S. Congress for ratification, the Congress tried to make it clear that any loans “for programs of economic reconstruction and the reconstruction of monetary systems, including long-term stabilization loans” should be made by the Bank and not the Fund (Mason and Asher 1973, 25). Yet this was not what U.S. negotiators pushed for, and the Bret-ton Woods negotiations produced an IMF that would come to make stabilization loans and a Bank initially empowered to make such loans only as an exception.

The U.S. Congress was yet more concerned to ensure that the executive directors of each institution would not be international civil servants but would be answerable to their own governments (Mason and Asher 1973, 34). Yet this argument had already been made by the founders of the institutions for other reasons (Keynes 1971-89, vol. 26). Furthermore, in both institutions the final result was a Board of Executive Directors who would have dual roles as international civil servants, paid by the Fund or Bank and working for the organizations, as well as being answerable representatives of their own governments.

Neither institutionalists nor liberal theorists explain why such an innovative, multilateral plan emerged at Bretton Woods. Several more modest kinds of international arrangements would have fulfilled the modestly enlightened interests of key states. Yet something more daring emerged from a debate between British and American officials. As Keynes declared in 1944: “The proposals go far beyond what, even a short time ago, anyone could have conceived of as a possible basis of general international agreement” (Keynes 1971-89, vol. 26, 15). The “political miracle” that occurred at Bretton Woods requires more explanation (Gardner 1985). Without new ideas from both the United States and the United Kingdom—ideas, principles, and beliefs about what was possible, legitimate, and might be effective—the creation of supranational economic institutions in 1944 would never have been on the agenda.

Certainly, policymakers drew on existing precedents. The proposed World Bank built on an existing private sector experience of bond markets. The proposed IMF built on a history of cooperation among central bankers to maintain the gold standard prior to its collapse, with banks giving temporary, conditional loans to each other to prevent devaluations. Previously, some cooperation had occurred under the auspices of the Bank for International Settlements (BIS), established in 1930 to foster international monetary and financial cooperation and to act as a bank for central banks. Other cooperation had been led by private sector actors (Bordo and Schwartz 1998, Eichengreen 1996, Schloss 1958). During the interwar period, the League of Nations had coordinated emergency balance of payments loans with funds provided by private bankers, again with conditionality attached (Pauly 1997, Gisselquist 1981, Clarke 1967). However, at Bretton Woods policymakers sought to go further. Keynes himself noted that if all went well the IMF would “furnish a truly international body for consultation and cooperation on monetary and financial problems which would serve the purpose which some had hoped, but had been disappointed, from the BIS” (Keynes 1971-89, vol. 26, 221).

In the event, forty-five countries agreed to create two new supranational institutions. The International Monetary Fund and the International Bank for Reconstruction and Development would “facilitate the expansion and balanced growth of international trade” and “facilitate the investment of capital for productive purposes” (see article I, respectively, of IMF and IBRD Articles of Agreement). The IMF would be guardian of a new system of international monetary cooperation, underpinned by stable exchange rates and a multilateral system of payments. The IBRD would facilitate international investment so as to raise “productivity, the standard of living, and conditions of labour” in all member countries, as well as assisting in a smooth transition from a wartime to a peacetime world economy (WB Art 1).

These institutions were dreamt up by economists on either side of the Atlantic. Representing the United Kingdom was the famous economist already cited above, John Maynard Keynes, who had been at the Paris Peace Conference of 1919 and written eloquently about its failures (Keynes 1920). The bold economic theories of Keynes influenced not only the Bretton Woods conference but several decades of economic policy thereafter. The input of Keynes and the British into the Bretton Woods settlement has been traced carefully by historians of the time (Boughton 2002, Gardner 1969, Van Dormael 1978, Eichengreen 1989, Iken-berry 1992).

The United States was mainly represented by Harry Dexter White who shared Keynes’s belief that governments could and should foster growth in times of stagnation, indeed he had watched approvingly as Roosevelt implemented such policies in the New Deal. In the late stages of the Second World War, White began to project this view into a new vision of international economic management (James 1996, 39). Initially the World Bank was central to this vision, a new agency that would create credit to ensure reconstruction and growth in an impoverished world economy. In an excellent historical analysis of White’s position and the politics of the Bretton Woods negotiations, James Boughton concludes that White’s personal convictions were vital in framing U.S. preferences and support f...

Table of contents

• Acknowledgments
• Introduction
• 1. Whose Institutions?
• 2. The Globalizing Mission
• 3. The Power to Persuade
• 4. The Mission in Mexico
• 5. Mission Creep in Russia
• 6. Mission Unaccomplished in Africa
• 7. Reforming the IMF and World Bank
• References