The Bretton Woods System
The Bretton Woods System of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.
In the first three weeks of July 1944, delegates from 44 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.
During the 1930s, many of the world’s major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.
Advocates of the Bretton Woods system believed that stable exchange rates would avoid the “beggar thy neighbor” policies of the 1930s and benefit economies around the world by expanding international trade. However, over time, exchange rates became uncompetitive because of the infrequent changes in parities. In addition, there were often large destabilizing flows of currency, as speculators bet on the value at which the fixed exchange rate would be re-fixed. There were also concerns that a fixed exchange rate system did not allow countries enough freedom to pursue their own monetary and fiscal policies.
CHIEF FEATURES OF THE BRETTON WOODS
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing financial strain, the system collapsed in 1971, after the United States unilaterally terminated convertibility of the dollars to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the agreement.
The Bretton Woods Agreement was also aimed at preventing currency competition and promoting monetary co-operation among nations. Under the Bretton Woods system, the IMF member countries agreed to a system of exchange rates that could be adjusted within defined parities with the U.S. dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. The per value system remained in use from 1946 until the early 1970s.
BRETTON WOODS INSTITUTIONS
The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act.
The International Trade Organization that had been planned in the Bretton Woods Agreement could not be realized in the form initially envisaged—the U.S. Congress would not endorse it. Instead, it was created later, in 1947, in the form of the General Agreement on Tarrifs and Trade, which was signed by the U.S. and 23 other countries including Canada. The GATT would later become known as the World Trade Organization. In recent years, the two international institutions created at Bretton Woods the World Bank and the IMF have faced a major challenge in helping debtor nations to get back on stable financial footing.
The World Bank is an international financial institution that provides financial and technical assistance to developing countries for development programs (e.g. bridges, roads, schools, etc.) with the stated goal of reducing poverty.
The World Bank was originally established to support reconstruction in Europe after World War II, but has since reframed its mission and expanded its operations both geographically and substantively. Today, the Bank's mission is to reduce poverty.
It has over 184 member countries and provides over $20 billion annually for activities ranging from agriculture to trade policy, from health and education to energy and mining. The World Bank provides funding for bricks-and-mortar projects, as well to promote economic and policy prescriptions it believes will promote economic growth. For example, part of the over $300 million the Bank is currently providing the West African country of Niger funds health programs addressing HIV/AIDS and irrigation. However, the Bank also promotes more controversial projects in the country, like privatization of state enterprises.
The Bank provides loans, grants and technical assistance to countries and the private sector to reduce poverty in developing and transition countries.
Its five agencies are:
• International Bank for Reconstruction and Development (IBRD)
On behalf of 182 member nations provides loans and other forms of development assistance to middle income countries and the more creditworthy nation.
• International Development Association (IDA)
On behalf of 161 member countries, specialize in funding loans aimed toward poverty reduction in developing nations.
• International Finance Corporation (IFC)
On behalf of 174 member countries promotes private sector investment in developing countries by committing its own funds, brokering loans from private source, and offering advice to private firms.
• Multilateral Investment Guarantee Agency (MIGA)
On behalf of 153 member countries, promotes foreign direct investment in developing nations by offering political risk insurance to lenders and investors.
• International Centre for Settlement of Investment Disputes (ICSID)
On behalf of 132 member countries, provides conciliation and arbitration facilities for settling investment disputes arising between foreign investors and developing countries
The term "World Bank" generally refers to the IBRD and IDA, whereas the World Bank Group is used to refer to the institutions collectively.
WORLD BANK REPORT ON GLOBAL ECONOMY 2009
World Bank forecasted a dismal picture of the global economy in 2009, with growth weakening to a meager 0.9 percent and trade volume falling by 2.1 percent, falling for the first time since 1982.
According to the report, developing countries' economies would likely expand at an annual pace of 4.5 percent while wealthier, developed economies are expected to contract 0.1 percent. The report forecasts that the Middle East and North Africa region would grow at a rate of 3.9 percent much lower than 5.8 percent it had grown in 2007 and 2008 expectations. According to Justin Lin, the chief economists of the World Bank, the global economy is at a crossroads, transitioning from a sustained period of very strong developing country-led growth to one of substantial uncertainty as a financial crisis rooted in high-income countries has shaken financial markets worldwide
PROSPECTS FOR DEVELOPING COUNTRIES:
The increased volatility, the impact on developing countries has been relatively minor to date. Risk premiums have escalated, but remain relatively low in a historic context, and capital inflows remain plentiful, although bank lending has dropped off. Aggregate growth in developing countries continues to be strong, reflecting improved fundamentals in many countries, sizable revenues from commodity exports, and continued access to international finance at moderately higher cost. Their strong gross domestic product (GDP) growth is partially offsetting weaker U.S. domestic demand, which is now expected to remain subdued well into 2008.
Despite the resilience demonstrated by the global economy, risks exist and increased volatility has made several developing countries more vulnerable to financial disturbance, especially those with large current account deficits, pegged exchange rates, or domestic banking sectors that have borrowed heavily in international markets.
WORLD BANK’S WORKING IN PAKISTAN
The World Bank does not work alone, but in cooperation with various groups including, communities, civil society, government, and donor agencies. The joint effort of these groups is required to significantly reduce poverty. The World Bank provides technical expertise and funding in areas such as health, education, public administration, environmental protection, agriculture, and basic infrastructure.
HOW ARE PRIORITIES SELECTED?
Working with the government and civil society, the World Bank has developed an action plan known as the Pakistan Country Assistance Strategy which describes what kind of support and how much could be provided to the country beginning June, 2002 and covering a period two years . The strategy was designed to directly support the government's Povery Reduction Strategy and focuses on three key areas:
1) strengthening economic stability and government effectiveness;
2) strengthening the investment climate;
3) supporting pro-poor and pro-gender equity policies.
STUDIES AND REPORTS
The World Bank also produces studies and reports based upon its own analysis of a given issue. Topics of research come from the Bank's Country Assistance Strategy. This research is intended to provide an unbiased perspective on a range of specific development challenges.
Additional studies include reviews of economic policies (Country Economic Memoranda), fiscal spending (Public Expenditure Review), environmental reviews (Environmental Action Plan), and other specific topics. Further discussion of development issues is promoted though workshops and other events. These events bring together groups such as government, media, and civil society organizations to discuss how best to move forward on a given issue.
Pakistan develops its own projects with World Bank financing and technical support. The project cycle outlines the process of identifying, financing, implementing, and evaluating projects. Various financing options are available based upon the type of assistance needed.
Loans or credits (interest-free loans) for these projects are then submitted for approval to the Executive Directors, the World Bank's decision-making body which represents all member countries.
It is important to note that the implementation of projects is managed by the government itself. The government designates an office, referred to as the Implementing Agency, which is responsible for aspects such as procurement and selection of consultants and day to day work, monitoring and evaluation.
Operational Policies set guidelines to ensure that projects meet the World Bank's own criteria such as social and environmental standards. Project evaluations are conducted to capture and share lessons for future reference.
RECENT EXTENSION OF LOAN TO PAKISTAN
Pakistan has received a $500 million loan from the World Bank to help stabilize the economy.
The loan is interest-free and for 35 years, said the State Bank of Pakistan official.The loan from the World Bank will help contain the current account deficit, which in the year ended June 30, 2008, ballooned to more than $14 billion, putting immense pressure on the country's forex reserves. According to the World Bank, Pakistan has experienced severe external and internal shocks in the past year and is confronting a very difficult macroeconomic situation. The rise in international oil and food prices sharply inflated the country's import bill and the subsequent slowdown in the global economy dampened demand for Pakistan's exports.Also, political turmoil and uncertainty affected investor confidence which, together with macroeconomic imbalances, led to capital outflows, the World Bank said in a press release March 27.
According to bank’s representative,
“The World Bank is committed to supporting Pakistan in line with its vision for equitable progress and rapid development. We are committed to working with the government during this difficult time, protecting the most vulnerable groups and carrying out critical reforms that will set the basis for higher, inclusive and sustainable economic growth,”
The projects of World Bank will support the immediate challenges in education, health, safety nets and community-led development, while laying the foundation for investment in infrastructure to foster long-term growth and job creation.
WORLD BANK EVALUATION REPORT
The World Bank has recently completed an evaluation of its interventions in Pakistan over a ten-year period (1993-2003). Its conclusion is that Pakistan performed poorly in a number of areas, including poverty, education, social sector performance, agriculture and natural resource management, rural development, power sector, taxes, public sector management and governance.
INTERNATIONAL MONETARY FUND (IMF)
The International Monetary Fund (IMF) is an organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
The IMF plays three major roles in the global monetary system. The Fund
• surveys and monitors economic and financial developments,
• lends funds to countries with balance-of-payment difficulties, and
• provides technical assistance and training for countries requesting it.
The IMF describes itself as "an organization of 185 countries (Montenegro being the 185th, as of January 18, 2007), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". With the exception of Taiwan, North Korea, Cuba, Andorra, Monaco, Liechtenstein, Tuvalu, and Nauru, all UN member states participate directly in the IMF. Most are represented by other member states on a 24-member Executive Board but all member countries belong to the IMF's Board of Governors.
Any country may apply for membership to the IMF. The application will be considered first by the IMF's Executive Board. After its consideration, the Executive Board will submit a report to the Board of Governors of the IMF with recommendations in the form of a "Membership Resolution." These recommendations cover the amount of quota in the IMF, the form of payment of the subscription, and other customary terms and conditions of membership. After the Board of Governors has adopted the "Membership Resolution," the applicant state needs to take the legal steps required under its own law to enable it to sign the IMF's Articles of Agreement and to fulfill the obligations of IMF membership. Similarly, any member country can withdraw from the Fund, although that is rare.
A member's quota in the IMF determines the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of Special Drawing Rights (SDRs). The United States has exclusive veto power. A member state cannot unilaterally increase its quota — increases must be approved by the Executive Board and are linked to formulas that include many variables such as the size of a country in the world economy.
The IMF's influence in the global economy steadily increased as it accumulated more members. The number of IMF member countries has more than quadrupled from the 44 states involved in its establishment, reflecting in particular the attainment of political independence by many developing countries and more recently the collapse of the Soviet bloc. The expansion of the IMF's membership, together with the changes in the world economy, have required the IMF to adapt in a variety of ways to continue serving its purposes effectively.
In 2008, faced with a shortfall in revenue, the International Monetary Fund's executive board agreed to sell part of the IMF's gold reserves. On April 27, 2008, IMF Managing Director Dominique Strauss-Kahn welcomed the board's decision April 7, 2008 to propose a new framework for the fund, designed to close a projected $400 million budget deficit over the next few years. The budget proposal includes sharp spending cuts of $100 million until 2011 that will include up to 380 staff dismissals. At the 2009 G-20 London summit, it was decided that the IMF budget will be tripled to $1 trillion, to better meet the needs of the global community amidst the late 2000s recession.
ASSISTANCE AND REFORMS
The primary mission of the IMF is to provide financial assistance to countries that experience serious financial and economic difficulties using funds deposited with the IMF from the institution's 185 member countries. Member states with balance of payments problems, which often arise from these difficulties, may request loans to help fill gaps between what countries earn and/or are able to borrow from other official lenders and what countries must spend to operate, including to cover the cost of importing basic goods and services. In return, countries are usually required to launch certain reforms, which have often been dubbed the "Washington Consensus". These reforms are generally required because countries with fixed exchange rate policies can engage in fiscal, monetary, and political practices which may lead to the crisis itself. For example, nations with severe budget deficits, rampant inflation, strict price controls, or significantly over-valued or under-valued currencies run the risk of facing balance of payment crises. Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.
“WORLD ECONOMIC OUTLOOK” BY IMF
As was feared, the international financial crisis continued to worsen during H1-FY09 with devastating impact on the world economy. Most of the large economies face recession, with corollary negative impact on developing economies. With billions of dollars gone into various stimulus packages, policy makers are still not sure about the full extent of the losses. IMF has now raised its estimate of the potential losses in U.S. originated credit assets held by banks and others from US$ 1.4 trillion in October 2008 to US$ 2.2 trillion. In its January 2009 update to World Economic Outlook, IMF is now forecasting that the global recession will be much deeper and more protracted than previously envisaged. It may be pointed out that this is the 3rd downward revision in the world economic outlook by the IMF in the last four months.
Global growth is now expected to fall to 0.5 percent in 2009, with advanced economies expected to suffer their severest recession since World War II. Collectively, advanced economies are expected to contract by 2.0 percent in 2009, which is the first annual contraction in the post-war period.
Emerging economies are expected to slow sharply, growing by 3.3 percent in 2009. The IMF has also revised downward its economic growth forecast for China in 2009 by almost 2 percentage points to 6.7 per cent.
RECENT IMF LOAN EXTENSION TO PAKISTAN
According to the Wall Street Journal, the IMF, after an annual review of the country’s economy, said it expected tight domestic credit and dim private external financing prospects to constrain Pakistan’s growth. Pakistan’s economy grew 5.8 per cent between June 2007 and June 2008, the IMF said in its report. The IMF came to the country’s aid last fall with a $7.6 billion loan package and is encouraging other entities to provide additional assistance. The IMF’s loan programme is aimed at restoring financial stability, while protecting the poor.
Additional external aid is necessary “to strengthen the economy and to provide scope for greater development and social spending,” the IMF said, describing an upcoming donor meeting as “an important opportunity.” The International Monetary Fund's executive board approved a disbursement of $847.1 million of a loan to Pakistan, as the country's growth outlook worsened. The additional access to funds follows the first review of the $7.6 billion, 23-month standby facility the IMF granted Pakistan in November, bringing the total disbursements under the program to $3.9 billion
THE INVASION OF STRUCTURAL ADJUSTMENTS IN PAKISTAN
While no country, rich or poor, has escaped the impact of neoliberal structural adjustments in the age of globalization, let us keep our focus on Pakistan's dilemma of development. For the technocratic development elite of Pakistan, long used to complying with the conditionalities of World Bank/IMF loans, the implementation of structural reforms was simply the next step to be followed in the process of development planning. Perhaps they did not have much of an option as the country was brought to heavy dependence on foreign economic assistance. By 1980 Pakistan had become the 10th largest recipient of the World Bank/IMF loans. The first of the loans under the Structural Adjustment Program (SAP) was approved in 1982 when General Zia had established his military rule. But after receiving the first tranche of the SAP loan the General's economic managers decided not to proceed with the rest, perhaps anticipating with some foresight that the enforcement of required adjustments will hurt the common people, making the General more unpopular than he already was. In any case the country had once again become the front line state in the American supported Islamic jehad against the Soviet communists, and as such was being well supplied with economic aid directly by the US and its allies.
The crunch of SAP loans came after Zia's demise in 1990s and during the alternating civilian governments of Benazir Bhutto and Nawaz Sharif. The outgoing Zia regime had almost doubled the country's foreign debt liabilities which stood at $15.5 billion in the year 1990-91, creating greater dependency on SAP loans. When Sharif replaced Benazir's first short-lived government, he launched the first substantial package of structural adjustments to the economy in earnest. Controls on foreign exchange were lifted, first batch of state assets were privatized, business and industry was deregulated, and public expenditures on social programs were curtailed. Pleased with this performance, the World Bank/IMF released an average of $400 million in SAP loans over the 3 years of Sharif's first government. When in 1993 Moen Qureshi was brought in from the World Bank to serve as interim Prime Minister he implemented another round of structural adjustments, including 10 percent devaluation of currency, increase in prices of petroleum and electricity, dismantling of price controls on flour and cooking oil, and further reduction in Tarriffs. Whatever these reforms may gave accomplished for the health of the economy, for common people they spelled more misery of inflation and rising costs of basic necessities.
But more was yet to come. After Qureshi's departure and return of Benazir to the Prime Minister's office a new World Bank/IMF Extended Structural Adjustment Facility (ESAf) loan of $1.5 billion was signed up to be disbursed in installments. To meet the conditions of this loan privatization was stepped up, a new regressive General Sales Tax was imposed on 268 items, import duties were further reduced and later in October, 1995, the rupee as devalued by another 7 percent. What the Benazir government failed to do was to meet the other important condition of the ESAP loan, the cutting of the budget deficit from 5.6 % of the GNP to 4.0 %, while over 80 percent of the budget revenues were tied up in debt servicing and defense expenditure. As a result the ESAF loan was suspended after payment of the first tranche. It took long and intense negotiations in Washington before the World Bank/IMF authorities agreed to replace the ESAF concessional loan with a $600 million standby loan at 5.0 percent rate of interest.
While the people of Pakistan were smarting under the cumulative burden of these structural adjustments, the Benazir government was dismissed by presidential dictate, and she was forced to contest fresh elections against her main political rival Nawaz Sharif in 1997. But the traditional working class supporters of the PPP having endured the bitter medicine of structural adjustments lost interest in voting and Nawaz Sharif walked away with an easy victory based on a small turnout of voters.
Back in office, Sharif continued on the path of structural reforms, claiming a heavy electoral mandate. Then in May 1998 when the people of Pakistan were waiting for the structural reforms to work their magic, and the economy was going from bad to worse with GDP increase rate stalled at about a jittery 4 % average, India exploded a nuclear device for the second time as a test of its atomic weaponry. And in reaction the Sharif government followed suit by detonating its own nuclear contraption against a spate of warnings issued by the United States and other G-8 countries. United States and Japan, the two major aid donors immediately imposed sanctions on both India and Pakistan which came as a blessing in disguise for Sharif government's economic woes. Blaming the economic crisis of Pakistan on these sanctions, and taking advantage of the nationalist xenophobia generated by the nuclear tests, his government declared emergency in Pakistan on May 28 and froze $11 billion in foreign currency bank accounts held by local and expatriate Pakistanis.
But this move was hardly enough to save the day for Nawaz Sharif, as the economy kept teetering on default. In America there was already talk about Pakistan's future as a "failed state." The US could have made, in the words of Henry Kissinger, a horrible example of Pakistan, but in December 1998, after a meeting with Nawaz Sharif in Washington President Clinton decided to rest the matter after obtaining assurances from the Prime Minister to observe non-proliferation and negotiate peace with India. As an incentive to compliance, Clinton also promised his support of an IMF bailout package to Pakistan.
In fact IMF has had little problem with its aid operations in Pakistan as the country's development planners have rarely declined to comply with the conditionalities of its loans, the latest of the series euphemistically called structural reforms. The real problem that IMF and the Bank were having in 1990s was the mounting discontent with their development strategies blamed for enriching the rich and impoverishing the poor. By the fiftieth anniversary of the birth of Breton Woods institutions this discontent had turned into a loud and widespread campaign under the rallying cry of "Fifty Years Is Enough."
STRUCTURAL ADJUSTMENTS WITH POVERTY REDUCTION?
Faced with these protestations, the Washington twins were compelled to do something about their image without changing their ideological commitment to neoliberal globalization. The IMF came up with the novel idea of integrating poverty reduction with its structural adjustment agenda. In September, 1999 it changed the name of its Extended Structural Adjustment Facility (ESAF) to Poverty Reduction Growth Facility (PRGF).
This reformulated lending procedure was ready when a month later the Nawaz Sharif government was swept aside by yet another military coup. The economic managers of the new administration under the leadership of a new finance minister, no stranger to the financial world of Washington, had little problem producing Pakistan's first comprehensive Poverty Reduction Strategy Paper (PRSP) required to qualify for the PRGF loan. The strategy paper met quick approval of the IMF Executive Board on December 6, 2001, resulting in a new round of concessional lending in tranche.
This brings us to the latest phase of Pakistan's development planning. The picture of how Pakistan's PRSP has worked in practice as a policy document controlled by IMF (although "owned" by Pakistan) emerges from three years of its implementation closely monitored by the Fund staff through no less than nine documented reviews. Economic growth as measured by the rate of increase in GNP remains the number one concern, but is yet to move up to the celebrated high figures of the Ayub and Zia eras. The main instrumentality of growth remains the relentless implementation of structural adjustments based on the "Washington Consensus." That means privatization which is proceeding well although IMF would like to see more progress in the sale of major state assets, investment environment for both foreign and local capital is improving, the reduction of budgetary deficit and public debt is on target, customs and tariff reforms to lower the costs of doing business in Pakistan are well under way, tax concessions and subsidies are being eliminated, poverty reduction expenditures are rising, and above all macroeconomic situation looks very good. The foreign currency reserves have also increased sharply, which may not have as much to do with structural adjustments as with the windfall from America's Operation Enduring Freedom and a rebounding of remittances generated from the sweat and labor of expatriate workers.
There are of course other sociologically interesting objectives embedded in IMF's new poverty reduction discourse, such as devolution of power, participation of the civil society, empowerment of the poor, the challenge of inclusion, good governance, and transparency. But these potent phrases strike one like mantras flowing out of a sorcerer's bag than having much to do with the real life situation of Pakistanis living in poverty.
INCOMPATIBILITY OF STRUCTURAL ADJUSTMENTS AND POVERTY REDUCTION
What is more telling about Pakistan's economic performance under the PRGF arrangement, monitored closely by the Fund staff, is the lack of any significant reduction in poverty. In its ninth and final review under the PRGF arrangement, the IMF Board, while praising Pakistan's "strong recovery from the economic crisis of the 1990s," goes on to conclude that the country "continues to face major challenge ... to achieve significant and lasting reduction in poverty." In other words Pakistan's perennial dilemma of development remains unresolved. On their part, Pakistan authorities have decided not to proceed with the last and final tranche of the PRGF amid affirmations from both sides of continued cooperation in matters of economic development.
The fact of the matter which does not receive mention by either side is that the neoliberal globalization agenda which the IMF and the Bank have been extending to Pakistan since 1980s in the form of structural adjustments has practically foreclosed the possibility of any significant reduction in poverty.
Why is it so? The answer to this question lies in the common observation that the overwhelming majority of poor in the world, including one third of the people of Pakistan who live below the national poverty line, are workers, employed, unemployed, or underemployed, including their dependents and many women whose work remains unrecognized and un-waged. It therefore stands to logic that any effective program of reducing poverty must be directed at improving the position of workers in the labor market and the work place. Yet most of the structural adjustments - the diminished role of the state, free market fundamentalism, privatization, deregulation, flexibility of labor - which operate at the heart of neoliberalism accomplish the opposite, creating the structural conditions which make it virtually impossible for workers to climb out of poverty
In the ongoing process of restructuring the world economy on neoliberal lines the position of capital and its cross-border mobility has been enhanced tremendously. The role of the state as a key player in promoting distributive justice has been undermined and subordinated to the so called free market. Labor and working classes have turned out to be the biggest losers, bearing the burden of "competitive austerity."
There are some revealing figures about what this restructuring of relations between capital, state and labor has accomplished world-wide. In the United States, the organic core of liberalized global capitalism , the income gap between the top fifth and the bottom fifth of households was narrowing before 1973, but between 1973 - 1996 this gap increased by 50 %. In 1950 one third of American waged and salaried workers belonged to trade unions but in 1995 this figure dropped to only 14.2 percent; just in one decade of neoliberal ascendency between 1985-1995 union membership in the U.S. declined by 21.1 % and in U.K. by 27.7 % . During roughly the same period of globalization child poverty increased by one third in America and by one half in Britain.
The affluent worker of the America of 1950s and 1960s is now displaced by the flexible worker who lacks a job for life, is adjustable with respect to wages and hours of work, lacks collective bargaining and union protection. The flexible worker is often a single mom or single dad and if married needs a working spouse to make ends meet or keep up with the American standards of consumption.
Gone are also, I might add, those thriving farming communities that were to be seen around the State University I attended from 1958 to 1961. Last time I visited my American Alma Mater before 9/11 those prosperous farming settlements had either disappeared from sight or reduced to ghost towns. But those farms were still green and growing bountiful genetically altered crops now owned by agribusiness corporations.
Obviously, what goes under "Washington Consensus" has failed the working people of America. It can hardly be expected to work for the toiling people of Pakistan whose position has never been enviable and is certainly much too vulnerable to be left to the mercy of the unregulated market. From what one can glean from the available data on Pakistan, union membership in the country has continued to decline from 850,517 in 1985 to 296,257 in 1999; the proportion of employees covered by collective bargaining has declined from 1.44 % in 1990 to 0.91 % in 1999; and the wage costs as proportion of total production in Pakistan stood at the abysmally low figure of 6.0 % in 1999.
Clearly, the development project that was initiated in the 1950s with a focus on eradicating poverty and inequality from Pakistan got lost somewhere in the labyrinth of development "fashions" and econometric modeling learned assiduously by our scholars in the Ivy League universities of America and IMF/World Bank seminars. The question that I want to leave here is whether it is possible to revive that original development project defined, at least rhetorically, around normative preoccupation with poverty alleviation and equality?
It seems to me that there are a few favorable conditions at the moment which raise that possibility. First of all, inevitable as the hegemonic sweep of neoliberal globalization may appear, its agenda is under attack both from within and without. From within, there are emerging warnings that capitalism in its neoliberal articulation is headed towards depression economics and an internal crisis with its purely market calculations. From without the system it is under frontal challenge by world-wide social movements such as the World Social Forum and many environmental and feminist initiatives.
Foreign debt is the main lever used by donor countries and multilateral aid organizations to break resistance to the imposition of external economic agendas and development policies. Pakistan authorities have made this year a $1.1 billion repayment of foreign debt, which is an encouraging sign if the intent of this move is to break out of the vicious circle of loans and debts. More encouraging in this respect is the re-energized India-Pakistan peace movement which can lead to decrease in heavy defense spending and therefore less reliance on foreign debt accompanied by policy constraints.
Yet another hopeful development is the reactivated interaction being witnessed in the context of South Asian Association for Regional Cooperation, SAARC. Cooperation among South Asian countries, where an estimated 40 percent of the world's poor live, is the key to building an environment in which indigenous policies can be designed to solve South Asian problems in the context of South Asian realities. One must remember that Pakistan is historically, geographically, culturally and temperamentally part of the South Asian subcontinent and will remain so no matter what kind of national ethos the "petro-wahabis" are trying to impose on the country. Pakistan stands a better chance of setting its own priorities of development in cooperation and concerted action with its South Asian neighbors, India in particular, than trying to resist alone the agenda of globalization set elsewhere.
But first it has to be seen whether there is a will and a consensus among the countries of South Asia to bring poverty reduction to the center stage of development planning.
CRITICISM OF BRETTON WOODS INSTITUTIONS
"The interests of the IMF represent the big international interests that seem to be established and concentrated in Wall Street."
— Che Guevara, Marxist revolutionary, 1959
Two criticisms from economists have been that financial aid is always bound to so-called "Conditionalities", including Structural Adjustment Programs. It is claimed that conditionalities (economic performance targets established as a precondition for IMF loans) retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries.
One of the main SAP conditions placed on troubled countries is that the governments sell up as much of their national assets as they can, normally to western corporations at heavily discounted prices.
That said, the IMF sometimes advocates "austerity programmes," increasing taxes even when the economy is weak, in order to generate government revenue and balance budget deficits, which is Keynesian policy. Countries are often advised to lower their corporate tax rate. These policies were criticised by Joseph E. Stiglitz, in his book Globalization and Its Discontents. He argued that by converting to a more Monetarist approach, the fund no longer had a valid purpose, as it was designed to provide funds for countries to carry out Keynesian reflations, and that the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community."
The impact of structural adjustment policies on developing countries has been one of the most significant criticisms of the World Bank too. The oil crisis in the late 1970s, the second in a decade, plunged many developing countries into economic crisis. The World Bank responded with structural adjustment loans which distributed aid to ailing countries while enforcing policy changes meant to mitigate domestic inflation and fiscal imbalance. Some of these policies included encouraging production, investment and labor-intensive manufacturing, changing real exchange rates and altering the distribution of government resources.
EX ANTE VERSUS EX POST CONDITIONALITY
It is common for IMF officials to initially place only very general conditions on the loan they extended. They tend to switch to high conditionality only after a borrower nation has already enacted policies that violate the original low-conditionality arrangements. By that point, of course, the IMF has already failed to avoid the moral hazard problem.
Critics argue that IMF secrecy and its tendency to impose high conditionality only when pressed to, effectively amounts to firm conditionality only on an ex post or after-the – fact ,basis. They contended that this after-the-fact, discretionary approach to establishing conditions under which the IMF lends, which they call ex post conditionality, undermines the IMF’s credibility both with actual borrowers and with prospective borrowers. This lack of credibility, they argue, increases the likelihood for moral hazard problems while also widening the scope of the adverse selection problem by attracting borrower nations that are most likely to try to take advantage of vague conditions of a policy of low conditionality.
• IMPACT ON PUBLIC HEALTH
In 2008, a study by analysts from Cambridge and Yale universities published on the open-access Public Library of Science concluded that strict conditions on the international loans by the IMF resulted in thousands of deaths in Eastern Europe by tuberculosis as public health care had to be weakened. In the 21 countries which the IMF had given loans, tuberculosis deaths rose by 16.6 %.
• CRITICISM FROM FREE-MARKET ADVOCATES
Typically the IMF and its supporters advocate a monetarist approach. As such, adherents of supply-side economics generally find themselves in open disagreement with the IMF. The IMF frequently advocates currency devaluation, criticized by proponents of supply-side economics as inflationary. Secondly they link higher taxes under "austerity programmes" with economic contraction.
Currency devaluation is recommended by the IMF to the governments of poor nations with struggling economies. Some economists claim these IMF policies are destructive to economic prosperity.
Complaints are also directed toward International Monetary Fund gold reserve being undervalued. At its inception in 1945, the IMF pegged gold at US$35 per Troy ounce of gold. In 1973 the Nixon administration lifted the fixed asset value of gold in favor of a world market price. Hence the fixed exchange rates of currencies tied to gold were switched to a floating rate, also based on market price and exchange. This largely came about because Petrodollars outside the United States were more than could be backed by the gold at Fort Knox under the fixed exchange rate system. The fixed rate system only served to limit the amount of assistance the organisation could use to help debt-ridden countries. Current IMF rules prohibit members from linking their currencies to gold.
• WESTERN RECIPES OF "DEVELOPMENT"
First criticism is that the highly homogenized and Western recipes of "development" held by the Bank. To the World Bank, different nations and regions are indistinguishable, and ready to receive the "uniform remedy of development". To attain even small portions of success, Western approaches to life are adopted and traditional economic structures and values are abandoned. A second assumption is that poor countries cannot modernize without money and advice from abroad.
One of the strongest criticisms of the World Bank has been the way in which it is governed. While the World Bank represents 184 countries, it is run by a small number of economically powerful countries. These countries choose the leadership and senior management of the World Bank and as such, their interests are dominant within the bank
• DUAL ROLES
The World Bank has dual roles that are often contradictory: that of a political organization and that of an action-oriented organization. As a political organization, the World Bank must meet the demands of donor and borrowing governments, private capital markets as well as other international organizations. As an action-oriented organization, it must fulfill the role of a neutral organization specialized in delivering development aid, technical assistance, and loans. These dual roles are often inconsistent with one another. The World Bank’s obligations to donor countries and private capital markets have caused it to adopt policies and programs that endorse liberal economic theory which dictates that poverty is best alleviated by the implementation of market-oriented policies.
In the 1990s the World Bank and the IMF forged the Washington Consensus. The Washington Consensus placed too much emphasis on the growth of GDP and not enough on the sustainability of that growth; economically, socially, politically and environmentally, or on questioning whether or not this growth actually contributed to increased living standards
Some critics of the World Bank believe that the institution was not started in order to reduce poverty but rather to support United States' business interests, and argue that the bank has actually increased poverty and been detrimental to the environment, public health, and cultural diversity.
Some critics also claim that the World Bank has consistently pushed a neoliberal agenda, imposing policies on developing countries which have been damaging, destructive and anti-developmental.
• KNOWLEDGE PRODUCTION
The World Bank has been critiqued for the manner in which it engages in “the production, accumulation, circulation, and functioning” of knowledge. The Bank’s process in the production of knowledge has become integral to the funding and justification of large capital projects . The Bank relies on “a growing network of translocal scientists, technocrats, NGOs, and empowered citizens to help generate data and construct discursive strategies”. Its capacity to produce authoritative knowledge is a response to intense scrutiny of Bank projects resulting from the successes of growing anti-Bank and alternative-development movements “Development has relied exclusively on one knowledge system, namely, the modern Western one. The dominance of this knowledge system has dictated the marginalization and disqualification of non-Western knowledge systems” It has been remarked, that in these alternative knowledge systems researchers and activists might find alternative rationales to guide interventionist action away from Western (Bank) produced ways of thinking. Knowledge production has become an asset to the Bank and “it is generated and used in highly strategic ways” to provide justifications for development.
• ADVERSE SELECTION
IMF officials do not publicly announce the terms of institution’s lending agreements with specific nations. This means that it is solely up to the IMF to monitor which borrower nations are wisely using fund donated by other countries. Often private investors can discern that a country has failed to abide by its agreement with the IMF only when the IMF under takes an action such withholding a scheduled loan installment. Swift adverse market reactions following such IMF moves can place borrower nations in even worse financial straits, making it even more difficult for the borrower to meet the terms of its original agreement with IMF. Thus, the IMF’s policy of keeping loan agreements secret can undermine its efforts to protect members’ funds for its use.
PROSPECTS OF BRETTON WOODS IN 21ST CENTURY:
DOES THE INTERNATIONAL FINANCIAL ARCHITECTURE NEED A REDESIGH?
The experiences with the crises in the 1990s engendered a number of economists and policymaker to offer proposals for restructuring the IMF and the World Bank. Multinational institutions have confronted two types of criticism in recent years. One use of critics believes that these institutions are correctly designed and structured but contends nevertheless that these institutions could do a much better job of heading off official crises before they occur. Another group, however, criticized the operation of and in some cases evens the existence of multinational financial institutions. According to this latter group, at a minimum the international financial architecture requires some retuning and it may even require a redesign.
CAN POLICYMAKERS PREDICT INTERNATIONAL FINANCIAL CRISES?
To be able to limit or even prevent, international financial crises, policy makers must have a good idea about their underlying causes. However there are different perspectives concerning the main causes of crises. Let’s consider each in turn to discuss what guidance they provide about factors that might help national and supranational authorities determine when they should intervene to try to reduce the like crises.
ECONOMIC IMBALANCES AND INTERNATIONAL FINANCIAL CRISIS
The traditional view of financial crises focuses on economic fundamentals, which are underlying factors such as the nation’s current and likely future economic prospects and its monetary and foiscal policies. According to this view, on inconsistency between the value of the exchange rate corresponding to a nation’s economic fundamental and an officially targets exchange rate value can engender a financial crises. if foreign exchange traders perceive that the financial value of a nation’s currency is higher than its true value in private foreign exchange markets based on the economic fundamentals, then there naturally will be a tendency for traders to sell their holdings of assets denominated in that currency to avoid losses. By unloading these assets, traders who are averse to risk will reduce their losses if it should happen that the government or central bank run out of foreign currency reserves used to purchase the currency and maintain the official exchange rate.
Further, speculators may seek to profit from their anticipation of an imminent exhaustion of official foreign exchange reserves by selling assets denominated in the nation’s currency in an effort to push the Govt. or central bank into giving up on supporting the exchange rate at its officially targeted level. At the same they can bet on a collapse of the official exchange arte via post positions they take in market for futures, options and wasp. This type of behavior is called a speculative attack on a nation’s official exchange rate.
If a speculative attack is successful, then speculators potentially can earn significant profit from taking these positions.
SELF-FULFILLING EXPECTATIONS AND CONTAGION EFFECTS
A 2nd perspective focuses on the potential role of self fulfilling anticipation and contagion effect that can bring about an international financial crises even when underlying economic fundamentals are consistent with an officially pegged exchange rate or when Govt and central banks otherwise have sufficient foreign exchange reserves, given a slight misalignment of the government’s exchange rate target. According to this view, all that is needed to induce a speculative attack is relatively widespread perception by traders that a nation’s policymakers face relatively high internal cost, perhaps because of resulting political difficulties, from maintaining the official exchange arte.
STRUCTURAL MORAL HAZARD PROBLEMS
Finally a third perspective focuses on flows within the structure of a nation’s financial system as the major factors that lay the groundwork for a crises situation. Crises conditions exist when governmental policies create a situation of rampant moral hazard problem. For instance, a nation’s government might require its banks to make loan to specific firms or industries, and because these firms and industries know that they will receive credit no matter how they use the funds, they commit them to risky undertaking. many observer of the financial crises in Malaysia and Indonesia during the late 1990s have argued that such moral hazard problems existed in those nations. ultimately, the risks taken on by those who receive government-directed credit generate actual losses and failures/ these observers conclude, which sets off a crises situation.
Others who emphasized the potential for moral hazard problems to generate financial crises also contend that the policies of multinational institutions such as the IMF and the World Bank also can contribute to financial crises.
CRISIS PREDICTION AND EARLY WARNING SYSTEMS
Each of these perspectives indicates different factors that might help in predicting financial crises. According to the view that emphasizes the importance of imbalance in economic fundamentals, variables such as exports, imports, foreign exchange reserves, real income, monetary aggregates, exchange rates and interest rates might all be useful indicators of the potential for a crisis. For instance, if a country’s trade balance quickly worsens and its foreign exchange reserves rapidly decline, then a crisis may be in the offing.
The perspective emphasizing moral hazard problems, however, indicates that such changes in economic fundamentals are likely to occur when a crisis is already progress. Hence variation in economic fundamentals will not necessarily help predict crisis far enough in advance to help prevent them. The view that self-fulfilling expectation can induce crisis offer an even more pessimistic view about the usefulness of economic fundamentals as crisis indicators. According to these views, it may be difficult to find a close relation between fundamentals and crises, because crises may sometimes take place with out a previous significant change in fundamentals.
However there are different views on how to determine that a crisis has occurred. Crisis defiantly exists when a nation’s currency experiences a nominal depreciation of at least 25% within a year that follows a depreciation of at least 10% the previous year. And some other economists consider a crisis to have occurred when such an index exceeds a threshold that depends on the normal, historical pattern of variations that the index has exhibited in prior years.
In such studies, economists seek to determine whether they can identify any variables that serve as financial crisis indicator or the factors that typically precede such crisis and thereby aid in predicting them. Indicator is ratings of the countries’ debt. These rating may reflect moral hazard problems.
Other authors find that credit rating do not help predict financial crisis. This could be because moral hazard problems are not a key causal factor in crisis. But it is also possible that rating agencies such as Moody’s do not have sufficient information to accurately assess the scope of moral hazard and its implications for the true creditworthiness of international borrowers.
The objective of studies searching for financial crises indicators is to develop an early warning system, or a mechanism for monitoring financial and economic data for signals of trouble that might eventually evolve into a crisis.
There is some optimism inside and outside the IMF and World Bank that economist may
ultimately develop a reliable early warning system.
RETHINKING ECONOMIC INSTITIONS AND POLICIES
The strongest critics of multinational institutions contend that there is little evidence that these institutions have developed the capability to head off financial crises before they occur. According to critics the World’s nations should consider making fundamental reforms in the structure of these institutions.
RETHINKING LONG-TERM DEVELOPMENT LENDING
Not all lending by supranational institutions is related to crisis situations. Both IMF and World Bank also make longer-term loans intended to foster growing standard of living in many of world’s poorer nations.
Since the early 1990s one of the main themes of development economist has been that markets work better at promoting growth when a developing nation has more effective institutions, such as basic property rights, well-run legal systems, and uncorrupt govt.agencies. considerable evidences indicates that countries where property rights are not well enforced, the rule of law is weak, and governments are corrupt tend to grow more slowly, even if they otherwise permit markets to function without regulatory hindrances.
Further more, bringing about structural reforms consistent with achieving a higher long-term growth rate requires nations to develop strategies for making reforms last. This requires building a consensus for reforms and sometimes may entail compensating those who lose when reform is enacted.
A number of economist have suggested that the IMF and World Bank should adopt strict policies against countries with institutional structures that fail to promote individual property rights, law enforcement, and anti corruption efforts. This would they argue, give countries an incentive to shape up their institutional structures.
PROPOSALS TO RESTRUCTURE THE INTERNATIONAL FINANCIAL ARCHITECTURE
Most proposals for altering the international financial architecture focus on multi national policymaking related to financial crises. A few of these are summarized and given below. They range from relatively, minor changes in existing institutions and procedures to replacement of existing multinational institutions with new institutions
NATIONAL PROPOSALS AND DESCRIPTION
• Canada proposal for emergency standstill clause: under this proposal, countries would establish rules for restricting capital outflows that threaten international financial stability.
• France proposal for an IMF council composed of national finance minister: the proposal would upgrade an “interim committee” of national finance ministers to the status of the ultimate governing and decision-making body for the international monetary funds.
• United Kingdom proposal for a standing committee for global financial regulation: this proposed committee would encompass the IMF, World Bank and bank for international settlements and would establish and implement international standards for financial regulation and economic policymaking.
PRIVATE PROPOSAL AND DESCRIPTION
• Calomiris-meltzer proposals for strict international lending rules: although these economists proposals are different in certain respects, they share the idea that current multinational institutions might be replaced with a single institution that makes only short-=term loan to illiquid countries.
• Garten’s proposal for a global central bank: this envision a new multinational institution overseen by the G-7 and rotating emerging economy members that would engage in open market operations using funds raised from members and international taxes.
• Soros’s proposal for an international investor’s insurance agency: under this proposal, nations would create a public corporation that would insure investors against debt defaults up to a specific ceiling level.
• IMF proposal for internal reforms: This entails among other things, requiring borrowers to provide more in depth financial information, to adopt better accounting standards and to release more IMF data and information to the public.
• G-7 proposal for a large role for private-sector lenders: this extends the IMF proposal by calling for greater private-sector involvement in providing funds to distressed nations and providing incentives for private lender to be willing to participate.
• G-22 proposals for greater accountability, stronger financial systems and crisis containment: the IMF would require preparing a “transparency report” for each nation receiving an IMF loan. Nations requesting loans would have to follow common financial and accounting principles and international loan contracts would contain flexible-payment provisions simplifying loan renegotiations in the event that crises take place.
The Bretton Woods institutions created for postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies now serve the interests of the big players of international economic scenario. Also it is criticized that instead of betterment and economic growth of developing countries, they are aggravating the problems of LDCs pushing them in vicious circles of poverty, unemployment, inflation and economic crisis. Hence, the concerned masses call for effective reforms of these institutions so that the hegemony if big players may be abolished. But such prospects seem bleak as these economic powers who have the control over the reigns of these institutes would not allow for such reforms.