Topic: The reformation of international financial institutions to relieve economic suffering
Introduction: Global Economy means the economic interaction and exchange between countries. This interaction between hundreds of countries means a great and a very sensitive system. Therefore, this system should be administrated by multilateral organizations. These multilateral organizations are generally mean International Financial Institutions (IFIs). By definition, any multilateral organization with financial operations is an IFI. This definition includes; regional multilateral banks, regional monetary authorities, UN Agencies that disburse funding etc. Since these organizations are chartered by more than one country, they are subjects of international law. Hence, any reformation is the case of international law. The reason behind the international economic suffering is considered to be the International Funding Institutions because of their mass effect on the global economy. In most cases, these institutions stay very passive, inactive or act biased. When people talk about IFIs, they are mostly referring to the two Bretten Woods institutions(refer to the Background Section) called the bank and the fund, namely the World Bank and the International Monetary Fund. Since they are claimed to be responsible for global economic crisis, a major reformation is necessary for relieving current economic suffering, combating with further crysis and regaining their reputation. Background Info Types of International Financial Institutions should be analyzed before producing solutions for the problem. There are mainly four types of institutions; Bretton Woods institutions, regional development banks, bilateral development banks, regional financial institutions. Bretton Woods Institutions After World War 2, European and people began to seek new solutions for the control of the reconstruction process. In order to maintain the control, speed up the process and create a win‐win situation multilateral financial institutions were deemed necessary. Therefore, a new system called Bretton Woods created in a meeting in Bretton Woods, New Hampshire at July 1944. This monetary management system established the rules of commercial and financial relations among the world’s major industrial states. After setting up the system, representatives at Bretton Woods established International Monetary Fund(IMF) the International Bank for Reconstruction and Development(IBRD) which is currently a part of the World Bank. These organizations along with the system began to operate in 1945 after sufficient number of countries ratified the agreement. After the 1997 Asian financial crisis, IMF could never recover. It is agreed by all that IMF is in its most vulnerable state, suffering a triple crisis: a legitimacy crisis, a budget crisis and a role crisis.
The legitimacy crisis: After the Asian financial crisis, IMF gave a review on its ongoing structural adjustment programs that IMF and WB was imposing on over 90 developing countries. A few of these reviewed programs was successful in growth, equality and poverty relief in the IMF/WB‐ imposed countries. However, Russia and Eastern Europe suffered an increase in poverty in 1990s along with IMF’s “shock therapy” programs. A budget crisis: A number of big borrowers in Asia and Latin America have refrained from new borrowings from IMF, which caused a budget crisis in IMF in the last two decades. The reason of the boycott of these big borrowers is IMF’s coercive policy advises. The budget for IMF’s operations has rigorously decreased, from $3.19 billion in 2005 to $1.39 billion in 2006 and to $635 million in 2009 (Valot, 2006). A role crisis: The recent acts and operations of IMF have caused the reputation of the fund to get damaged. The developing countries, which make the biggest contributions to IMF’s budget, have been avoiding making agreements with the fund since they do not wish to give up their own financial sovereignty. Regional Development Banks Regional Development Banks are institutions that are working similarly with the World. However, these institutions focus on a specific region. Some examples for these banks are Inter‐American Development Bank, Asian Development Bank, and the European Bank for Reconstruction and Development. Bilateral Development Banks Bilateral Development agencies facilitate are institutions established by individual countries. Their function is to facilitate the provision of grants and loans from the founding country of the institution to other governments , NGOs , numerous UN agencies, development banks and other international‐ governmental bodies. For example: the Netherlands Development Finance Company and the German Development Bank. Regional Financial Organizations Some group of organizations or countries in a particular are forms Regional Financial Organizations. These organizations financially support the projects in areas of mutual interest. The difference between these organizations and Regional Development Banks is development banks are not necessary founded by the countries from that region. However, Regional Financial Organizations are founded by the organizations and countries located in that region. Current examples of Regional Financial Organizations are European Investment Bank, Black Sea Development Bank, Islamic Development Banks etc., all of them are founded by the countries in the related region. Related Countries and Other Organs Global Unions Group and World Confederation of Labour: have stated in the annual meeting of IMF and World Bank in 2006 that IMF’s role as a global lending institution has diminished also with its credibility on several policy issues. The group is not totally against the IFIs; however, they expressed
that in order to play a positive role for an equitable globalization, IFIs should develop totally different approaches on issues such as trade liberalization, privatization and labor market deregulation, through which the IFIs impose on developing countries as loan conditionalities. Argentina: The economy in Argentina collapsed in 2002 because of instability of government and weak financial policies. IMF spent billions of dollars in order to support the government financially with stabilization loans. However, IMF was not successful in this attempt, which caused IMF’s credibility to become dubious. Russia: was assisted by IMF during the crisis in 1990s. On the contrary, Russia had an increased poverty with the “shock therapy” programs of IMF. Together with the US government, IMF imposed policies for market economy and other dogmatic directions as a condition for aid (Fagen, New York Times, 1992). Japan: The same “shock therapy” program failed in Japan during and after the Asian crisis (Wolfe, 2001). Indonesia, Philippines, India, China, Brazil, Argentina: are attempting to be financially independent of IMF. They generally implicitly asserted that they do not wish to borrow funds again from IMF. Bolivarian Alternative for the America (ALBA): is an organization founded by the helps of Venezuela, Bolivia and Cuba. This regional institution appeals to serve as a source of capital and a lender of last resort. Under this organization, the member countries, which are generally developing countries, are able to negotiate with more favorable terms than with the dictates of developed countries, which is the case with IMF (Arreaza, 2004). Possible Solutions: ‐
IMF and other IFIs should redesign the vote distribution and representation in their bodies’ governing structures. First, the US veto power and special priorities should be eliminated for an equal environment in IMF. Second, in a few IFIs, there are only two representatives of 47 Sub‐Saharan countries whereas there are 13 representatives of 30 OECD countries because of the amount of their financial contributions to the institutions. Voting is a right in democracy; a vote should not be based on monetary strength (Caliari, 2003). By turning its back to Millennium Development Goals (MDGs), IMF made itself irrelevant to the global needs of the world. The IFIs, especially IMF, should reconsider involving poverty reduction programs and in MDGs. The IFIs should revise their governing structures and their financial and adjustment programs with coercive advises they impose on the borrower.
Involvement of UN: IMF: By forcing the borrowing countries to adopt the policy advises of itself, IMF has taken over the financial sovereignty. Consequently, the borrowing countries, which are mostly developing countries making up the IMF budget, have refrained to borrow money or make a new agreement with IMF.
UN ECOSOC: met with the Bretton Woods Institutions for the consideration of the implementation of the institutions to make them more accountable, participatory and transparent. World Bank: has taken action regarding the possible reformation. As aforementioned, it has met with the UN ECOSOC for its implementation. It also published proposals about the reformation of governance structures of the IFIs. Suggested Links & Articles: ‐
Can We Reform the International Financial Institutions?
A previous proposal from the World Bank Database: Reform Proposals for the Governance Structures of the International Financial Institutions
http://info.worldbank.org/etools/docs/library/57439/caliarischroeder.pdf Bibliography: ‐
Wolfe, Kathy. “IMF Shock Therapy in Japan: ‘Just Not Functioning’” Executive Intelligence Review. December 14, 2001. Internet available;
Valot, Henri. “Can We Reform the International Financial Institutions?” Global Policy Forum. August 18, 2006. Internet available;
Fagen, Melvin. “Russia: Shock Therapy Isn’t the Way to Promote Democracy.” The New York Times. May 12, 1992. Internet available;
Arreaza, Teresa. “ALBA: Bolivarian Alternative for Latin America and the Caribbean” Venezuelanalysis. January 30, 2004. Internet available;
Caliari, Aldo, and Frank Schroeder. “Reform Proposals for the Governance Structures of the International Financial Institutions.” World Bank. 2003. Internet available;