Bretton Woods Institutions’ Origins and Activity

Introduction

The terms Breton Woods Institutions refer to the International Monetary Fund (IMF) and the World Bank. These institutions were established in the year 1945. Actually, the original main aim of the World Bank was to reconstruct Europe, which was formerly destroyed due to the wars to which it was subjected. To do this, it was intended to fund its reconstruction while at the same time help to be stable. However, this vision it seems to have diverted to the poverty-driven Third World countries in that the World Bank has been funding financial and environmental projects such the construction of dams, mines and roads running in these countries. The effect of such funding to the third world countries is that it has led to debts amounting to billions of dollars therefore tying them down in underdevelopment. Moreover, such kind of projects it has been funding has led to the degrading of the environment through destruction of estuaries, forests, rivers some resulting in environmental pollution. The other major aim of World Bank was to alleviate poverty in such countries but this remains to be true, given the disturbing and excessive debts these countries have incurred thanks to the “monetary assistance”.

The International Monetary Fund was started with the aim of stabilizing the exchange of trade, encourage cooperation in monetary terms at the international levels and give rise to the international expansion of trade. This institution would achieve these objectives by challenging the economic policies of member countries that are experiencing difficulty in balancing their payments and offer advice, only conditionally, on how to tackle these challenges. Despite these well-laid and sensible-looking objectives, the International Monetary Fund has been put under the lime light and accused of worsening the economic state of developing countries, especially those based in Africa. The International Monetary Fund institution is also famous for its pressure on developing countries to adopt Structural Adjustment Programs (SAP’s) as a condition to receiving its future financial support and service their debts not only from itself but also from other financial institutions that offer monetary services.

The shifting of the Breton Woods Institution’s policies and the pressure they subject to developing countries with unstable economies leaves a lot to be answered. For instance, in whose interests, really, did the architecture of Breton Woods Institutions reflect on most closely during its establishment? Was it the developing nations or otherwise? The countries that are still developing seem to be having a lot to offer the Breton Woods Institutions-but this remains to be uncovered. Developmental policy was left in the hands of international financial institutions that have enhanced the agenda of mainstream, which continues to be based on the ideals of neo-liberalism (Chomsky, 1998).

Therefore, this essay will argue that the interests of the Breton Woods agreement reflected its interests on the Western countries while undermining the needs of the developing countries, and making their progress far reaching, basing on the fact that it forgot its original aim of smoothening the economies of its member countries. It will base its argument on evidence about the effect this monetary help has had on these countries by giving examples and also touch on the countries with strong economies and how they have benefited, or not, from the IMF and the World Bank.

Breton Woods Agreement

Delegates emanating from 44 countries met in Breton Woods, located in New Hampshire with the focus on forming an international agreement that would facilitate monetary policy among nations. However, this aim seemed to be far reached since it was based in unstable assumptions. Each country that signed the agreement promised to maintain its currency at values within a narrow margin to the value of gold (Wiggin, 2006). The agreement was expected to work in such a way that it would base international currency to the value of gold, that was thirty-five dollars an ounce, but it did not consider one important fact. The issue was that the value of gold would change with time and the power of purchase by the dollar would vary as the years went by while at the same time, the reserves for gold would replenish. This resulted in the United States eliminating its currency from the standard value of gold, that is, thirty-five dollars, making this agreement unworkable. In the first place, the reason why the United States chose to use its currency as a standard was that it had dominance in Breton Woods. It earned its credit due to the fact that it was very strong both economically and military wise. The wars that took place in the Second World War did not occur on its soil and it therefore established its economic power by giving military aid to its partners. Since the gold standard failed to work, the United States, being the mighty nation, changed the standard to the dollar making all countries make conversions with reference to the dollar. The Breton Woods Agreement intended to prevent devaluation of currency by ensuring progress in the Third World countries through lending and investing in infrastructure via the International Monetary Fund. These intentions, however, seem not to have been strictly followed. These international organizations make rules and create social knowledge but being international organizations, they may not have done what its creators intended (Barnett & Finnemore, 1999).

Conditional assistance of the IMF

It was evident that the monetary help that the Breton Woods Institutions was offering to the intended countries had strings attached. In fact, its method of carrying out its operations has been found questionable. The International Monetary Fund demanded adjustments to be made on the particular countries, especially the developing countries. Despite the fact that this institution was established with the intention of balancing payments, it seems to have made it worse on the developing countries in that they have amassed huge debts, until balancing of their payments has proved a daunting task. This is such an irony, keeping in mind that the International Monetary Fund intention was to establish balancing of payments.

The other observation to note is that the IMF imposes its unnecessary conditions on obtaining and payment of loans plus exchange rates handling and its rigidity in lending to countries that have a reputation of bad human rights. Take for instance, in the early 1990’s; the Central Bank of Kenya was forced to eliminate controls over capital flows because corrupt politicians were finding it easy to transfer money from the economy. While this was intended to save the country’s economy from corrupt officials, what the IMF failed to grasp was the dynamics that the country was undergoing. The IMF is known to handle matters of the developing countries from a monetary point of view, such as the example above, in order to enrich itself instead of getting to understand the basic politics and economies of the targeted countries. In such cases, it is the countries that suffer and their welfare destroyed.

The IMF’s Bailout packages

The giant rescue packages that the International Monetary Fund recently imposed extended to Turkey and Argentina is yet to produce economic stability in the two countries (Mutume, 2010). This tradition, therefore, of IMF offering monetary support to countries facing huge debts in order to bail them out of their financial problems just escalates the problem and makes the debtors want to ask for more. It becomes a dangerous habit. In the long run, it is the taxpayers of these countries that suffer debt, that experience the pressure of repayment. Moreover, the fact that the rescue package that is yet to stabilize the economies of the countries mentioned above is enough proof to show that the IMF’s mandate of helping economically, is not valid enough. The policies of this institution on when and how to borrow money results in economic conflicts when a country is in desperate need of money but is given conditions as to why it cannot borrow the money.

In an attempt to improve the economic crisis of developing countries, and at least encourage rich countries such as the United States to give extra credit to the needy countries, the IMF has decided to drive the banks and financial institutions of these countries to may hem thus discouraging the confidence of investors. This has therefore led to the downfall of developing countries and the rich countries continue to stabilize.

This view is supported by Khor (2010), the United States has a major say in the IMF’s policies and is controlled by a few rich countries that decide the economic fate of 80 other developing countries that come under its “structural adjustment” loans. The IMF clearly shows that it practices power monopoly in making policies and does not show transparency in making its decisions other than just implementing and imposing to the unlucky and unable developing countries.

Therefore, it would be sufficiently and logically sound to say that the IMF is today’s economic nightmare for developing countries given that it determines their fate economically, and makes decisions for them on why they should or should not borrow money. This has been supported by evidence from the 80 developing countries that are being governed by the institution: their economic state has worsened following the huge debt that was being offered by the so called “rescue package.” It is the mother of debt crisis caused by its poor financial policy formulation and the lackadaisical monitoring of loan repayments by the World Bank (Gill, 2002).

World Bank’s projects in developing countries

The World Bank is known for its advice and loan lending to most developing countries in the world for purposes of ongoing projects such as those related to health, environment, education, agriculture or infrastructure. The mission of the World Bank is to fight poverty with passion and to help people help themselves and their environment through provision of resources (World Bank, 2006). The many infrastructural projects that are funded by the World Bank Group have been said to have social and environmental implications for the populations in the affected areas (Breton Woods Project, 2005). For instance, the funding of the construction of dams, especially in developing countries have resulted in the relocation of people leaving in the neighboring areas to other areas. Developing countries that really need health and educational services may experience a short of the very services given the World Bank gets into collaboration with the Non Governmental Organizations.

Will also undermine the ability of these states that have the role of being the major providers of these services making them look unable and unreliable.

There is more than enough evidence on the fact that the World Bank is funding projects that have unimaginable effects on the environment. One could almost say that the projects are still going on because of the air of power this financial institution possesses. Take for instance, the programs that were going on in the bank-funded mining projects in Kyrgyzstan and Guyana led to major cyanide spills but these financial institutions say that the government of the world’s most impoverished countries must obey (Radin, 2000). The World Bank has led to destruction of the environment, indirectly, in the developing countries, instead of eliminating poverty in these countries. It has also encouraged the incurring of debts in these countries. The World Bank has therefore gone against its goals and objectives despite the interception of environmental groups and institutions, and in the long run, it seems to have lost track, making it in need of reforming. This institution’s credibility is therefore questionable; it is as it is after its own interests without considering the overall effect it has on the countries it is operating.

The Structural Adjustment Programs (SAP’s)

Structural adjustment refers to the adjustment of policies based on the International Monetary Fund and the World Bank terms. These changes in policies, usually, are the conditions that countries must fulfill in order to get the loans from these financial institutions. Among the many aims of Structural Adjustment Programs, they are intended permit the economy of the developing countries to be based more on the global market thus forcing these countries to concentrate on trading plus production for exports in order to uplift their economy. They also encourage spending less by imposing cuts in various sectors for developing countries that wanted to have a continuous flow of cash and were facing serious problems with its economy, needing cash; they were forced to provide room for Structural Adjustment Programs in order to access this monetary or financial assistance. Structural Adjustment Programs also include the planting of one type of cash crop, for example, tea or coffee, in order to use them as a means for export and privatizing government-run enterprises. The IMF and the World Bank encourage developing countries to adopt the SAP’s in order to aid them to recover economically and grow.

Criticisms on the Structural Adjustment Programs include its effect on the social life of the citizens in the affected countries. For instance, these programs may insist that there should be a cut in spending on the health sector thus, reducing the access to such services. The other negative effect of these programs is that make developing countries make difficult adjustments on their already weak economies thus worsening poverty levels. SAP’s argue that for developing countries to service their debts, they should increase their exports. What does this mean? It means that these developing countries, whose main exports include timber and its products, natural gas, fisheries exports and minerals will continue to be produced in masses in order to export the particular products in plenty. The overall impact on the environment is unimaginable. First of all, the cutting of timber results in deforestation which in turn leads to soil erosion.

Thereafter the soil nutrients are washed way leaving the land unproductive. Other environmental impacts include air pollution, rising levels of green house gases resulting in global warming, thanks to the Structural Adjustment Programs. Oringer and Carol (1998) say that these SAP’s are based on a short term, profit-maximization model that perpetuates poverty, inequality and environmental degradation. An excellent example of a country that still has a weak economy despite two decades of the Structural Adjustment Programs and economic reform is the Philippines (Lim and Montes, n.d.)

Conclusion

The Breton Institutions have always been under heavy criticisms concerning their method of funding. To say that the IMF and the World Bank have worsened the situation of developing countries is an understatement. What they have really done to these countries is unspeakable. These powerful financial institutions have in fact created a new level of poverty in these countries: one that involves huge debts and excessive borrowing from richer countries so that despite the aim of the Breton Woods to improve the economy of developing countries, it has ironically worsened it. As George (1990) states, the IMF cannot seem to understand that investing in a healthy, well-fed economic state is the most intelligent choice a country can make. The IMF and the World Bank promised that they would alleviate poverty by introducing SAP’s as the road towards achieving this dream. What they have truly caused is plunge many developing nations in debt and poverty partly due to their policies (Shah, 2010). The most degrading thing on that these financial institutions have had on these poor countries is lowering the dignity of the citizens. They have done this by insisting that these countries lower their living standards through cutting down of costs in the health sector therefore resulting in infectious or contagious diseases and malnutrition while focusing in its attention on repayment of debts and economic policies. This is almost an abuse of human rights. The IMF and the World Bank should therefore be subjected to reforms.

References

Barnett, N. & Finnemore, M., 1999. The Politics, Power, and Pathologies of International Organizations. International Organization, [Online]. 53(4), Web.

Chomsky, N., 1998. Profit Over People: Neoliberalism and Global Order. New York: Seven Stories Press.

Critical Voices on The World Bank and IMF, 2005. What are The Main Concerns And Criticsm About The World Bank and IMF? Breton Woods Project, Web.

George, S., 1990. A Fate Worse Than Debt. New York: Grove Weidenfeld.

Gill, S., 2002. Constitutionalising Inequality and The Clash of Globalization. Web.

Khor, M., 2010. IMF Policies Make Patient Sicker. TWN: Third World Network, [Online]. Web.

Lim, J., & Montes M., n.d. Structural Adjustment Program After Structural After Structural Adjustment Program, But Why Still No Development In the Philippines? Web. 

Mutume, G., 2010. Criticism Of IMF Gets Louder. TWN:Third World Network, Web.

Oringer, J. & Welch, C., 1998. Structural Adjustment Programs. Foreign Policy In Focus, [Online]. Web.

Radin, C., 2000. Critics Say IMF, World Bank. Global Policy Forum, Web.

Shah, A., 2010. Structural Adjustment-A Major Cause for Poverty. Global Issues: Social, Political, Economic and Environmental Issues That Affect Us All. Web.

Wiggin, A., 2006. Breton Woods Agreement. The Daily Reckoning, Web.

World Bank, 2006. About Us, [Online], Web.

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