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Friday, 23 February, 2001, 11:54 GMT
IMF and World Bank: Help or hindrance?
A string of economic scandals have rocked poverty-struck nations across the world in recent years. BBC News Online's Jorn Madslien finds out if international institutions can prevent economic problems from happening, or whether they instead make matters worse.
When economic chaos breaks out in a developing country, there will always be heated arguments about whose fault it is.
Some tend to blame international institutions such as the World Bank Group and the International Monetary Fund.
This is because they are the ones that lend money to the troubled countries to help them instigate reforms and modernise their economies.
And to make sure the money is not squandered, they have to attach conditions to the loans.
But critics say these conditions are often intrusive, excessive and inappropriate.
Many IMF and World Bank projects have failed.
In Turkey, the Fund has done an about-turn and it is now backing the country's move to a floating exchange rate.
In so doing, it has abandoned the link with the dollar that had been seen as the backbone of its anti-inflation program - as recommended by the IMF.
In Russia, the Fund inadvertedly facilitated the rise of political forces which subsequently opposed the second phase of reforms, argued two Oxford University academics Nigel Gould-Davies and Ngaire Woods.
Here, it made matters worse by imposing detailed and inappropriate conditions on its short-term loans, said the economist Martin Feldstein.
By getting involved in the detailed economic management of a country, the Fund's programs have become "unwieldy, highly conflictive, time consuming to negotiate, and often ineffectual," according to the Melzer Report.
The Fund and the Bank are obsessed with measuring progress; if they cannot do so they will not have control over the government who is borrowing money.
"But because they have to write down things they can measure, they distort what the country does," Ms Woods added.
The IMF and the World Bank will often demand changes to inflation rates, exchange rates and laws.
And countries will work to fulfil these measurable requirements.
But maybe they should instead be tackling real - but difficult to measure - problems such as corruption, political instability or culture clashes between ethnic groups, critics said.
Sensible reforms, bad timing
Often, the IMF and the Bank demand stronger laws and institutions to ensure that the borrowing governments are in control of their own countries.
These may be admirable goals, but reaching them may take time.
"It is not that the different measures they advocate are wrong," Dr Woods said.
"[The problem] is that they advocate that countries do them at a speed and a sequence that is wrong for that country".
"The Fund approach to adjustment has had severe economic costs for many countries," according to a report by a group of 24 developing countries.
They say the IMF's involvement has often caused output and growth rates to fall, as well as unemployment to rise and the differences between rich and poor to grow.
The Fund and the Bank acknowledge that their projects sometimes go belly-up, but insist that this is often because governments ignore their prescriptions.
Many countries say they will carry out reforms, but soon after they get money from the Fund they back away from their promises, explained Dr Wood.
The Fund and the Bank also tend to insist that the economic steps they call far are the right ones - even after things have gone sour.
For example, following the Asian crisis, an IMF report said that "the overriding question is whether it was appropriate to place so much emphasis on structural reform measures in the financial and corporate sectors".
Its own conclusion: "The answer is clearly yes".
During the last decade, the Fund and the Bank have started imposing ever stricter conditionality on loans, Dr Woods said.
But demanding radical changes, regardless of whether or not they are sensible, is not their job, critics said.
"The Fund has to accept that the authorities of a country are the sole judges of its social and political priorities," said David Finch, a former IMF director.
"The IMF should [resist] the temptation to use currency crises as an opportunity to force fundamental structural and institutional reforms on countries," Dr Feldstein said.
The Bank and Fund are changing
In recent years, both the IMF and the World Bank have begun to change their ways following demands to become more transparent, more accountable and more participatory.
In February, the IMF published information about its decision making, its financial disclosure rules and its staff code of conduct as part of its reduced secrecy.
The Fund has also launched a new lending facility that aims to keep countries out of trouble, rather than sticking to its traditional role of bailing countries out of crisis, according to an IMF director, Jack Boorman.
And both the Bank and the Fund have vowed to work more closely with local authorities and experts in the future.
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