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Last Updated: Thursday, 22 July 2004, 10:44 GMT 11:44 UK
IMF and World Bank: Is reform underway?
Analysis
By Jorn Madslien
BBC News Online business reporter

Protestor tells IMF "you're fired"
Is it time for the Bretton Woods institutions to step down?

"How can poor people afford to buy water if they cannot afford to buy food?"

The question was raised by Kenyan member of parliament, Dr Oburu Odinga. During a parliamentary finance committee seminar last summer he questioned why the World Bank should demand that water supply be privatised.

The committee had just been told that aid and assistance from the International Monetary Fund (IMF) and the World Bank was not forthcoming, as they had expected - even though they had obliged with previous demands to clamp down on corruption and economic crime.

It appears there were more demands to be met. Moreover, some of the conditions could not be divulged. The MPs had been told it was classified information, according to the East African Standard.

"We do not go there to negotiate with these people. We go there to sign the conditions they have drawn us," former finance minister Chris Okemo told the MPs.

Crisis

Sixty years ago, the institutions that so frustrated the Kenyan MPs were conceived at an international pow-wow in Bretton Woods, New Hampshire.

The key question is whether the Bretton Woods institutions... pursue efficiently their primary objectives, which are the stability of the international financial system and the fight against poverty
Lorenzo Bini Smaghi
Italy's Treasury Department

Originally created to provide stability in a global post-war economy where exchange rates were fixed, though adjustable, the IMF and the World Bank were born with outstanding survival instincts that have kept them going after exchange rates were floated in the early 1970s.

Having morphed from technocrats to firefighters, they have often been praised for their ability to prevent or at least deal with economic crisis in the world's poorest countries, then move on to lend money that helps them modernise and instigate reforms.

But the reason why their names so readily slip off the tip of the tongue of lay people is a widely-held belief that they are arrogant, incompetent and ineffective, and that at times they actually make matters worse.

There have been several instances where following the institutions' involvement, output and growth rates have fallen, unemployment has risen and the differences between rich and poor have grown.

Eyeing the money

The Fund and the Bank acknowledge that their projects sometimes fail to achieve the desired results or have unintended negative consequences, but insist that this is often because governments ignore their prescriptions.

Tony Blair wearing a Sport Relief T-shirt
The UK has called for debt relief for poor countries.

Indeed, at times countries might say they will carry out reforms, but soon after they get the money they back away from their promises.

For every case presented by their critics as proof that their methods are mad, the Fund and the Bank are able to come up with a case that shows the opposite, that illustrates that their efforts often bear fruit.

Rightly or wrongly, when lending money to troubled economies, the IMF and the Bank attach conditions.

After all, it is their job to make sure the money injected by their shareholders is not squandered by corrupt or incompetent governments.

Reform

Critics, like the frustrated Kenyan MPs, say the conditions are often intrusive, excessive and inappropriate. And many, even among the world's elite, agree.

So as the IMF and the Bank turn 60, the institutions' shareholders, namely rich nations that pay for their operations, have begun talking about reform.

"So many things have changed in the world economy over the last 60 years and more changes will take place in the near future," said Lorenzo Bini Smaghi, director of international financial relations at Italy's Treasury Department.

IMF headquarters, Washington
New ideas are penetrating the IMF headquarters in Washington DC.

"The key question is whether the Bretton Woods institutions have been able to adapt so as to continue to pursue efficiently their primary objectives, which are the stability of the international financial system and the fight against poverty."

A strategic review of institutions' roles began in 2002 as part of the search for a "new international financial architecture". Some changes are already underway.

The UK has proposed that all debts owed by poor countries should be written off, and although the leaders of the G8 rich countries have not agreed, they decided in June to extend a debt relief scheme.

Less intervention

Demands for the IMF and the World Bank to both lend and meddle less are also being heard.

Poor boy in the Zeitoun neighborhood of Gaza City
Are the Bretton Woods institutions able to fight poverty?

There is serious consideration by shareholders of proposals to give grants instead of loans to very poor countries and to limit conditions to macro-economic targets.

Moreover, both institutions have been working for several years to become more transparent, more accountable and more participatory. Formerly secret information about their decision making, their financial disclosure rules and their staff codes of conduct is now public.

There is also growing acceptance among shareholders that national governments should be the judges of their social and political priorities, though the institutions continue to push for stronger laws and institutions, that is legal and financial reform, to ensure that borrowing governments are in control of their own countries.

Denial

Of course, there are those who insist that focusing on macro-economics would ignore real - but difficult to measure - problems that are the true reasons why development is held back, such as corruption, political instability or culture clashes between ethnic groups.

Other critics insist that the institutions' obsession with measuring progress in terms of inflation rates or exchange rates is merely a neat way of controlling the aid recipients, indeed a method that actually distorts the way their national economies are run.

Then there are those who say the institutions simply cannot be trusted, not least because they sometimes continue to insist that the economic steps they called for were the right ones - even after things have gone sour.

Beyond such attacks, a more probing one is often made by free market thinkers: To their shareholders, the Fund and the Bank have become political tools which they often use to further their own ends.

And as long as there is confusion about the institutions' true purpose, any changes in their behaviour or structures, however sensible or well-meaning, will continue to be viewed with suspicion.


SEE ALSO
Profile: International Monetary Fund
28 May 04 |  Country profiles
Rodrigo Rato: Tough new IMF boss
28 Apr 04 |  Business
IMF 'not always to blame'
30 Dec 03 |  Business
Explained: the IMF and World Bank
19 Sep 03 |  Business

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