The Bretton Woods Twins: Caught in Their Paradigm

25 June 1999

Kamal Malhotra*

*Kamal Malhotra, a citizen of India, has, since 1995 been Co-Director of Focus on the Global South, an independent international policy research institute based at Chulalongkorn University’s Social Research Institute in Thailand. He has a Master’s in International and Public Affairs with a specialization in Economic and Political Development from Columbia University, New York, an MBA from the Indian Institute of Management and a BA (Hons.) in Economics from the University of Delhi. He was previously Director, Overseas and Aboriginal Program, Community Aid Abroad (Oxfam Australia) and Director, International Extension, International Institute of Rural Reconstruction, Philippines. He is the author of over 50 papers on development policy issues and the global multilateral system.

The genesis and mandates of the Bretton Woods Institutions were very specific, intended to complement each other, and primarily economic in nature. They have not changed very much in the past 50 years even though the world has changed quite dramatically. This has led to two anomalies:

I. The first is that neither institution was originally intended as a development organisation, yet this is precisely the role that they are both trying to project and play today. Ironically these roles are also those that many civil society activists and researchers want them to adopt – but they are nonetheless in contradiction with their original mandates.

II. The second anomaly is that while the world has changed dramatically, their charters haven’t really altered – and their economic models haven’t changed at all, as was seen in Gerald O. Barney’s presentation.

The World Bank in particular has been attempting to deal with these anomalies and to innovate by reinterpreting issues of political governance as issues of economic governance; for instance in dealing with ‘corruption’. The Bank recently co-hosted with the government of Korea a conference entitled ‘Democracy, the Market Economy, and Development’. It was seen as a major departure for the Bank – as President Wolfensohn stated about three times in his introduction – that it could now lead a conference under the heading ‘democracy’. So the Bank is trying to reinterpret its role within the same charter, whilst the IMF is going well beyond its chartered mandate by getting involved in structural reform issues; whether it be through the ESAF or through micro-management of the East Asian crisis. Looking at the IMF‘s agreement with Indonesia, they would appear to have something to say on every issue, going well beyond their mandate.

The history of the Bretton Woods twins has always been closely allied to the history of conventional neo-classical economic growth theory. In the first 2½ decades a Keynesian variety held sway for the institutions, and then for the last 15 years the neo-liberal variety was predominant. The Bank would now appear to be moving – at least in the pronouncements of its Chief Economist Joseph Stiglitz – towards a loosely neo-Keynesian approach; whereas the IMF is still stuck in the neo-liberal tradition. Because of this, it is dangerous to generalise about the Bank and the IMF – they are twins, but increasingly they are going their own ways. This has major strategy implications for approaching the two institutions.

It seems legitimate to ask the question, in the aftermath of the East Asian crisis, whether the pendulum is swinging back from the kind of neo-liberalism we have had over the past 15 years. There are some signs that this might be the case, especially in Bank announcements. And even the IMF in adjusting its East Asian programmes has been going much further than ever before in allowing for fiscal deficits, which can be put down in part to this crisis. But whether they are pursuing a neo-liberal or a neo-Keynesian approach – and whilst there is a fundamental difference between such supply-side and demand-side economics – the same unaltered growth theory remains central to both.

There is no doubt that the World Bank has significantly changed in the last decade or so in terms of its rhetoric, its targets, some of its research and its project initiatives. There are many examples of this, such as the Wapenhans report, the Inspection Panel, and the participation policy – despite fact that this latter is fairly instrumentalist and focused on involving people in the social aspects of policy only rather than the macro-economic aspects. Now we also have the Comprehensive Development Framework. But it can be argued that these changes have occurred largely in the area of rhetoric, and in areas of policy and instrumental work to some lesser extent. They have not happened in the core area of the Bank’s work: its economic reform programs which continue to be based on conventional neo-classical growth theory.

So, for those concerned with macro- and micro-economic policy issues, one needs look at what has happened to the core structural adjustment packages over last 15 years. There have been two turning points from the traditional Structural Adjustment Packages (SAPs) of the early 1980s. After sustained critique from outside the Bank (by UNICEF and others), and some internal evaluations at the Bank, there was an attempt to make changes by introducing social safety nets and the human capital approach. The human capital approach is fundamentally different from a human development approach. The introduction of the human capital approach meant in practical terms that the Bank’s loan portfolio for health and education dramatically increased from the late 80s. But we have to look at the quality of that spending and what it went into, in order to understand the difference between human capital and human development. Overall these changes did nothing to change the core design of the SAPs; they acted merely as add-ons. The continuing crisis in large parts of Africa and the increasingly widespread recognition that SAPs have failed to generate even economic growth, led to the introduction of Higher Impact Adjustment loans. These were developed mainly for Africa, but were intended to apply to all new SAPs including those in the Asia Pacific, Latin America and the Caribbean. HIALs mark a shift from ‘comprehensive’ to ‘limited’ conditionality and appear to be an attempt to achieve quicker loan disbursement and an enhancement of the World Bank’s loan portfolio. Such lending does not mark a major change in the core SAP content or design. The intention seems to be to use single tranche lending that rewards past performance and helps the Bank keep SAP loans flowing, rather than refuse disbursements due to the multitude of ‘conditionalities’ that governments have been expected to satisfy and been unable to.

Before the financial crisis the IMF had not even adapted its rhetoric. Now this is changing. The IMF is admitting some of its mistakes. It is saying that they were miscalculations, though, and is not apologising for its strategic mistakes. So now there is a gap between the Bank and Fund, especially in East Asia. There is an element of a good cop, bad cop routine, with the World Bank claiming that it is concentrating on poverty, and is not involved in macro-economic decision-making.

Despite these differences, it appears clear that neither the Bank nor the Fund have accepted that there is a fundamental problem with the type of economic growth paradigm that has been their staple diet for much of the last 50 years. The Bank has been willing to recognise that there are some problems, and that economic growth and good conventional economic fundamentals are not enough, but the Fund remains seemingly impervious to such changes in its thinking. As such, the gap between the two has widened considerably since the East Asia led crisis.

The number of people challenging the Bank and Fund is small. Many non-governmental and civil society organisations (NGOs, CSOs) support the core economic paradigm either consciously or inadvertently by collaborating with the Bretton Woods twins in projects and by playing surrogate service delivery roles or doing micro-credit or enterprise programmes. If these are conducted in an uncritical, market-oriented manner, they are the micro level equivalent of economic neo-liberalism at the macro-level.

Many advocacy groups are not reflective enough on their approaches and often focus too strongly on processes rather than content. There are relatively few current initiatives to challenge the Bank and Fund. They include work on to prevent the IMF changing its articles of agreement on capital account convertibility, the Structural Adjustment Participatory Review Initiative, and the World Commission on Dams.

Despite all such initiatives, very little has been achieved in terms of changing the core economic growth paradigm despite the fact that the current crisis may be bringing Keynesian economics back into vogue among some economists at the Bank. At their best, NGOs and CSOs have been reactive rather than proactive contributors to change; rarely have they been the sole movers pushing for changes. Overall, there was not much mobilisation or focus on the Fund before the crisis or even now, and very little has been achieved in relation to it.

Any discussion of proposed alternatives to the current system should begin by rethinking development. We can no longer avoid what has long been obvious to those outside the halls of political and economic power. This is that our primary medium and long-term objective if we are interested in achieving sustainable development should not be economic growth or even economic growth with equity but rather human development which includes but is not limited to economic growth through (not with) equity. The dominant neo-liberal economic growth paradigm and the human development paradigm championed by people such as Amartya Sen and multilateral organisations such as the UNDP are different in many important respects. The first focuses primarily upon shortages of income as the main indicator of poverty while the second adopts a much more comprehensive view of poverty. UNDP‘s 1997 Human Development Report, for instance, uses the following definition; ‘the denial of opportunities and choices most basic to human development – to lead a long, healthy, creative life and to enjoy a decent standard of living, freedom, self-esteem and the respect of others’. The Human Development approach sees poverty not as a condition but as a process; and it sees the poorest people not as passive, but as leading actors struggling against a process of impoverishment.

The current crisis should compel us to challenge the economic growth paradigm with an expanded understanding of the human development approach, if we are seriously committed to sustainable development. We need to ask questions such as: growth for what (human or economic development?) and in what (consumer luxuries, drugs, prostitution, or health, education, gender equity, environmental regeneration, meaningful participation and political empowerment). These are quality questions rather than the quantity ones which the institutions mostly focus upon. A primary challenge therefore is to subordinate economic policy-making to human development and social policy goals. This will necessitate:

1) A re-subordination of the financial ‘bubble’ economy to the real productive economy; and a monetary policy that responds to the needs of small and medium scale enterprises and ordinary households in the real domestic economy, not to foreign investors, hedge funds, banks and speculators.

2) The creation of appropriate regional monetary funds or facilities to contribute to plurality and competition within our current hegemonic global monetary system.

3) A fiscal policy framework based upon a progressive direct taxation system, supported by both political will and institutional measures to enforce tax collection. This will provide the domestic resources for a range of public and social expenditures necessary to sustain a comprehensive social policy and broader human development.

4) An economic policy firmly rooted in both domestic savings and a domestic market and not as heavily dependent on external engines of growth (foreign financial flows, exports) as the current strategy of countries such as Thailand.

5) A discriminatory approach to foreign financial flows. A large contributing factor in the crisis was the lack of controls on financial flows and a vast overrating of their potential contributions to people-centred development.

6) More serious consideration of process and participation issues than in the past; the challenge of institutionalising civil society input at all levels in economic and social policy making remains a formidable but essential one which has hardly begun.

7) Finally, issues relating to future regional and global financial, economic, and social architecture. If it is accepted that economic policy should primarily serve medium to long-term human and social policy goals, then it should follow that regional and global financial institutions like the IMF, World Bank, and ADB should be more accountable to human and social policy; they should also play subordinate roles to regional and global multilateral institutions that are primarily concerned with human and social policy issues (for instance the UNDP).

This may be threatening to the disproportionate power of the IFIs in the current global and regional multilateral system, but the existing status quo is threatening people’s livelihoods and right to sustainable development even more and cannot be defended any longer.

In many areas today, the tail is wagging the dog. This situation needs urgent reversal if we are seriously interested in sustainable human development – we need a human policy dog which is clearly able to lead and stay in control of its economic tail.

To do this we need:

1) the subordination of the IFIs to the UN agencies: civil society groups do too little to strengthen the UN system;

2) To push the IMF back to its original narrow surveillance function and to be more transparent in its operations;

3) to make clear the reasons to be sceptical about the likelihood of Wolfensohn’s new rhetoric about the Bank being implemented:

a) the mandate/charter restricts Bank actions;

b) the ratio of economists to social scientists is 28:1, and the non-economists are also not very progressive from a political economy perspective;

c) health and education are not valued in themselves, but only as contributors to productive activity (so the Bank’s approach to issues such as disability, HIV/aids is half-hearted);

d) the Bank’s fundamental schizophrenia about its identity – between a Bank and a development institution, as highlighted starkly on the debt question;

e) Bank chief economist Joe Stiglitz has been making interesting speeches, but there is a disconnect between his role and the Bank’s operations. It is convenient for Wolfensohn to have Stiglitz there and vice versa. Wolfensohn is only likely to tinker at the margins: to go further would be to question his whole life’s work;

f) the Managing Directors at the Bank have most of the power;

4) to place the Bank and Fund’s roles in proper perspective and put more emphasis on the G7, BIS, private banks etc;

5) to tackle the causes and consequences of overconsumption in the North.