The Bretton Woods System

Bretton Woods refers to the international monetary system adopted in July

1944 that established rules for rebuilding the postwar economic order.
Though World War II was not yet over, 730 delegates from 44 Allied
nations attended the conference at the Mount Washington Hotel in Bretton
Woods, N.H., to create a new monetary structure governing the financial
and commercial relations among the world’s leading economies. The goal
was to avert a replay of the economic disasters of the 1930s.

Some delegates grumbled that the United States was using its new
superpower status to push its own interests — like global free trade —
and that it was slow to compromise. At one point, the British
representative, the economist John Maynard Keynes, wrote that the
Americans “plainly intend to force their own conceptions through,
regardless of the rest of us.” (The Soviet Union was at the conference but
refused to join the I.M.F.)

But the allies needed American help to rebuild their war-ravaged

economies, and what emerged was a consensus among them that would
last until 1971.

Under the agreement at Bretton Woods:

— Countries were to maintain an exchange rate in which the values of

their currencies could fluctuate only within a narrow range around a fixed
value based on gold. Gold's value was set in terms of the U.S. dollar.

— Two organizations were set up to help govern the international

monetary system: the International Monetary Fund, which would address
temporary imbalances of payments, and the International Bank for
Reconstruction and Development, which is now the chief agency of the
World Bank Group.
 I.M.F. and World Bank

The International Monetary Fund and the World Bank are products of the
Bretton Woods monetary conference, held in New Hampshire in 1944.
The meeting was called to supervise a fixed exchange rate system and
help industrialized countries emerging from World War II cope with
trade and capital imbalances.

The monetary fund started with 39 countries -- excluding the Soviet

Union, which declined repeated invitations to join. Dominated by
industrialized nations, the fund helps developing countries draw up
and carry out large-scale economic reforms aimed at growth without
inflation. It often provides loans along the way to help them in this
painful process, which often involves cutting government food and
energy subsidies that help the poor.

Left-of-center critics say the I.M.F.'s prescriptions help countries pay their
international debt but hurt their long-term health. Right-of-center
analysts fault the institution for an emphasis on central planning rather
than economic growth.

The World Bank, the sister organization of the fund, has the same
membership. It is typically involved in more narrowly focused
programs than the fund, helping countries develop their transportation,
health and education systems and their private sectors.

The bank is made up of the International Bank for Reconstruction and

Development and its affiliate, the International Development
Association, which makes low-interest loans to the poorest countries.
Two other affiliates are the International Finance Corporation, which
lends to private companies in developing nations, and the Multilateral
Investment Guarantee Agency, which assists foreign investment in
poor countries.
In a nutshell, the monetary fund works at stabilizing economies, while the
World Bank works at developing them long term.

Once various formalities involving the 14 former Soviet republics are

complete, the monetary fund will have 170 members, which contribute
money to it under a formula based on their economic output. The
United States provides nearly a fifth of the financing for the monetary
fund and the World Bank. Membership in the fund is required for
joining the World Bank and for assistance from the two organizations.

WTO
The World Trade Organization (WTO) is an international organization
dealing with the rules of trade between nations. At the core of this
organization are the various WTO agreements, negotiated and signed
by the bulk of the world’s trading nations which are its Members.

The WTO was born out of negotiations between countries, and everything
the WTO does is the result of negotiations. Every Member country of
the WTO, whether big or small, rich or poor has equal rights and
obligations under the WTO agreements and thus the main essence of
this global organization is to create a level-playing field for every
country in the world in respect of trade.

The WTO was established on 1st January 1995, and has currently 150
countries of the world as its Members.

An Independent European
Assessment
The International Monetary Fund
(IMF)
It seems impossible that the World Bank and International Monetary Fund
(IMF) would give advice to developing countries without fully
considering how it might affect the lives of poor people. Yet, despite it
being a long-stated policy of both institutions to do so, and some recent
progress on the part of the IMF, they are still failing to consistently ensure
that there is a proper assessment of the likely consequences of different
policy actions on the poorest people.

Both institutions should urgently ensure that before they recommend a

course of action, the impacts of a range of options on poor people have
been thoroughly explored in a country-led process. The findings should
also have been discussed by parliamentarians, NGOs, and other citizens’
groups. That way, those affected by a World Bank or IMF-advised reform,
policy, or project will be able to influence its direction. This will improve
the policy-making process, build country ownership, and make it more
likely to succeed.

It is particularly important that this issue is discussed as the World Bank is

negotiating new funds from donors. Donors should insist on these changes
being implemented to ensure that their money is more likely to result in
genuine, sustainable poverty reduction.

The report reveals that impoverished countries still face an unacceptably

high and rising number of conditions in order to gain access to World
Bank and IMF development finance. On average poor countries face as
many as 67 conditions per World Bank loan. However, some of the
countries faced a far higher number of conditions. Uganda, for example,
where 23% of the all children under 5 are malnourished, faced a
staggering 197 conditions attached to its World Bank development finance
grant in 2005.

In addition to imposing a massive administrative burden on already over-

stretched developing governments, the proliferation of IMF and World
Bank conditions often push highly controversial economic policy reforms
on poor countries, like trade liberalisation and privatisation of essential
services. These reforms frequently contravene developing countries’
wishes, an acknowledged prerequisite for successful development. They
can also have a harmful impact on poor people, increasing their poverty
not reducing it, by denying them access to vital services.

If reform is delayed any further, World Bank and IMF conditionality will
continue to hinder rather than aid poor countries ability to fight poverty
and meet the internationally agreed Millennium Development Goals.

The IMF must:

 Radically cut the number of binding and non-binding conditions
attached to their lending. The World Bank in particular must stop
its tendency to micro-manage reform in poor countries.
 Immediately stop imposing controversial economic policy
conditions which push privatisation and trade liberalisation related
reforms, even if these are contained in nationally owned poverty
reduction papers.
 Ensure that any conditions focus only on fundamental fiduciary
concerns which enhance developing countries citizens’ ability to
hold their governments to account, rather than developing countries
accountability to the Bank and Fund.
 Stop all forms of 'cross conditionality'.

The World Bank

World Bank conditionality is more important now, than ever before. This
is because it is highly likely that a significant amount of the new aid that
was agreed at the G8 summitwill be delivered through the World Bank
and as such, will be subject to its conditionality practices.

The World Bank Conditionality review carried out in 2005 offers a unique
opportunity for the Bank to radically reform both the policy and practice
of conditionality to ensure that it contributes to rather than detracts from
poverty reduction and country ownership. Sadly, at present the findings
and recommendations from the review largely miss this opportunity,
essentially calling for business as usual and limited change.
It also downplays the problem of controversial conditions like utility
privatisation and trade liberalisation. This is despite research by Eurodad
member, the Debt and Development Coalition Ireland, which shows that
this continues to be a big problem in low-income countries and is
overriding national poverty strategies.

The central recommendation of the review is for conditions to be drawn

from mutually agreed accountability frameworks with developing
governments taking the lead and other financial partners involved. This
recommendation recognises the need for greater donor harmonisation to
reduce transaction costs on developing countries, but only in principle
ensures country control over the process.

On a more positive note, the review does call for greater use of country
systems in monitoring results, more harmonised reviews with other
donors and greater use of outcome orientated results indicators, stopping
short, unfortunately, from calling for outcome based conditions.

Finally, the review hints at radical reform of Bank conditionality in the

long term in order to reduce aid unpredictability, exploring the potential to
stop attaching conditions to specific policy in a given program and instead
attach them to overall progress with the Bank’s Country Policy and
Institutional Assessment or Country Assistance Strategy. NGOs need to
consider the full implications of this policy. Despite being sold as a means
of reducing the need for micro-conditions and ensuring greater aid
predictability, it goes against ensuring conditionality is confined to
fiduciary concerns and country owned national poverty reduction
strategies.

The World Bank Must:

 Dramatically reduce the number of policy ‘benchmarks’ it
employs.
 Cease setting all economic policy conditions .
  Ensure that the conditions it sets around Public Finance
Management draw on standards or approaches that have been
devised in a transparent and participative manner.

 Turn ‘mutually agreed accountability frameworks’ into ‘mutual

accountability frameworks.

 Monitor World Bank Conditionality on an Annual Basis.

The World Trade Organization

Strong rules for the contracting of goods, works and services are a
cornerstone of a robust and accountable public budgeting system. It is
important for donors to not only support the development of those
systems but also to use them; this has been shown to be a more
effective use of aid resources. Christian Aid welcomes donor
commitments to improve the effectiveness of their aid in general and
use recipient procurement systems in particular, but positive outcomes
from these commitments are undermined by a reliance on imposing a
standard procurement model that emphasises market opening over
accountability to poor men and women.
A substantial amount of government budgets is used to contract goods, works and
services (in Ghana, for example, it is about 70% of the budget). To ensure that the
money is used well and to limit the risk of corruption, rules guiding government
spending decisions need to ensure transparency and accountability to citizens.

Government procurement is worth about US$2,000 billion each year

which explains why rich countries have been keen to put the subject of
access to these lucrative markets on the agenda at the WTO and pursue
it bilaterally through regional trade agreements and EPAs.

Donors can play an invaluable role through providing long-term

support to developing countries to make the rules guiding government
 purchasing clearer, to make the process more transparent and to make
government officials more accountable. It may be necessary to link aid,
especially budget support, to improved procurement systems. Because of
the heavy transaction costs on recipients from complying with lots of
different procurement systems, donors must commit to using those
systems.

However, the decision of whether or not to allow foreign firms to compete

for particular contracts must remain the decision of the government. If
this means aid money gets spent in the local economy rather than back in
the donor country, so be it. It may well be that this maximises the
development impact of government spending, and indeed of aid, and
donors should support it - while pursuing their own economic objectives
independently of their aid strategy.

An Independent American Assessment

The World Trade Organization
In the closing years of the Second World War, American policy makers
envisaged three specialized international economic organizations: The
International Monetary Fund, the International Bank for Reconstruction
and Development (now known as the World Bank), and the ITO.
Congress approved U.S. membership in the IMF and the World Bank, but
never voted on the third organization. Instead, the United States would
participate in the General Agreement on Tariffs and Trade (GATT),
originally established as an interim arrangement, pending approval of the
ITO.

The original ITO "charter" was formulated by the planners at the U.S.
State Department in 1944. The documents were redrafted three times
before the final charter was signed by 54 nations in Havana in March
1948. By then, Congress had approved U.S. involvement in the IMF and
World Bank (in 1945). Aaronson claims "ITO missed the flurry of support
for internationalism that accompanied the end of the war" (p. 4). Worse
still, in her view, unlike the advocates for the United Nations, the IMF,
and the World Bank, proponents of the ITO never mounted an effective
appeal for public support (p. 42). Secretary of State Cordell Hull (1933-
1944), she suggests, lost his one-time enthusiasm for an international
trade organization before he left office and none of his successors--
Edward Stettinius, James Byrnes, and George Marshall--gave the idea
priority. By the time Dean Acheson, who had been involved in the initial
planning for the ITO, became Secretary of State in 1949, he had put the
ITO on a back burner.

Thus, in 1946, U.S. planners adopted a two-track approach to global

cooperation in international commerce. One track was to develop the
temporary general agreement on tariffs and trade (GATT), in line with the
US RTAA; the ITO was now the second track (once it was approved, it
was assumed it would replace GATT). The next step in the process
occurred in Geneva in April 1947, where international negotiations were
launched on both GATT and the ITO. The GATT arrangements were
understood as provisional.

By the autumn of 1947, the first round of GATT discussions was

successfully concluded in Geneva, where 23 nations engaged in bilateral
bargaining--product by product--seeking reductions in duties.
Concessions made were then generalized, through the endorsement of the
most-favored nation principle (i.e. concessions made to one country
would be extended to all most-favored nations). This conformed to the
existing U.S. Reciprocal Trade Agreements Act (the RTAA). In all, 123
sets of negotiations were concluded and incorporated into the GATT,
signed on October 30, 1947. The US, under the RTAA authority, was a
signatory.

It came to pass that the State Department never pursued the "second
track." While the 1949 Senate hearings on the RTAA extension did touch
on the ITO, while President Harry Truman did submit the Havana Charter
for the ITO to Congress in April 1949, and while in 1950, the House of
Representatives did conduct hearings on the charter, for all practical
purposes the ITO was "dead on arrival" at the Congress. America failed to
join the ITO, and that organization (for which there had been so much
preparation) never materialized. At the end of 1950, the United States
officially abandoned all efforts to create the ITO. The United States did
remain part of GATT, participating in the sequence of rounds of
international trade negotiations.

Accordingly, the provisional GATT continued to serve as the forum for

international trade negotiations--until the World Trade Organization came
into being in January 1995. The United States--through GATT--endorsed
trade liberalization. Aaronson does not seem to recognize the importance
of the 1962 U.S. Trade Expansion Act. She does not document the history
of the "fast-track" provision in American trade legislation. A chapter on
U.S. public policies and public opinion on trade covering the years 1950
to 1994 has only ten pages, of which eight are devoted to 1992-1994. This
chapter is followed by a short one on the U.S. approval of entry into the
WTO.

The World Bank

Life expectancy and literacy indicators show overall improvements, but
some Regions show worrisome trends. There has been slow and steady
progress in overall development outcomes during the period, but the
speed and scale of change remain static. These averages, of course, mask
huge differences across Regions, with very worrisome increases in
poverty and continued low growth in Sub-Saharan Africa.

There has been a steady improvement over the past decade in the ratings
of the outcomes of Bank projects. Outcome ratings have increased from
around 65 percent satisfactory in the mid-1990s to over 75 percent
satisfactory in the past four years. This is indeed impressive progress, and
it should be continued. But it does not necessarily indicate improved
development impact at the country level. OED’s Country Assistance
Evaluation (CAE) ratings, which take a long-term perspective and can
better assess the impacts of World Bank support to countries, show a
satisfactory outcome in about two-thirds of the Bank’s country programs.
They also show that even when project ratings in a sector are high,
sectoral outcomes may not be satisfactory.

With one-third of country programs rated unsatisfactory, there is

substantial room for improvement in the Bank’s development
effectiveness through more coherent country programs tailored to country
circumstances, as well as through further improvements in specific
projects and programs. The PRSP initiative offers the low-income
countries a framework under which both country ownership can be
encouraged and donor interests can be incorporated. This direction could
also improve the outcomes of the Bank’s country assistance programs.

The Bank is struggling to improve its effectiveness at two ends of the

development spectrum— in LICUS countries where state capacity has
collapsed or weakened considerably, and in middle-income countries
(MICs) that have much greater access to other sources of capital. Greater
focus and selectivity are also needed in the Bank’s global programs to
enhance their poverty impact and their benefits to developing countries.

The Bank also must focus on its costs of doing business, which have risen
significantly over the last 10 years. For every dollar of its administrative
budget the Bank disbursed $13 in fiscal year 1995, but only $9 in fiscal
2005, after a brief increase in fiscal 1998–99 during the Asian crisis. Bank
commitments have also fallen from $16 per dollar of administrative
budget in fiscal 1995 to $11 in fiscal 2005. The average size of loans has
fallen from around $90 million in the mid- 1990s to around $80 million in
the last two years.

Lending has stagnated but the budget has continued to grow. Lending has
dropped sharply to middle-income countries with access to
cheaper sources of finance.

The Bank argues that some of the increased cost, such as safeguards or
new communitybased approaches, has helped improve its projects.
Some of the increased cost is due to expansion of knowledge activities,
and some to the financing of global programs. But smaller loans do not
square with the Bank’s objective of scaling up its poverty-reducing
activities. It must also address why lending is declining at the Bank and
not in other Multilateral Development Banks (MDBs), and how effective
all its non-lending activities the knowledge bank are for supporting
development. Knowledge and lending should complement each other and
not be seen as substitutes.

OED findings and evaluations at the project, sectoral and thematic, and
country and global levels suggest that the following nine directions can
improve the Bank’s development effectiveness:

 Understand and analyze comprehensively, but act far more

selectively.
 Emphasize institutional development and capacity building even
more strongly.
 Re-think areas of punctured optimism, such as growth, private
provision of infrastructure, and turn-around situations.
 Tailor programs and projects to the circumstances of each country,
and adapt strategies to the local political economy.
 Lend mainly to countries with improving policies and institutions,
but find ways to deal with poor, misgoverned states.
 Introduce greater flexibility into programs with well-managed
MICs.
 Make better use of the Bank’s knowledge and technical assistance.
 Improve monitoring and evaluation for results, and start measuring
what is important.
 Improve coordination within the Bank and across the Bank Group.

This review of the Bank’s development effectiveness points to a number

of opportunities for further improvements. Some of these will require
changes in business processes, such as new ways of dealing with LICUS
and MICs and further improvements with the PRSPs. Some will require
changes in the organization, to improve coordination within the Bank and
across the Bank Group to set the right incentives; consolidate the Bank’s
networks toward the two pillars—the investment climate and social
inclusion; more focused use of knowledge to address country needs, less
mechanistic application of safeguards; and a review of the matrix
structure, which leads to multiplication of tasks and works against
selectivity.

Still others will require strategic choices for the institution, such as how to
define its role more selectively, more focused on its core competencies in
the global war on poverty, rather than trying to cover every aspect of
development. A greater emphasis on growth is needed for lasting poverty
reduction.

The Bank has transformed itself significantly in the past 10 years, and
should be ready for further adjustments to current climate of rapid change.
Greater selectivity, more flexibility, and improved efficiency within its
chosen areas of intervention are needed going forward if a global
institution such as the Bank is to remain useful and relevant and show
concrete results in a fastchanging world.

The International Monetary Fund

IMF

The IMF was created as an institution to support the Bretton Woods

regime. It aimed to avoid the volatility of previous decades by targeting
destabilizing capital flows, exchange controls, beggar thy neighbor
policies, and trade protection. Europe required reconstruction after WWII,
and the IMF was supposed to ensure an expansion of global trade, thereby
promoting recovery. After the breakdown of the Bretton Woods system,
the IMF needed to redefine its role as a financial institution. It attempted
to become a policy coordinator and advisor, a crisis manager, a provider
of credibility, and a type of development agency. In doing so, the IMF
overstepped its intended boundaries, taking on roles that are inconsistent
with its original objectives.
The original mandate for the IMF was defined in the 1944 Articles of
Agreement. The IMF was intended to promote international monetary
cooperation, facilitate the growth of world trade, promote exchange rate
stability, and help to establish a multilateral system of payments.
Furthermore, the fund would make available its assets to member
countries with balance of payments problems, creating confidence in the
international trade system. These goals were mainly a response to the
economic history of the 1920s and 1930s. The floating exchange rates of
the interwar period were seen as highly unstable, thus the IMF was meant
to monitor the pegged exchange rate. International monetary cooperation
would prevent the competitive devaluations of the 1930s, and current
account convertibility would expand world trade. The fund would also
provide short-term finance based on member contribution, akin to a credit
union.

Since the dissolution of the Bretton Woods regime, the IMF has assumed
various new roles to remain a significant international institution, an
economic equivalent of the United Nations. Its surveillance function has
expanded greatly, especially in the provision of data and forecasts. This
role is consistent with the original mandate. The IMF publishes
information on international capital markets and world economic
developments under the Special Data Dissemination Standard. Among
other publications, the fund puts out the World Economic Outlook, which
examines the trends of the global economy. The reports are put together
by the Executive Board, which consists of ministers of finance or central
bank governors of the most prominent countries in international trade.
Global policy discussions among people in the correct political positions
encourage international monetary cooperation. The IMF is best suited for
this role because countries will usually provide accurate data to take
advantage of the fund's lending capabilities. Information from the fund is
easily accessible and follows a common standard-a public good that can
foster cooperation and growth.

However, many of the new roles of the IMF are inconsistent with the
original mandate. The fund's function as lender of short term finance was
meant to fix balance of payments problems, but has expanded so much
that the IMF can now be seen as an aid agency. Specifically the Poverty
Reduction and Growth Facility (PRGF), the former Enhanced Structural
Adjustment Facility (ESAF), allows the IMF to essentially subsidize
interest rates for the poorest member countries. Such lending is aimed at
poverty reduction and structural overhauls, which require large amounts
of financing and long repayment periods, and can create dependency on
IMF support. However, resources often flow to corrupt governments,
while the impoverished population is put into debt (Stiglitz). The loan's
conditionalities do not always benefit the country. Furthermore, ESAF
countries tend to require debt relief due to regime changes or other
systemic problems. This type of lending surpasses the original mandate-
not only does it impinge on the role of the World Bank, but can also be
destructive to stability and growth.

The IMF strayed furthest from the original mandate in its expansion of
lending activities. The fund was not meant to be a development agency,
and its longer term loans can create a moral hazard problem. A
government following bad macroeconomic policy has no incentive to
reform, since it is protected from repercussions by an expected IMF
bailout. Similarly, private investors are protected in risky lending (Eiras).
Also, conditionalities attached to loans are often social and political-a
function of the World Bank.

Other new roles are more difficult to judge. The honest broker, crisis
manager and purveyor of credibility functions help prevent the collapse of
financial markets and contagion, creating confidence in world trade and
fostering growth. They can, however, lead to market distortions.
Functions like surveillance and provision of data are consistent with the
framers' intent. The dissemination of accurate statistics on global
development and national policies through the World Economic Outlook
and Public Information Notices fosters a transparent international trade
system, supporting cooperation and growth. Furthermore, the IMF
provides useful technical assistance to member countries in order to
strengthen internal economic policies. The fund's monitoring and training
functions can be seen as positive expansions of the original mandate.
However, many of the new lending facilities stray from the original
mission by defining a development role not intended for the institution.