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November 27, 2003

what's wrong with the IMF and World Bank?

Why do the international lending institutions (the IMF and World Bank) draw such ire? Protestors picket at their doors, not outside Citigroup (US), Mizuho Holdings (Japan) or UBS (Switzerland), which are currently the world’s three biggest banks. Yet the IMF and World Bank exist to make subsidized loans to needy countries. Their loan agreements are intensively negotiated; no potential borrower is required to accept their offer.

On the other hand, the World Bank and IMF make their loans contingent on changes in the borrowers’ behavior, and the changes they demand are based on current mainstream economic theory. Thus, for instance, they tell borrowing countries to privatize their large state-owned enterprises and to cut spending, in return for loans (when there are no other sources of capital). I see four plausible interpretations of these demands:

(1) Perhaps the Bank and the IMF give good advice--good for a whole borrowing country’s population. Indeed, independent professional economists tend to endorse the main themes of the “Washington consensus.” If they are right, then the anger of the anti-globalism activists is misplaced.

(2) Perhaps these lenders are interested in maximizing the odds that their loans will be repaid. Then their advice is hard-headed and practical, but they ought to be more generous with very poor countries. If they ran out of funds as a result, the donor nations should give them more money.

(3) Perhaps they are well-meaning but misguided. They require reforms that will (as they claim) maximize economic growth in the borrowing countries. However, a government can add a percentage point to GNP through a policy that plunges a significant portion of its population into hunger and homelessness. Growth of GNP is a good thing all else being equal, but it’s often not the right goal to aim for.

(4) Or perhaps they require reforms that will harm recipients but benefit holders of capital, who are concentrated in the wealthy countries of the north. This doesn’t mean that lenders are deliberately and consciously cruel. Rather, they may honestly believe in mainstream academic economics, which could be a fundamentally biased discipline. In that case, wouldn’t borrowing countries prefer not to take their loans at all? Wouldn’t they be better off defaulting? Not necessarily. The overall system imposed by the “Washington consensus” could be bad for all poor countries, yet each country could be better off taking a loan than refusing it.

I don’t know enough to choose among these interpretations. But I’ve reached the point where all I want is empirical evidence that helps me see which of the above theories is true. Most of the rhetoric on both sides (about greedy capitalists or wise economists) is unhelpful.

November 27, 2003 9:39 AM | category: none


I've often wondered the same, but you wondered more clearly than I have. I really don't understand the protests against the IMF and World Bank, and haven't had anyone reasonably explain why they were protesting...

It's like a puzzle with a missing piece. Why *are* they protesting?

November 27, 2003 9:58 AM | Comments (1) | posted by Taran

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