Global economic governance is either exceptionally important or completely useless, according to radical thought leaders. This paper aims to deconstruct some of the misconceptions surrounding international financial institutions and trade agreements in an effort to demonstrate both limitations and capabilities of the instruments of global economic governance. The purpose of this essay is to examine the strengths and weaknesses of such tools in the context of a rapidly changing economic environment.
Reasons for the Authority and Legitimacy of the International Monetary Fund (IMF) and World Bank
Many critics try to assess the effectiveness of global economic governance institutions. In order to do that, it is first important to examine the reasons for the authority and legitimacy of such organizations as the International Monetary Fund and the World Bank. Since their establishment in 1944, both institutions have undergone major transformations to address new types of issues in the global monetary system. Thus, the first reason for the organization’s legitimacy and authority is the Bretton Woods Conference of 1944. It officially tasked the IMF and the World Bank with facilitating cooperation and restoring economic growth after the troublesome first half of the 20th century. The Fund and the Bank acted as twin institutions under the conditions established at the Bretton Woods Conference. One of them, for example, was the creation of a fixed system of exchange rates, which failed mere two decades later. Based on the aforementioned analysis, it is apparent that the actions of the IMF and the World Bank are legitimate as long as they reflect the conditions established at the Bretton Woods Conference.
The second reason behind the legitimacy and authority of the IMF and the World Bank are their mandates. The IMF’s mandate legally binds the institution to its capacity to provide loans and create policy programs. The document identifies the main limitations of the IMF’s authority, which contributes to its reputation as a legitimate global organization and not just a tool of the power-hungry international elite. The mandate also discloses the information about the Fund’s primary and secondary sources of funding. Such transparency is crucial in constructing an image of a respectable global institution. The mandate of the World Bank specifies the organization’s key responsibilities, goals, and rationales. The document identifies the sources of funding, just like the IMF’s mandate. Both of these internal directives are essential in establishing the legitimacy and authority of the Fund and the Bank.
The final reason is the institutions’ real-life successes in reaching their pre-determined short- and long-term objectives. A thorough analysis of an organization’s failures and positive outcomes contributes to its reputation in a global arena; it could either be taken seriously or regarded as a joke. It is important to acknowledge that the role of the IMF and the World Bank has changed over time, which is why these institutions act primarily as financial crisis managers nowadays. Hence, it is extremely difficult to assess the success of their policies since there is no reliable framework to determine whether the outcomes of their initiatives are worse than whatever the alternative solutions would have had. Despite that, based on certain data, the IMF and the World Bank are rather successful at battling economic issues. For instance, they have helped a number of heavily indebted poor countries (HIPC) as “debt reduction packages under the HIPC Initiative have been approved for 36 countries out of 39 eligible countries providing $76 billion in debt-service relief over time.” Thus, despite all the criticism, the International Monetary Fund and the World Bank continue to deliver positive results, which contributes to their authority and legitimacy.
Key Roles and Rationales of the IMF and World Bank
The IMF and the World Bank’s tasks are promoting economic stability and improving the existing standards of living by reducing poverty. The institutions often work together to stabilize the international financial system by reducing the external debt burdens of developing nations. Argentina, Brazil, and Mexico are some of the countries that received the assistance of the IMF. However, the HIPCs are definitely not the only ones that can be in need of help. For instance, it is crucial to recognize that “the 2008 global financial crisis and subsequent European debt crisis required major bailouts in advanced eurozone economies, such as Greece, Iceland, Ireland, and Portugal, for the first time.” In addition to providing loans, the World Bank and the Fund restore foreign exchange reserves, and advise poor countries on their economic policy. They also often collaborate to ensure that the member states remain economically resilient.
Despite the aforementioned reasons for the legitimacy and authority of such global economic governance institutions as the International Monetary Fund and the World Bank, many critics argue the opposite. They believe that both the IMF and the World Bank cannot be regarded as legitimate international institutions due to various factors. First, there appear to be fewer distinctions between the Fund and the Bank as there ought to be. After the failure of the fixed exchange rate system in 1973, the IMF started to act as a development institution, which was not meant to be in accordance with the set of conditions established at the Bretton Woods Conference. Initially, it was not qualified to grant long-term loans, which made its decision to start doing so to help poor countries with structural adjustment controversial. The World Bank, on the other hand, “increasingly provided budget support rather than financing specific projects.” Thus, the two institutions are now inseparable, which explains how often they partake in the same business. Unfortunately, this leads to an overall lack of accountability as neither organization has to take full responsibility for the results of these shared initiatives.
The second area of concern is the fact that major stakeholders dominate both organizations. It is often the case with international organizations, with the United Nations being yet another example of such unfair power distribution among member states. The voting share of the Group of Seven (G7) countries is over 40 percent, with 17 percent allocated exclusively to the United States. Such inequality could have probably been ignored if it did not interfere with the IMF and the World Bank’s initiatives. Studies demonstrate that G7 states’ political allies receive bigger loans, which contain fewer binding conditions. Additionally, the International Monetary Fund is particularly biased in favor of the countries close to the United States, which is apparently based on the number of high-benefit, low-commitment programs they get. It is important to note that “the Managing Director of the IMF is always European; the World Bank President is a citizen of the United States.” Thus, such bias affects the international community’s attitude towards the IMF and the World Bank as legitimate institutions with proper authority.
The third reason, it is grounded in the principle of conditionality. Originally, neither the World Bank nor the International Monetary Fund had any power to impose a set of conditions on the member states. However, as the IMF started to issue reform packages, the recipient countries faced numerous micro-economic conditions, which affected their socio-political activities as well. Such detailed conditions are often seen as the contributions of the organizations’ bureaucrats. The IMF and the World Bank’s increasing levels of intrusion are extremely controversial and lead to a variety of debates within the international community of economic and political leaders.
A Christian Perspective on International Finance
As far as the Christian worldview can guide people in the understanding and assessment of international financial developments, it is important to acknowledge that any global financial institutions, including intermediaries such as the World Bank and the International Monetary Fund, should be regarded as human creations, which have to follow God’s purposes. Christians are in full support of the initiatives started by the IMF and the World Bank as long as they serve a larger goal. This objective is usually the creation of long-term solutions to finance sustainable and beneficial activities. For example, a country can borrow a sum of money to battle the crisis of primary school education. This will also serve God’s purpose of using the available resources to invest in the future of humanity.
Pros and Cons of Free Trade
The primary advantages of free trade include a more dynamic business climate, increased economic efficiency, as well as technological advancement. Free trade agreements allow companies to compete for international consumers, which fosters transformations, experiments, and technological innovations. Free trade allows each country to not waste time and play to its strengths, which may be automotive production or agriculture, instead of doing everything at once, which is exceptionally effective. The main disadvantages of free trade are poor working conditions, environmental abuses, and increased job losses. Due to free trade agreements, companies use reduced tariffs to move manufacturing to poor countries where labor is much cheaper. As a result, domestic economies struggle to employ people since the majority of large corporations look for a cheap workforce elsewhere. New manufacturing hubs such as Vietnam and India usually have poor labor regulations, which allows companies to limit the employees’ benefits and overwork them regularly. Similarly, such countries a lack environmental laws, which would require companies to reduce waste or set up air purifying mechanisms.
Global economic governance is important although particular institutions can abuse their authority in favor of powerful political agents. The need for financial institutions such as the International Monetary Fund and the World Bank is especially apparent during crises. Free trade agreements, on the other hand, contribute to long-term solutions related to economic resilience and efficiency of various countries. Despite the successes of the projects initiated by global economic institutions, there is a need for reforms in order to reinforce their legitimacy and increase their effectiveness by eliminating bias in the decision-making process.
Amadeo, Kimberly. “Free Trade Agreements with Their Pros and Cons: Advantages and Disadvantages and Their Possible Solutions.” The Balance. n.d. Web.
Cho, Seo-Young, and Axel Dreher. “Forum for Economic Policy Do We Still Need the IMF and the World Bank?” Georg-August-Universität Göttingen, 2009. Web.
Fooshee, George. “10 Financial Principles that Are Biblical.” Back to the Bible, 2019. Web.
International Monetary Fund. “The IMF and the World Bank.” IMF.org, n.d. Web.
Masters, Jonathan, and Andrew Chatzky. “The IMF: The World’s Controversial Financial Firefighter.” Council on Foreign Relations. n.d. Web.