Monday, November 17, 2008

IMF and World Bank: Obsolete Financial Institutions?

Born out of the Articles of Agreement drawn up during the Bretton Woods Conference of July 1944. Are the IMF and the World Bank still relevant financial institutions in the 21st Century?

By: Ringo Bones

As the scheduled G20 Summit of the November 14, 2008 weekend at Washington, D.C. attempts to solve our current global financial crisis. Many leading academics of the financial world now wonder if there is a need to drastically overhaul the workings of the International Monetary Fund (IMF) and the World Bank since these institutions seem powerless in reversing the tide of current the global financial crisis whose worse is yet to come. Plus the criticisms of an overwhelming majority about the two institutions’ development programs which seems to entrap poor countries into an endless cycle of debt. Barring radical policy changes does the IMF and the World Bank still relevant in the 21st Century economic globalization that’s fuelled by credit and it’s derivatives?

Back in July 1944 at the Bretton Woods Conference - which was held in Bretton Woods, New Hampshire as a post World War II reconstruction and global development plan. The soon to be victorious Allied Nations were already planning their post World War II economic development in which Adolph Hitler was even powerless to utter the phrase “Are you already measuring the drapes?” in protest to this conference. The historic conference led to the establishment of The International Bank for Reconstruction and Development – also known as the World Bank – together with the International Monetary Fund or IMF under the Articles of Agreement. Among the main objectives of the former were stabilization of the foreign exchanges and improvement of foreign economic relations. Since the US dollar was then the form of currency in greatest demand, contributions to the Fund by the United States were to be an important ingredient in worldwide stabilization. The Bank’s headquarters are in Washington, D.C.

Presently, after many years of change, the consensus reached at the Bretton Woods Conference – were its used to be that various currencies were pegged against the US dollar and backed by gold as a means of global financial stability – no longer holds true. There are other countries that had managed to transform themselves into a formidable economic superpower rivaling that of the United States. Like China for example, with the country’s large currency reserves and strong economy has the ability to undervalue her own currency. Thus gaining an unfair advantage when it comes to the pricing of export products. But is our present global economic structure that’s modeled after the consensus reached in the Bretton Woods Conference of July 1944 is now having trouble keeping up with its commitment of promoting development of poor countries without entrapping them to an endless cycle of debt? The inability to efficiently adapt to recent financial trends, not to mention in tackling our current ever deepening global financial crisis.

Recently the G20 Summit in Washington with the official banner of “ Summit for Financial Markets and the World Economy” was beginning to be seen by many as “Bretton Woods Part II” or “Bretton Woods Version 2.0”. This is so because it has set some pretty lofty goals – in the staunchly conservative financial world it does pass muster as lofty - to end our deepening current global financial crisis. The world leaders in the G20 summit had very much reached a consensus to promote free market capitalism or free trade and the rejection of wholesale protectionism. Other notable reforms of the 10-page long G20 declaration include new regulations to curb risky practices of banks and other financial institutions. Credit Default Swaps – those extremely sexy financial instruments that instigated the current global financial crisis – are now targeted for stricter regulation by allowing them to be processed on a centralized clearinghouse for better monitoring.

The existing practices that make “common folks” bedevil the world’s two leading financial institutions, IMF and World Bank, were not tackled. Like measures to end free trade distorting trade subsidies and “debt entrapment” of poor nations. Though the powers-that-be say that the latest G20 Summit is only a part of a series of high-level meetings aimed at resolving our present financial crisis, I just hope that they will to their part to end our existing global financial woes. After all, this recovery process requires the involvement of everyone of us. I mean, isn't the G20's "Global Economic Crisis Action Plan" granting a bigger role for developing nations just a euphemism for "we need everyone's help"?


Wiktest blog said...

Hey Ringo Bones,

I enjoyed reading your post on why such IMF and World Bank institutions are obsolete.

I work for and am personally approaching high quality bloggers such as yourself to join the Wikinvest Wire( The Wire is an invitation only blogwire, which links bloggers across the financial space, especially the personal finance space, and media partners such as CNET News, ABC News, SF Chronicle, USA Today, etc. The eventual reach of the Wire is slated to be around 400 million. Its a very exciting venture and I do hope you're interested. Bones Economics is a great blog and we're hoping to have you on the Wire.

If you are, let me know at and we should talk more.
Look forward to hearing from you


Ringo said...

Dear Advait,
I'm very interested and I'll drop you a line as soon as my schedule clears. Being a part of an "egalitarian community", the "Yuletide Season" in my place no linger revolves around the Anglo-Saxon Protestant and Catholic concepts of Christmas. And thanks by the way. I never knew my "financial musings" are of interest to anyone.
Ringo Bones