By Quentin Calhoun

U.S. President Donald Trump has had a fairly novel approach towards global institutions in modern American politics; he has lambasted the United Nations, discussed withdrawal from NATO, renegotiated NAFTA, and withdrew the United States from the Trans-Pacific Partnership Trade Agreement (TTP) when his administration was just days old. The International Monetary Fund (IMF) and the World Bank, two liberal Bretton Woods international financial institutions, seem like obvious targets of the Trump administration, and yet, the relationship between the two remains—at least publicly—congenial. 

Though not from Trump, the Bretton Woods Institutions (BWIs) have faced growing international criticism in their operations, despite ostensibly altruistic economic goals. The World Bank and the IMF have been a persistent centerpiece of U.S. post-World War II foreign policy, but their mission has evolved dramatically over the last few decades. 

The institutions are as old as the nation’s superpower status—and probably partially responsible for it, too. In July 1944, 43 nations met in Bretton Woods, New Hampshire in order to make preparations for post-war recovery and promote a more sustainable, stable growth. In his opening speech to the meeting, U.S. Treasury Secretary Henry Morgenthau argued that the “bewilderment and bitterness” caused by economic depression begat fascism and Hitler. Permanent international financial institutions, he asserted, would allow nations to “realize their potentialities in peace.” 

Most prominent experts at the time believed that to support stable currencies, the world needed to return to the traditional method of currency valuation: gold. Following World War I, nations had failed to reinstate the gold standard. During the interwar period, currency manipulation was rampant, causing some nations to abandon open trade, which in turn worsened the Great Depression. 

Despite this consensus, the nations of the world would struggle to return to the gold standard for an understandable reason: the U.S. owned the near entirety of the world’s gold supply. Instead, nations agreed to peg their currencies to the U.S. dollar, which in turn would be pegged to gold at $35 per troy ounce. The  IMF oversaw this system, which stabilized exchange rates and limited any nation’s ability to deviate the value of its currency by more than 10% without approval from the IMF. The “Bretton Woods system” would help limit currency exchange volatility and provide a healthy environment for growing international trade.

By contrast, the International Bank for Reconstruction and Development (forerunner to and a component of the World Bank Group) served the second goal of the Bretton Woods Conference: recovery and development. In short, the World Bank provides loans to creditworthy middle- and low-income nations in order to promote long term development and to reduce poverty. The IRBD was designed with the anticipated European and Asian need for financing for post-war reconstruction projects.

The IMF acts as the stick to the IRBD’s carrot. The IMF assumes a great deal of responsibility—and power—in maintaining global monetary and economic stability, which nations have surrendered to them. Yet for a nation to join the World Bank, they must first join the IMF.

The Bretton Woods Agreement proposed an “International Trade Organization,” but these plans would fail to materialize until the advent of the World Trade Organization (WTO) during the Clinton Administration. 

Since 1944, the power and role of the BWIs have changed dramatically. After the United States dropped the gold standard in 1971, the Dollar became a free-floating currency. The Bretton Woods system died, and nations were free to decide how to value their currencies. Yet the World Bank and the IMF survive.

Following the U.S.’s abandonment of the gold standard, the IMF embraced the new free-floating system of valuing major currencies. Instead of maintaining a unified currency exchange system, the IMF now focuses on developing nations and emerging crises. Over the years, the IMF has grown to include 189 member nations and performs a variety of tasks in their pursuit “to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” 

Following the Mexican Peso and Asian currency crises of the 1990s, the IMF has become a far more powerful organization, monitoring global economic conditions and acting as a lender of last resort for nations in economic crises. It offers these loans only under the condition receiving nation adopts economic reforms. 

During the Asian financial crisis, for instance, rampant inflation and an economic downturn threatened most of Southeast Asia, and the IMF intervened. It provided a massive $110 billion loan, yet enforced stricter fiscal constraints, higher interest rates, and privatization. Within two years, GDP growth resumed in affected nations.

From the IMF’s perspective, they are leveraging their position as the lender of last resort to assure a nation will adopt responsible economic policies and not require future assistance. Some nations see the IMF as exploiting economic crises to promote its unpalatable agenda, even where better alternatives exist.

The World Bank Group no longer only promotes development and recovery by loaning directly to creditworthy nations. It’s five component banks now loan to poor and middle-income nations, directly promote private sector growth in developing nations, and even settle international financial disputes. These are all altruistic goals that broadly align with the original purpose of the IRBD, but the fact remains: its power has significantly expanded. 

The administration of the World Bank is determined by voting power determined by the size of a nation’s dues. That creates a problem. Western nations like the United States and European countries in the E.U. determine the recipients and conditions of loans given to developing nations who are quite culturally different. Developing nations lack a significant voice in the World Bank, leading to a more ideologically homogeneous and inflexible agency.

The Washington-based World Bank’s first loan supported reconstruction in a newly-liberated France, financed by fellow Western nations like the United States. Newer loans to non-Western nations are still financed by the West and support development, but only after adopting reforms such as structural adjustment.  

Structural Adjustment loans aim to open up a nation to international trade and private investment, promoting a free market with fiscal restraints. To accomplish this, nations often must devalue their currency, privatize state-owned industries, ease restrictions on foreign businesses, and cut government spending. 

Detractors say that these loans fail to promote citizen welfare, foster inequality, and lead to environmental degradation. Structural adjustment, they argue, only serve to open protectionist emerging markets to western corporations. 

Bolivia, for example, has adopted structural adjustment policies under the guidance of the World Bank in 1985. These reforms led to increased foreign investment and some measure of economic stability, but at a cost. The nation fell into recession, unemployment skyrocketed, government revenues fell, and riots broke out after water privatization led to price hikes. 

Both the IMF and the World Bank often grant loans with harsh conditions, which critics say can undermine the sovereignty of debtor nations.

Since the 2008 global financial crisis, the IMF and the World Bank have begun to work beyond dealing with the economic problems of individual nations to regional and even global threats. 

Soon after 2008, the IMF confronted the growing European debt crisis. 

Following an election in late 2009, Greece admitted that its government debt was equivalent to 113% of its GDP, a figure that the erstwhile ruling party had undervalued with misleading accounting. The Greek economy collapsed, and rioting broke out as the government enforced austerity measures (raising taxes and lowering spending) to quell the crisis. With Greece and the wider Eurozone on the brink, the IMF and the European Union stepped in. 

Many European leaders at the time vehemently opposed the IMF’s intervention. The IMF traditionally caters to unstable and developing nations with its loans. The IMF’s intervention raised the question of whether European governments and economies could effectively deal with a crisis independently. Former French Finance Minister and Managing Director of the IMF Christine Lagarde said at the time, she hoped “Europeans could put together enough of a package, enough ring-fencing, enough of a backstop so as to show that Europe could sort out its own affairs.“

Another issue with the IMF’s Greek loans was how unusual it was given the fund’s charter and history. Greece, although in crisis, was a developed, western, European nation, and nearly half of the directors of the IMF questioned whether the loans would be effective—or would be paid back. 

The loans ultimately stopped the crisis from spreading throughout Europe but saddled Greece with greater political and economic turmoil than necessary. One senior IMF official said, “Objectively we made Greece worse off … You’re lending to a country that is already unable to pay its debt, and that is not our mandate.”

Regardless of how well the BWIs have used their expanded authority, the international community now instinctively looks to them during times of crisis. During the global economic downturn resulting from the 2020 coronavirus pandemic, Managing Director of the IMF Kristalina Georgieva noted that the IMF had $1 trillion in lending capacity and that over 90 nations had applied for assistance as of April 3. Speaking at WHO headquarters, Georgieva stated that, “Our [The IMF’s] main preoccupation in this crisis is to rapidly step up financing for countries, especially emerging markets, developing countries that are faced with very significant and growing needs.”

On the IMF’s website, they argue that because a global health crisis could have “an adverse economic impact,” the IMF has the mandate to offer loans and policy recommendations to nations afflicted by the virus. 

The World Bank, too, has faced calls to expand its reach to fight the virus’s economic impact. Several policy fellows of the Center for Global Development called for a “break the glass moment” to give the World Bank and other multinational development banks far greater ability to lend during this crisis. 

The coronavirus pandemic is already showing signs of causing a deep recession. The international community may need large international organizations to fulfill the role assigned today to the BWIs, but the IMF and the World Bank were designed to serve the needs of the 1940s. It may be time to reexamine alternatives.