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Colonialism by Other Means?

Khoon Tee Tan

When the American and British teams led by Harry D. White and John Maynard Keynes met at the Bretton Woods Conference in 1944, sullied and tempered by the destruction and suffering of World War II, it was likely that theirs was no conspiracy to ensure global economic domination by Western powers. It was in fact an expression of hope, a noble attempt to ensure that future generations would not have to bear the pain and grave repercussions of economic disasters. As a result, the World Bank and the International Monetary Fund (IMF) were established. More than half a century later, these very institutions are met with such scorn and vilification, none the least from the “common man” where there was once indifference. What happened in the interim?

At its inception, the World Bank, initially called the International Bank for Reconstruction and Development (IBRD) was to serve as a financier (using largely American funds) for rehabilitation of the European economies destroyed by the war and as an investor in the rest of the world. This role was to be complemented by the IMF, charged with the task of ensuring exchange stability while promoting a system of unhindered trade and capital convertibility amongst nations. These goals have since evolved although the general principles remain largely intact. Today, the World Bank strives to achieve the difficult but morally sound goal of poverty eradication worldwide, and the IMF, the more controversial goal of free capital convertibility, while serving as a “lender of last resort” to crisis-afflicted countries.

The post-World War II period has also seen the rise of non-governmental organizations and various lobby groups. The pressure from these groups (which often serve narrow interests) has led to such varied goals in the World Bank alongside the primary objective of poverty eradication, including environmental, cultural and human rights concerns, civil society participation, education, healthcare, debt relief, etc. Some of these are consistent with the fight against poverty, but at the same time, there are also competing interests against which tradeoffs need to be made.

Given the noble outlook of these institutions, what exactly are the protests all about then? The key to understanding most of these protests lies in the conditions imposed by the IMF and the World Bank before loans are disbursed to member countries. Furthermore, these institutions are widely seen as undemocratic with disproportionate voting and executive power held by the rich G7 countries, albeit in proportion to their financial contributions.

It could be argued that it is only fair that those who contribute more funds should have more say. But then practically all World Bank and IMF programs these days are carried out in developing countries and poorer regions of the world. Hence, there is a growing perception or at least suspicion that these institutions serve to protect and promote Western interests under the guise of financial aid.

Do the critics have a case? I am not quite sure who coined the term, but the ideals of free trade, capital market liberalization, fiscal discipline and freedom of information, amongst other things, have come to be known as the “Washington consensus,” a kind of economic medicine that, if followed by the rest of the world, would lead to greater prosperity for all. Columbia professor Jagdish Bhagwati calls the principal proponents of this consensus the “Wall Street-Treasury complex.” It is without doubt that the United States Treasury Department and Wall Street are big fans of such capitalist ideals, which also resonate in many other European governments and financial markets. Hence, it is no coincidence that the World Bank and the IMF consistently appear to uphold the Washington consensus.

More importantly, we need to ask whether the IMF’s medicine actually protects and promotes the well-being of those to whom it is prescribed? I have no reason to believe, and would go further to say that it is absurd to think, that the IMF or the World Bank would wish for the failure of the programs and policies that they themselves support financially. But the conditions that they impose, however ideal, are not necessarily suitable in all cases. In fact, in many cases these prescriptions do more harm than good in the short run, no matter how benevolent the intentions.

As an example, the fiscal contractionary measures and high interest rates demanded by the IMF of the countries hit by the recent Asian financial crisis have been widely blamed for exacerbating the situation. The IMF failed to understand (by its own admission later on) that the problem in East Asia, unlike in Latin America, was not with fiscal discipline.

Of course, it is a bit too late for many of these countries, whose companies, already pressured by a credit crunch, were further decimated by high interest rates and depressed demand, leading to a fire sale of assets to foreign investors. And to make matters worse, the IMF conditions of further capital market liberalization appear to serve the interests of rich country exporters and investors. Perhaps in the long run, these will also serve the interests of the people, but in the meantime, the people have to cope with massive unemployment and extreme structural adjustments, which in some cases has led to internal strife.

The wisdom of promoting the Washington consensus in times of crisis, irrespective of the short run consequences, is questionable. The well-being of society appears to matter less than the near-religious faith in free markets, which is widely seen to benefit the rich. This is what lends credence to the belief that the Bretton Woods institutions today serve as instruments for “colonialism by other means.” What a pity, for many countries, especially the East Asian economies in the 1980s and early 1990s, have benefited immensely from foreign direct investments and export-driven growth. In fact, in the Philippines and Malaysia, the income gap between the rich and the poor actually decreased while per capita incomes rose during the same period. But these countries benefited because, in the words of Joseph Stiglitz, “they made globalization work for them:” liberalizing markets at their own pace while attracting long-term investments from abroad.

The IMF and the World Bank would serve the interests of the poor and the crisis-stricken better by being more flexible and less ideologically dogmatic in their stance. Both should strive to engage governments in meaningful consultation. After all, those who have to live out the consequences of the policies undertaken surely deserve some say before the choice is made. The IMF should also refrain from using crises to impose the Washington consensus on member countries. Unless some things change, both will always be open to accusations of neo-imperialism. That would be a shame, for these institutions have an important role to play in ensuring global economic stability while improving living standards worldwide.