Walden Bello

During the heated debate on whether

or not to raise the US quota in the IMF in 1998, the US Congress voted for the

quota increase but attached several conditions, including the creation of an

independent body to look at the missions and performance of the World Bank and

the International Monetary Fund.

The report of the International

Financial Institution Advisory Commission, better known as the "Meltzer

Report" after its chairman Alan Meltzer, serves as a striking confirmation

from the mainstream of what progressive critics of the Bretton Woods

Institutions have been saying for the last 25 years. Among the most important

claims in the corpus of critical literature that the report supports are the


  • instead of promoting economic growth,

    the International Monetary Fund institutionalises economic stagnation;

  • the World Bank is irrelevant rather

    than central to the goal of eliminating global poverty;

  • both institutions are to a great

    extent driven by the interests of key political and economic institutions in

    the G-7 countries-particularly, in the case of the IMF, the US government

    and US financial interests;

  • the dynamics of both institutions

    derive not so much from the external demands of poverty alleviation or

    promoting growth but to the internal imperative of bureaucratic expansionism

    or empire-building.

There is little in the report that

was not earlier documented in such works as Cheryl Payer’s The Debt Trap, Bruce

Rich’s Mortgaging the Future, Susan George’s Faith and Credit, and the Food

First trilogy Aid as Obstacle, Development Debacle: The World Bank in the

Philippines, and Dark Victory: The US, Structural Adjustment, and Global

Poverty. But then the importance of the document lies not only in its critique

but in the fact that a significant part of the establishment has embraced much

of the progressive analysis, and, even more significantly, has made fairly

radical proposals for the future of the Bretton Woods twins.

Criticisms of the IMF have found a

very receptive global audience recently owing to the devastating performance of

the Fund during the Asian financial crisis. To the credit of its authors, the

Meltzer Report was not taken in by the World Bank’s propaganda that, in contrast

to the IMF, it has turned a new leaf. The report shows that the much vaunted

Poverty Reduction Strategy or Comprehensive Development Framework articulated by

ideological entrepreneur James Wolfensohn is largely a public relations effort

to save the Bank and that, although it is billed as a new development paradigm,

it is largely devoid of substance.


The IMF: No Redeeming Value

While diplomatic in its language when

discussing the IMF, the report finds little of redeeming value in the

institution. It shows that the Fund’s foray into macroeconomic reform via

structural adjustment institutionalized economic stagnation, poverty, and

inequality in Africa and Latin America in the 1980’s and 1990’s-precisely what

we had documented in detail in our 1994 book Dark Victory: the US, Structural

Adjustment, and Global Poverty.

It confirms that the Fund’s duty of

ensuring a stable global financial order was derailed by its prescription of

indiscriminate capital account liberalization for developing countries, its

habit of assembling financial rescue packages that simply encouraged moral

hazard or irresponsible lending and speculative investment, and its prescribing

tight fiscal and monetary policies that merely worsened the situation in the

crisis countries instead of reversing it.

The report is on the right track when

it recommends the closure of the structural and extended structural adjustment

programs, now renamed the "Poverty and Growth Facility." And it is

correct in recommending downsizing the IMF in both size and its scope of

responsibilities, though as we shall argue below, it would do better to

recommend an outright abolition of the Fund.

The report is, however, wrong in its

recommendation that the IMF should serve as a "quasi-lender of last

resort" to countries suffering a liquidity crisis. The IMF, by the

Commission’s own account, has handled this function badly in the past. Moreover,

the Commission’s recommending of strict conditions under which the IMF may

extend credit contradicts its own criticism of "the use of IMF resources

and conditionality to control the economies of developing nations."

Particularly objectionable is the

Commission’s proposal that the Fund provide liquidity assistance only to those

countries that "permit freedom of entry and operation for foreign financial

institutions" on the ground that these entities would, among other things,

"stabilize and develop the local financial system." This

recommendation is problematic for two reasons. First, foreign financial

institutions such as hedge funds, which have taken full advantage of "free

entry and operation," have helped precipitate one financial crisis after

another. Second, forcing countries to adopt western-style free market norms

governing ownership of foreign financial subsidiaries and their local operations

violates the first core principle it proposes for IMF reform – that is,

"sovereignty – the desire to ensure that democratic processes and sovereign

authority are respected in both borrowing and lending countries. 

This contradiction between the logic

of the analysis and the prescription reminds us that the Commission is, after

all, a US government-appointed body, many of whose members come from the banking

sector, conservative think tanks, and establishment universities who are very

wary about placing significant restrictions on the free flow of finance capital

globally, even when the evidence they are staring at underline the

destructiveness of unchecked capital mobility.


The World Bank: Hype versus


When it comes to the World Bank, the

report is equally devastating. The rhetoric about focusing on poverty

alleviation, it says, is contradicted by the reality that 70 per cent of the

Bank’s non-aid lending is concentrated in 11 countries, while the Bank’s 145

other member countries are left to divide the remaining 30 per cent. Moreover,

80 per cent of World Bank resources have gone, not to poor countries with poor

credit ratings and investment ratings, but to countries that could have raised

the money in international private capital markets owing to their having

investment grade or high yield ratings.

In terms of achieving a positive

development impact, the Bank’s own evaluation of its projects shows an

outstanding 55-60 per cent failure rate. The failure rate is particularly high

in the poorest countries, where it ranges from 65 per cent to 70 per cent. And

these are the very countries that are supposed to be the main targets of the

Bank’s anti-poverty approach.

The picture that is drawn of the

World Bank is that of a massive institution that is driven to lend more by

institutional imperatives than actual need in the recipient countries, that is

burdened by high failure rates both in its project lending and its program

(adjustment) lending, that has poor monitoring capabilities of the

sustainability of its projects, that competes with rather than supplements the

regional development banks (Asian Development Bank, Inter-American Development

Bank, and African Development Bank). The stark reality is that of a dinosaur

that is slowly sinking in a bog of its own making but which flags a "new

approach" of "Poverty Reduction" or "Comprehensive

Development" to mask a fundamental crisis of identity and direction.

Reform or Abolition? 

The Meltzer Report’s basic conclusion

is that the IMF and the Bank are monolithic institutions that have outlived

their usefulness. Now, institutions should be saved and reformed if their

functioning, while defective, nevertheless broadly achieves their basic

objectives. They should be abolished if they have become fundamentally

dysfunctional in achieving their basic objectives. The IMF, in the Report’s

view, has become part of the problem rather than part of the solution in global

development and financial governance. The World Bank likewise has become

irrelevant rather than central to the alleviation of poverty. Despite

adjustments here and there, the two institutions are imprisoned within paradigms

and structures that cannot handle the multiple problems confronting the world

economy during this phase of globalisation.

To borrow the language of Thomas

Kuhn’s classic Structure of Scientific Revolutions, both institutions are like

paradigms in crisis, and the solution when a paradigm is in fundamental crisis

is not to try to reform it with endless minute adjustments that merely prolong

its inevitable demise, but to cut cleanly from it in favour of a simpler, more

relevant, and more useful paradigm – in a manner similar to the way the founders

of early modern science simply junked the old, hopelessly complex Ptolemaic

paradigm for explaining the cosmos (the sun and other celestial bodies moving

around the earth) in favour of the simpler Copernican paradigm (the earth moving

around the sun).

In other words, rather trying to find

a function for the Fund and assigning to it the role of being a lender of last

resort, we would do better to scrap it totally and create a new institution that

does not have the baggage of institutional failure and an obsolete institutional

mindset and is thus better positioned to manage financial crises in this era.

Rather than expect the highly paid World Bank technocrats who live in the

affluent suburbs of Northern Virginia to do the impossible – designing

anti-poverty programs for folks from another planet: poor people in the Sahel –

it would be more effective to abolish an institution that has made a big

business out of "ending poverty," and completely devolve the work to

local, national and regional institutions better equipped to attack the causes

of poverty. And this task should not fall to the regional development banks so

long as they are imprisoned by World Bank-type structures.

The Meltzer Report does not go far

enough. It does not follow the logic of its analysis to its inevitable

conclusion: the abolition of the Jurassic Bretton Woods institutions. It is up

to the masses of people gathering in Washington, DC, on the occasion of the

IMF-World Bank spring meetings in mid-April, to uncompromisingly deliver that

message to the powers that be 

Walden Bello is executive director of

Focus on the Global South and professor of sociology and public administration

at the University of the Philippines.

Focus on the Global South (FOCUS) c/o

CUSRI, Chulalongkorn University Bangkok 10330 THAILAND Tel: 662 218

7363/7364/7365 Fax: 662 255 9976 E-mail: admin@focusweb.org Web Page http://www.focusweb.org


Leave a comment