Research: The United State Dominate World Bank And The IMF

The Bretton Woods Agreement was carried out in July 1944 by representatives from forty-four countries at the United Nation Monetary and Financial conference held in Bretton Woods, New Hampshire. During those times, gold was used as the bedrock for the acquisition of the United State dollar and other currencies were pegged to the United State dollar’s value. The United State dollar was pegged to gold at a fixed rate of thirty-five dollars per ounce and every other countries currency was pegged to the dollar at an equivalent value. The United State was the most powerful economy after World War 2 and its currency, that is the dollar, was then the world most valued and appreciated currency to the rest of the world, since there was no international central bank to generate and distribute currencies worldwide, thus the dollar became as good and equal as gold. The countries under the Bretton Woods System envisioned an opportunity for a new international system after World War 2 that would provide a postwar reconstruction after the encounter of the Great Depression and the previous gold standards.

The predominant originators of the Bretton Wood systems were the famous British economist John Maynard Keynes and the American Chief International Economists of the United States Treasury Department Harry Dexter White. John Maynard envisioned to set a strong global central bank to be called the Clearing Union and issued a new international reserve currency called the bancor. Whiles White’s also hoped to establish a reasonable lending fund and a powerful purpose for the United States dollar rather than the generating of new currencies. All member states under the Bretton Woods system were mandated to keep an eye on and sustain their currency pegs which was accomplished by basically using their currency to buy and sell dollars. The Bretton Wood system became fully practical and active in 1958 and adopted the ideas from both John Maynard Keynes and Harry Dexter White. The Bretton Wood system which included forty-four countries helped carry on, conduct and promote international trade across borders, and also the currency pegging helped reduce the flexibility of international exchange rate. The central goals of the Bretton Woods Agreement and System was to create an effective foreign exchange system, avoid competitive devaluation of currencies and also to encourage international economic growth. In the 1970’s, the Bretton Woods System started to fall out and finally collapsed in 1973. This was as a result of the suspension of the dollar’s convertibility to gold, the United State President Richard M. Nixon, depreciated the U.S dollar relative to gold thus making the United State gold supply insufficient to the cover the amount of dollars in the global system. The Bretton Woods System depended on the U.S economy for development hence when it remains strong when the U.S economy is also strong. Other important factors that lead to the collapse of the system is when Capital Control was abandoned by the United State and Great Britain. This made it easier for countries to freely choose any money exchange strategy for their currency. The Bretton Woods Agreement created two Bretton Woods Institution, that is, the International Monetary Fund and the World Bank which has functioned for a long time and also globally active and effective for international capital financing and trade actives.

The World Bank was established in 1944 and is composed of two main organizations, namely the International Development Association(IDA) and the International Bank for Reconstruction and development(IBRD). The World Bank has over seven thousand staff members working at its forty offices throughout the world but has most of its staff member at its headquarters in Washington, DC. The bank employs skilled personnel from different work profession of different disciplines such as statisticians, economists, agronomists, project appraiser and many others. The World Bank is an investment bank, a mediator between investors and recipients which borrows and lends to its member countries. Its member states have equal shares in the bank’s total worth. The World Bank is a main borrower in the world’s capital market and also borrows money by selling bonds to governments, their agencies and central banks. The income made is then lent to developing countries at a reasonable interest rate to help finance projects and policy reforms which brings about development. The IBRD acquires most its funds it lends to finance development through the issuing of bonds. Bonds are basically loans called debt securities and an issuing body for a bond pays the full loan at a certain maturity date. The International Development Association is also mostly financed by grant from donor countries. The World Bank is generally regarded as the most remarkable International Governmental Organization after the United Nation and its headquarters is in Washington, DC, United State of America. The activities of the World Bank are also completed by the International Finance Corporation(IFC), the Multilateral Investment Guarantee Agency(MIGA), and the Investment Center for the Settlement of Investment Disputes(ICSID).

The IFC encourages sustainable development growth by organizing fund to help finance private sector businesses as well as advisory services to businesses and government in the private sector. IFC also helps financial institutions in emerging markets to create jobs, generate tax revenue, assist local communities as well as develop commercial. The MIGA helps to improve foreign direct growth, reduce poverty in developing countries. The World Bank comprises of one hundred and eighty-seven member countries and involves itself in meeting the demands of its member states as well as promoting the movement than benefits its member countries rather than making profits off its members as compared to the commercial banks in the world. The International Bank for Reconstruction and Development focuses on reducing poverty rate in the middle-class and financially sound developing countries and the International Development Association also gives its attention to the poorest countries in the world such as the countries in sub-Saharan Africa. They focus directly on economic projects and activities by advancing on agriculture, rural development, small scale enterprises and urban development which helps these poor countries easily gain access to the basic needs of life such as housing, water, nutrition, healthcare and education. The bank generally assists developing countries giving them grants to help in developing their educational sector, healthcare, road infrastructure, private sector development, public sector management among others through extended financial support to these developing countries which support their developmental projects.

Throughout the history of the International Bank for Reconstruction and Development (the World bank), the United States has been the substantial shareholder and the most powerful member country of the World Bank. The U.S. influence the Bank have been primary to development of its policies, programs, and practices through its assistance, criticism and demands. The management of the World bank has been administered by a President delegated by the US President since it the time it was created to present times. The basic reason why the US President appoints the President of the bank is that, there is an unwritten law which state that the President of the bank must be a US citizen hence no citizen of another country can be appointed as President of bank. The members of the Board of Governors and the shareholders of the Bank must simply formalize the candidate appointed by the US as President of the Bank. I’m current times non-US citizens have been applying for the position but no one has been successful. The US economically became powerful and influential after the World War 2, thereby countries that collided to form the World Bank agreed for the institution to be headed by a US citizen. This qualification makes the US privileged enough to exert its power and control over policies of the World Bank.

Again from the creation of the World Bank to today, the US is the only country to have a de facto right of veto at the World Bank. Voting is based on a principle known as weighted voting, which implies that each countries votes depends on the financial contributions to the bank. As the largest shareholder from history to current times of the World Bank, the US continues to have veto power in the changes in the Bank’s structure which takes an exceptional role in in influencing and shaping global development of the World Bank. With the creation of the Bank, the US had 35.07% of the voting rights and since the last modification of voting rights, made in 2013, they enjoy 15.85%. Since its origin in 1947 (the year the Bank went into operation), the majority needed to change the law of the bank was 80% (held by at least 60% of the member countries), which in fact gave the US a right of veto. Therefore, the US is only country that have enough votes to veto decisions and policies of the bank.

Since 1970, the US regularly used its power to try to convince the Bank not to grant loans which promoted the manufacturing and yield of goods that would compete with US products in the global market. Goods such as palm oil, citrus fruits and sugar was constantly disapproved by the US for its production. In 1987 the US controlled the Bank to decrease loans that was allocated to the steel-manufacturing industry in India and Pakistan. In 1985, the US exerted its power to oppose an investment project by the International Financial Corporation (IFC - World Bank group) to support and promote the Brazilian steel industry and also a loan from the Bank to develop and reorganize of the steel-manufacturing sector of Mexico. It used its power of veto to prevent the bank from loaning the Chinese steel industry in the 80s. The US also influence the bank to refrain from rendering a loan from the IFC to a mining company for the extraction of iron ore in Brazil.

Lastly, the US has used its power to influence of the World Bank in certain cases of member states. Since the 1960s until the end of the Vietnam War in 1975, the US influenced the Bank, through its local agency the IDA, to allocate loans to the administration of South Vietnam - an ally of the US. After the end of the war and the defeat of the US, the World Bank successfully investigated Vietnamese authorities, and decided that even though the country was not lead by good economic policies yet met the requirements needed to receive concessional loans. Shahid Husain, director of the World Bank’s mission, stated into detail that the economic performances of the Vietnam were notable as compared to Bangladesh or Pakistan, which received help from the Bank. In spite of this, the Bank management, under influence from the US, suspended loans to Vietnam and its president, Robert McNamara which was based on the negative report of the investigation that was carried which was not a considerable justification for the basis of lending the Vietnam loans.

The international monetary fund is an international organization that helps improves global economic development and financial stability, encourages international trade and reduces poverty. The International Monetary Fund came to exist in December 1945 when its twenty-nine member countries signed its Articles of Agreement as part of the Bretton Woods Institution. Before the IMF was created, the global community was struggling with financial issues that came about as result of the Great Depression hence there was a need to develop the global economy. There was a quick change in the exchange of national currencies and many countries government were refusing for their currencies to be exchanged for foreign currencies. The IMF is a cooperative institution that was purposely design to encourage its member state to surrender practices that would be harmful to the economic development of other member state. The rules of the IMF which is written the IMF’s Article of Agreement signed by all member states comprises of a code of conduct which states that all members are mandated to allow their currencies to be exchanged for foreign currencies and also member states must disclose to the IMF of any changes they may consider regarding financial and monetary policies that could affect other member state. Thus allows the IMF to review and modify such policies to help make room for the needs of the whole member state. The IMF manages the institution by offering financial assistance to its member state to help them resolve their problems in times of struggles which easily influences the members to accept its code of conduct. The institution believes that creating employment, encouraging trade, developing economies and raising the living standard throughout the globe is a basic requirement necessary for international development.

The IMF is a small in size and structure as compared to the World Bank and has no supplementary agencies which helps to carry out its roles. It has about two thousand, three hundred staff members with most of them working at its headquarters in Washington, DC. It manages three offices in Geneva, Paris and the New York. The IMF is financially resourceful with a worth of six hundred and sixty-six billion dollars in quota and additional committed resources of six hundred and ninety-three billion dollars which has the mandates to use it whenever as pleased. The financial resources emanate from quota subscriptions, that is, the total amount of money each member country pays to the IMF as a contribution to the pool of the resources of the institution. Each member state pays a specific amount of money according to its economic power and size, thereby, the richer countries pays more whiles the poorer countries pays less. Each member state has access to the sum total of funds made from the sum total of each member’s contribution. Individual quotas paid by member states are modified every five years. Financial support can be given to all member state both developed and developing countries, that is, each member can borrow twenty-five percent of their quota from the pool of resources and must be repaid within three to five years by using member state’s currency which is common to the IMF to buy back its own currency.

Generally, in a year, about twenty currencies are borrowed and most borrowers change their currencies for the major convertible currencies, that is, the U.S dollar, the Japanese yen and the British pound sterling. These countries normally receive four percent of the amount borrowed. Each loan borrowed by member countries is assisted by a letter of intent, authorized in the Article of Agreement since 1968, which shows the macroeconomic adjustment and structural reforms necessary for the IMF to provide further financial support. The letter of intents helps reduce imports and expand export to make it possible for the country to benefit enough foreign exchange to enable it pay its debt. To be certain that money borrowed by member state is being used effectively and productively, the IMF continuously keep watch of the country’s economic growth.

The IMF was designed in times of the Great Depression to encourage financial stability in the global market. The institution is one of the most important International Organization in the global system with a great deal of financial resources and capacity to make economic policies for its member state which makes it wield more power and influence than other international organization. Most countries are members of the IMF but the United State is the largest and progressive contributor to the IMF at one hundred and fifteen billion dollars to IMF quota with a supplementary fund of thirty-nine billion dollars and the country with a substantial amount of votes, thereby, holding effective veto power for numerous decisions. This makes the US power in the IMF play a major role in shaping the IMF’s broad policy goals. Numerous studies have shown that indeed the U.S its power to control the IMF. For example; during the 1980’s, the U.S forced the IMF to expand credit to Argentina, in 1982, the U.S government also influenced the IMF to increase a 3.9 billion-dollar loan to Mexico. The U.S congress has achieved over sixty legislative mandate which involved the U.S representatives at the IMF to use conditionality agreements to carry out certain U.S objectives. Conditionality is a practice of giving financial support depending on the implementation of special policies. Conditionality Agreement is a basic IMF policy mechanism. The IMF’s governing document, the Articles of Agreement, makes it available for a three classes or categories of governance structure which consist of the board of governors, an executive board, and a managing director. The board of governors is the highest policymaking authority of the IMF and member states are represented on the board of governors, usually at the finance minister or central bank governor level. Daily power to influence over operational policy, lending, and other problems is vested in the board of executive directors, a 24-member bloc that meets three or more times a week to survey and manage the activities of the IMF.

The United States has the largest shareholder and has its own seat on the executive board. The executive board of the IMF can authorize loans, policy decisions, and many other matters by a simple majority vote; however, a supermajority vote is obligated to validate major decisions by the IMF. The supermajority may need a 70% or 85% vote, based on the matter at hand. At 16.52% of total voting power, the United States has an exceeding veto power over major policy decisions. The primary source of IMF resources is the quota subscriptions of its member countries. A country’s proportion of quota subscription generally depends the strength or power of its global economy; larger economies have larger quotas. A member’s quota also affects the country’s voting power at the IMF. Countries with larger quotas, and larger financial contributions and commitments to the institution, have a major vote or voice or power in the administration of the IMF. The United States contributes $117 billion to the IMF quota (17.46%). In addition, the United States has contributed $44 billion to funds at the IMF that adds to the quota resources thereby making the US powerful enough amongst other member state to influence the policies and decisions of the IMF.

The IMF administration therefore focuses on the role of the US which thus shows that the US indeed exert influence on the IMF. Studies have shown that the huge amount of money is given to member countries heavily indebted to the US commercial banks than to other countries.

Again the US policy makers enjoy some privilege in the IMF because they can shape the content of the IMF programs. The IMF conditionality agreement come about from the settlement and understanding between various IMF departments, that is, the member country asking for financial assistance’ the high level officials in flushing national repress serving in the fund’s Executive Board. These agreements allow each member country to extent their influence over the IMF decision which is protected by a formal decision structure, thereby making the US powerful in the institutions than other government. The Executive boards voting rules which agrees to all proposals of the institution allows the US to veto many decisions of the IMF therefore the managing directors of IMF cannot pass an important decision without the mandate of the US government. This accepted power gives the US control over the bargaining process of the program design.

07 July 2022
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