What do the World Bank and the International Monetary Fund actually do, and why do they wield so much power?
Right now, people in Greece, Spain and the other crisis-hit European countries are living with the dire results of IMF decisions, while poor countries in Africa, Asia and Latin America are receiving aid from the World Bank that often ends up doing more harm than help.
As these two global titans hold their annual meetings in Tokyo this weekend, now seems a good time to demystify these mysterious organisations a little bit. Who are these bodies that now control the fate of so many of the world's economies?
In the beginning ...
Both groups were conceived in 1944 at the Bretton Woods conference, which brought together representatives of 44 nations as the second world war drew towards its bloody end. The aim was to establish rules and institutions to guide the global economy into recovery and stability. British economist John Maynard Keynes, the hero of today's anti-austerity economists, was among the primary drafters of the plan.
The World Bank grew out of the International Bank for Reconstruction and Development, one of the two original Bretton Woods organisations. After the war, its main focus was to help shattered European economies get back on their feet. But as Europe recovered, the bank expanded its mandate to focus on alleviating poverty worldwide.
The IMF was set up initially to maintain stability in the international monetary system, and to expand world trade by making loans to countries with short-term shortfalls. This, it was believed, would keep countries from imposing tariffs and other barriers to trade.
One of these things is not like the other
It's easy to confuse the World Bank and the IMF because they're alike in key ways: both are technically owned and governed by their member nations, and nearly every nation now belongs to both. They're both large international finance institutions staffed with economists and analysts and other hard-to-figure-out-what-exactly-they-do experts. They both have headquarters in Washington, DC and hold splashy annual meetings together, like the one in Tokyo this week.
The difference between them is basically that the World Bank is primarily focused on development, while the IMF's job is to maintain an orderly system of money flows between countries.
So how's that been going?
Well, since its founding, the World Bank has given loans and grants totalling over $400bn. That money has been spent largely on heavy infrastructure such as dams, highways and power plants, as well as on projects to develop agriculture and sanitation. While these projects have undoubtedly done some good, the top-down, business-first approach to development taken by both the bank and the IMF has caused a lot of problems, too.
For a start, they demand that the countries that receive aid "liberalise" their economies. This typically means, among other things, deregulating industry, privatising public resources and cutting back on public spending on health, education and other services. Part of the rationale is that this will encourage foreign investment.
But this often results in poor countries essentially becoming economic colonies of richer ones, with profits going to foreign investors rather than to locals. Some of those dams financed by the World Bank have displaced indigenous people, and the bank has provided billions in financing for so-called "land grabs" that have dispossessed and impoverished hundreds of thousands.
The World Bank has also funded projects that damage the environment, and the IMF's emphasis on increasing world trade often causes poor countries to promote industrial agriculture and mining practices that result in deforestation, erosion, water pollution and more.
Right now, the eurozone mess is at the top of the IMF's fix-it list. As Greece unravels, with Spain and Portugal close behind, the fund – as part of the so-called troika, along with the European Commission and the European Central Bank – is pushing the same "structural reforms" it's been forcing on developing countries that have sought its help for many years. But the situation on the ground in Europe gets grimmer, more and more people are asking whether these solutions make any sense.
The experience of Argentina offers one example of a different way out. After IMF-enforced savage austerities, privatisations and budget cuts brought Argentina to the edge of collapse, the country defaulted on its debt in 2001. Although there was much tut-tutting about Argentina stiffing their creditors, within six months of ditching the IMF regime and going it alone, they were on the road to recovery. Retired IMF chief Michel Camdessus admitted last year that "we made a lot of mistakes with Argentina". So far, though, those lessons don't seem to have been learned.
Governance by the Golden Rule
Both the World Bank and the IMF work by the Golden Rule of Economics: the people with the gold make the rules. For one thing, that means the rich industrialised countries have a bigger vote in the governance of the two organisations. In fact, because the US contributes the most money to the IMF, it has an effective veto power on IMF decisions.
Add in the fact that by longstanding custom, the head of the World Bank has always been American, and the IMF has always been run by a European, and you can see why the rest of the world is unhappy at their lack of representation.
Who's in charge?
The IMF is headed by Christine Lagarde, a former French trade minister and finance minister under former centre-right President Nicolas Sarkozy. She was appointed last year after her predecessor Dominique Strauss-Kahn resigned in a sex scandal. She's the first woman to be managing director at the IMF.
Lagarde is well-respected in international financial circles. She's pledged to increase diversity at the IMF.
At the World Bank, Jim Yong Kim just took over as president this spring. Born in Korea, Kim is an American physician whose background is in public health. He played a lead role in providing drugs for HIV/Aids to Africa.
The appointments of both Kim and Lagarde were marked by calls to break the traditional US-European arrangements and appoint someone from the developing countries, calls that were ultimately not heeded.
Time for change!
Now, at the annual meetings in Tokyo, reformers are upping the pressure on both institutions to clean up their acts. Oxfam International is among the groups pushing for the World Bank to suspend financing for "land grab" projects until it can properly assess the impact of that lending on local people and the environment. Activists are hopeful that Kim will follow through on his comments about the need for reform.
On the other hand, efforts to reconfigure representation at the IMF to give emerging economies more power are hung up in the US Congress, and Lagarde says she doesn't expect progress on that during the Tokyo meetings.
Bottom line? These two organisations wield too much power and impact too many lives to keep going the way they are. They cannot stay frozen in their postwar time warp. The chorus calling for fundamental change in how global development is funded and shaped must be heard. IMF chief Christine Lagarde has herself warned that time is running out to act. "Whether you turn to Europe, to the United States of America, to other places as well, there is a level of uncertainty that is hampering decision makers from investing, from creating jobs," she said. "We need action to lift the veil of uncertainty."
If these institutions are going to be of any use in the coming decades; if they are to do more good and less harm; the countries that formed them more than half a century ago will have to relinquish their grip. With the world economy on the brink, the need for change has never been more urgent.
Learn more: The Bretton Woods Project has this excellent overview of what's at stake in the meetings in Tokyo. It also has links to keep up with developments throughout the week.
Sources: US Department of State, IMF, The Age, Global Issues, Bretton Woods Project, Avaaz, Essential Action, Media Monitors, Guardian, Buenos Aires Herald, Foreign Policy in Focus, BBC, Oxfam, Reuters, Kyodo News