IMF and the World BANK
The World Bank (WB) and the International Monetary Fund (IMF) are the two most influential international financial institutions across the globe. They are the chief sources of lending to nations across the world, especially developing nations, where they use the loans they offer to poor nations to edict major alterations in their economies. The World Bank is the leading public development establishment in the world. The WB and the IMF are financed and controlled by the rich states in the world, predominantly the United States, which is the biggest shareholder in the two institutions (Ismi 5). The WB headquarters is in Washington, DC in the US. The US holds approximately 17 % of the vote in the World Bank as compared to the whole 48 sub- Saharan African nations that have less than 9% votes (Dembélé). Other nations controlling the WB are the G-7 powerful nation, which controls a higher percentage of the institutions’ vote through a process called the “Washington Consensus.” Through their mission and objectives, the IMF and the WB will attempt to highlight their significance in assisting the poor nations in development (Babb 2). However, through the commonly known as “Washington consensus model”, the institutions have not helped address the issue of poverty among the developing nations, but they have continued to promote a growth model that supports the interest of the wealthiest states. Most of these effects are being felt in the African continent.
Structural Adjustment Programs (SAPs)
During the late 1970s and early 1980s, the IMF and WB began to use the strategies that were aimed at intervening the state of affairs that was being experienced in the African continent. Their main objective was to accelerate development in the nations that would see the population shift from poverty. This initiative was published in the famous report dubbed “Berg Report” that was published in 1981 (Dembélé np). According to the institutions, the main alleged reason for the involvement was to help alleviate the debt crisis that had hit the African nations in the late 1970s. The cause of the crises was an amalgamation of both the external and internal shocks, particularly steep alterations in commodity prices and higher interest rates. The institutions came up with a remedy called the structural adjustment programs (SAPs), which was a total mess. The programs worsened the external debt that was already accumulating and aggravated the economic and social crisis (Dembéle).
In 1980s, the institutions began their influence in African nations (Babb and Kentikelenis 1). For instance, in 1980, during the beginning of the intervention programs by the WB and IMF, the ratios of debt to Gross Domestic Product (GDP) and the export of goods and services were 23.4% and 65.2 % respectively (Dembéle np). However, in 1990, ten years later, the ratios had worsened, hitting 63% and 210% respectively (Dembéle np). This decline was as a result of the poor nations’ incapability to serve their external debts. Consequently, the accrued arrears on the principal and interest rates became part of the expanding outstanding debt. In 1999, for instance, the debt in the whole African continent was at 30% as compared to 15% in the 1990s and 5% for all the developing nations in the same period of time (Dembéle np). Therefore, it is evident that the poor African nations are not getting any benefits from the new loans since they use it to service old loans. The development agenda under the constants cannot be achieved in the poor nations since there are no funds to drive the motive. This IMF and WB policies, therefore, only benefits the wealthy nations through interest rates, leaving poor nations and populations in poverty.
Moreover, between the1980 and 2000, the Sub- Sahara African (SAA) nations had remitted more than $240 billion in the form of debt services that is close to more than four times the amount of debt in 1980 (Dembéle np).. Furthermore, the nation still owes the same amount twenty years down the line. A good example of this absurdity is the Nigerian debt case. In 1978, the nation had borrowed $5 billion, which it reimbursed $ 16 billion by 2000, but it still owed $ 31 billion, according to the then President Olusegun Obasanjo (Dembéle np). This is a perfect example of the structure of developing nations’ debt crisis and the power of imbalance that is featured in the world of economics in terms of financial relationships (Ismi 29). This condition benefits the wealthy nations at the expense of the developing nations, thus, making poor people poorer. In this context, the IMF and the Word Bank have been able to increase their dominance and influence over developing nations, especially in the African continent. This is evident in the share increase of the World Bank and its partner, the International Development Association (IDA), in the SSAs debt (Dembéle np). According to the World Bank, the total share of both the institutions that was 5.1 % of SSA’s total debt in 1980 shifted to 25% and more that 37% in 1990 and 2000 respectively (Dembéle np). This implies that the World Bank is the chief creditor of almost all the sub-Sahara nations, an aspect that clarifies the massive sway it grasps over the nations’ policies.
The institution imposes its influence over the poor nations through the imposition of hard conditions on the nations to acquire loans and credits (Babb 7). For instance, they necessitated a financial liberalization that was aimed at attracting more investments to the nations (Ismi 29). In turn, this led to short- term capital flows, which together with high- interest rates crowded the public and private investments. The low rates of investments resulted in a restricted low output. The real Gross Domestic Product fell miserably in the African nations, resulting in a period dubbed as “the lost decade” for Africa. According to the 2004 edition of the World Development Indicators, it was proven that the Sub- Sahara Africa is the sole region in the world that poverty has continued to persist since the early 1980s, at the beginning of the Intervention programs by the two main financial institutions. It is estimated that approximately 160 million people in Africa live on less than a dollar in a day, a number that has persistently increased (Dembele).
Cost of trade Liberalization
The IMF and the World Bank determined that some of the causes of financial crisis in Africa are associated with the nations’ inward observation of the trade systems that are featured by the protection of home markets subsidies, revamped exchange rates, and other market misrepresentations. The characteristics made the African export markets to be less competitive in the global arena (Bond and Dor 3). To replace these systems, the institutions proposed an open and liberated trading system where there are less or no tariffs and non-tariffs barriers. The system was joined with other several export- led strategies aimed at enabling the developing nations in Africa to experience an economic recovery, according to the IMF and the WB. However, the costs incurred by the developing nations in implementing trade liberalization has not gained any benefits that were meant during the process of implementing free trade liberalization (Dembele). First, trade liberalization has enhanced a number of fiscal losses because many nations in Africa were depending on import taxation as their key source of fiscal revenues. Consequently, the eradication of import tariffs or reduction has made the nations experience a decreased rate of revenues, thus, making the nations and their populations remain poor at the expense of the wealthy nations that continue to thrive.
Another negative consequence of trade liberalization in the developing nations is associated with the collapse of the domestic industries. Due to the reduction and eradication of imports and free trade, local industries in the nations have failed to match the competition power of other subsidized goods and products from the wealthy developed nations. The African industry sector has experienced the greatest challenge from this structural transformation, leaving the wealthy nations to maintain their prosperity over the poor nations. Thus, this strategy by the two institutions has led to an increase in the wealth of the developed nations and rendered the poor nations to remain in poverty (Dembele np).
Many African nations have been affected locally by this arrangement, for instance, Senegal, Zambia, Mali, Tanzania, Ivory Coast, and Uganda among many others. Several domestic industries have been wiped out, therefore, leaving severe consequences. Apart from the collapse of industries in these nations leading to a fall in the Gross Domestic Product, the effects have also affected the industrial workforce, rendering most people unemployed, thereby increasing poverty rates. In Senegal, for instance, more than a third of employees in the industrial sector became jobless in the 1980s. In the 1990s, the trend increased even further as a result of trade liberalization strategies and the forced privatization enforced by the IMF and the World Bank. This was mainly after the 50% depreciation of the CFA Franc in 1994. The same effects were also felt in Ghana where the industrial workforce in the country reduced drastically from 1987 to 1983 (Dembele np). In Zambia, the consequences were even worse. The textile sector alone experienced a major blow after more than 75% of its employees lost their jobs in less than one decade (Dembele np).. This was as a result of the disassembling of the sector by President Chiluba administration. The nations mentioned above also experienced the same trends in their economic sectors (Dembele np).
Several special reports by the International LABOR Organization (ILO) have acknowledged numerous negative impacts of the SAPs on the employment and wages, especially on the developing nations (Dembélé). The African Union seems to be a devastated region in the world. The body planned for a Summit on Employment and Poverty in the capital of Burkina Faso in September 2004. During this summit, it was discovered that only 25% of the employees in Africa work in the formal sector (Dembele np). The other employee workforce is in subsistence agriculture or in the informal sector. To counter this situation, the summit resolved to establish a plan of action to increase employment opportunities in the nations. However, it was also evident that such a strategy would only be effective if the nations in Africa would be ready to abandon the IMF and World Bank programs that were starkly disparaged during the summit.
The United Nations Conference on Trade and Development (UNCTAD) in its reports has also indicated that more than 70 % of the African nations’ exports are yet to be explored and they still in their primary form (Dembele) Furthermore, approximately 62% of these exports are also in non- processed forms. Focusing on this factor, it is apparent more need to be done on the issue of trade liberalization as well as deregulation to make the exported from these nations more globally attractive. The second aim is to help in the justification for the need of more liberalization and deregulation so that the nations’ economies can attain global competitive standards to attract foreign direct investments; an aspect that explains the push for additional privatizations.
In terms of comparative advantage, the strategies to increase exports for the developing nations by the two institutions have exposed the nations to face fiercely competitive market, thus, resulting in flooding in their market with many products. Consequently, trade liberalization has heightened the instability of the African nations’ commodities, which initially had better prices, thus, impacting negatively on the nations in terms of trade. With regards to the UNCTDA, the African nations would have experienced the following benefits if their terms of trade would have remained the same before the integration of the IMF and WB policies;
- Their share in global trade would have been twice what they are experiencing currently
- Investment ration would have increased by 6$ annually in the nations not exporting oil
- 4% annual growth
- Increased GDP per capita
The Cost of Financial Liberalizing
According to the IMF and the WB, the purpose of financial liberalization was to make the developing nations attractive to foreign direct investments. However, it is proven that foreign direct investment is motivated by development experience and not financial liberalization. Furthermore, despite all the correct perceived financial strategies in the nations, foreign investment continues to stagnate in the African nations as compared to other wealthy nations despite having a higher return on investment in the whole world. According to the WB and UNCTAD, the minimal percentage flow in the African nations in investment is only felt a few mineral oil rich nations (Dembele np)
The financial liberalization has not produced any intended benefits in the developing poor nations. The strategy has been linked to the increased huge costs in the nations. First, the policies incorporate high levels of foreign exchange reserves aimed at protecting domestic currencies against any spell from the hypothetical short – term capital outflows. Moreover, the financial liberalization has enhanced the possibility of financial flight due to the high instability of the domestic currencies by the developing nations (Bond and Dor 3). Therefore, the high cost of trade liberalization and financial liberalization has exposed the developing nations to economic hazards, which have weakened them, and they have led to the privatization of many parts of the continent.
Privatization of the African Nations
Privatization is another strategy besides financial liberalization, considered by the IMF and the World Bank as effective in the promotion of private sector development. Privatization was seen as the crucial engine to stimulate growth. Privatization of state- owned entities in the African nations, for instance, water and power utilities, is one of the conditions put forth by the two institutions to eradicate poverty. In the 1990s, the African nations registered several direct investments, which were a response to the privatization of state- owned entities. This took a rapid form, entailing even the most crucial national sectors, such as telecommunication, energy, and water among others in the 1990s. The WB came up with a report in 1994, which evaluated the process of privatization in the Sub- Sahara African nations (Dembele np). The report, according to the institution, had registered a slow pace in the process of privatization in the region. Therefore, the World Bank went ahead and issued a threat to the African nations over the slow pace of privatization process and required the nations to speed up the process of dismantling their public sectors, which were blamed for being the main factors behind the intense economic crises in the nations. In the late 1990s, the process of privatization kicked off in the midst of more deregulations, liberalizations, and enticements provided to the potential investors.
Currently, it estimated that nearly 40,000 African state- owned entities have been sold off to the African continent. Nevertheless, the benefits from this strategy, put forth by the World Bank and IMF, have not been felt. In fact, the privatization policies have had negative implications on the economies of the developing nations as well as the social conditions. Through privatization of state- owned entities, there have been enormous losses of employment opportunities and enhanced goods of products and services that most of the local citizens cannot afford. This has resulted in the poor state of the nation’s (Bond and Dor 6) debt and their populations at the expense of increasing the interests of the wealthy nations.
Establishing a Neoliberal State
The IMF and WB applied the concept of good governance in their explanation of the failure of the Structural Adjustment programs (SAPs) they initiated in the developing nations in Africa. This was meant to convey an understanding that SAPs failed due to corrupt and wasteful nature of the African nations, thereby leading to a poor implementation of the programs (Bond and Dor 19). In other words, the institutions were implying that the programs were effective but they failed due to effective implementation of the strategies. The good governance concept, thus, was necessitated to come up with a neoliberal state that will be in position to properly implement sound policies and protect the interests of foreign investors by the two institutions.
Certainly, the main purpose of the IMF and WB objectives was to disrepute the state formed development in the developing nations in Africa to incorporate the market- led strategies. To achieve this purpose, a two- track approach was adopted. The first approach was to disapprove the integrity of the African nations’ states as agents of development. To attain this objective, the institution came up with several publications that painted a negative picture of the nature of the African states. The second approach entailed rendering the function of states in development in the developing nations weak through financial resource dispossession. This objective was achieved through trade and financial liberalization. Consequently, many poor developing nations in Africa were relieved from their main economic and social responsibilities (Dembele). This is the main reason many Africa nations are not in a position to provide basic social services that would help eradicate poverty levels, such as health and education. Therefore, the progression of poverty levels in these nations is triggered by the IMF and WB policies at the interest of the wealthy nations.
Through the process of weakening the economic and social responsibilities of the developing nations’ states, the two institutions have endeavored to fortify the enactment of neoliberal policies as well as the promotion of the private sector development. This is the reason behind the famous policy of capacity building often fronted by the World Bank and the International Monetary Fund over the years. This capacity building does not reflect development but rather markets for their commodities. It implies that the proposed capacity building institutions lay a foundation for neoliberal policies in the service and private sector by foreign investors. Therefore, the concept of institutional building as fronted by the IMF and the WB is entirely aimed at effecting their decisions reflecting the interests of the wealthy G7 nation, making decisions for the poor African nations at their expense (Babb 7).
Poverty Reduction Strategies
It is evident that the International Financial Institutions (IFIs) played a significant role in enhancing poverty levels in the developing nations in African due to their own selfish reasons. The IFIs focus on poverty reduction approaches from 1999, therefore, was not genuine. However, in an attempt to make this effort look credible, the institutions developed Enhanced Structural Adjustment Facility (ESAFs), which was later referred to as Poverty reduction and Growth Facility (PRGF) and the WB supported initiative dubbed Poverty Reduction Support Credit (PRSC). However, due to the failed nature of these strategies by the World Bank, the FIPs were put into question as well as their legitimacy. This was heightened by the Global Justice Movement and mainstream economies, particularly from Joseph E. Stiglitz, who was the former World BANK Chief Economist (Dembele np)..
Poverty Reduction Strategy Papers (PRSPs)
PRSPs were aimed at offering a free space for the developing nations in Africa to come up with their own approaches in the eradication of poverty. According to the World Bank, this concept was referred to as the national ownership. It was to encompass a complete representation from the nation governments, the private sectors, civil society organizational, and the poor community in coming up with draft policies (Bond and Dors 19). The intention was to ensure that the nations come up with proceeds aimed at releasing the debt relief and reduction of poverty levels. However, the macroeconomic structure that fortifies the PRSPs are similar to those that disgraced the SAPs. The framework turned to be non-engaging as required and incorporated the fiscal asceticism, trade and financial liberalization, privatization as well as deregulation and state cutback. In as much as the past policies for the two institutions were not working for the developing nations, they still believed that they are the best approaches at the interest of the poor nations. Predominantly, they insisted on trade liberalization as well as transparency as the only channels of addressing the issue of poverty in the developing nations.
According to a survey conducted in 27 African nations by the UNCTAD in 2002, all the African nations that participated in the research are entailed in the policies by the IFIs (Dembélé, n. p). These policies are against the interest and wishes of the poor (Bond and Dor 12). The policies have tied the hands of the developing poor nations, and it has prevented them from coming up with any substantial strategy in the process of eradicating poverty in the nations. In most cases, several nations have been suspended for the IFIS funding programs since they fail to effect these conditions.
Essentially, the financial institution views on poverty eradication represent an isolated case of the economic and social development, which needs to be dealt with on the short- term basis. Hence, much focus of PRSPs should be placed on primary education and health among other significant aspects that will address the issue of poverty. Therefore, PRSPs need to integrate short – term measures intended to alleviate the negative influences of macroeconomic strategies and framework reforms targeting the poor and not the rich (Bond and Dor 20). Nevertheless, the mechanisms applied by the World BANK and International Monetary Fund put forth in the attainment of this objectives are the ones applied previously and proven to have failed and worsened the poverty situation in the nations. In the real sense, PRSPs mirror the SAPs, but with more conditions, reduced resources, and integrated concept of good governance with ill intentions.
According to a report by UNCTAD, it was discovered that 13 African nations signed the stiff conditions by the IFIs between 1999 and 2000. Most interestingly, 75% of the requirements are governance- related rules and regulations (Dembele np). This brings about the question of how many human and financial resources will be required to address such conditions. Consequently, the measure of the IFIs programs among the developing nations from the mid-1990s has drastically declined. For example, the percentage of amenability between 1993 and 1997 was projected to be 28% of all the 41 agreements signed (Dembele np).
Therefore, the World Bank and the IMF through PRSPs pursue three main goals. The first goal is to deceive the world public outlook, particularly in the Northern nations about their intention of eradicating poverty. The World Bank has perfected this method through an erudite propaganda to attain the goal with more than enough staff in External Relations Departments research reports (Dembele). The second goal for the PRSPs programs is to conscript backing within each nation in trying to mend the fallen strategies. This is achieved in their schemes of national ownership and participation, especially the civil organizations. Lastly, through the PRSPs, the IFIs endeavors to shift the blame to the African nations and their populations for the botch of the strategies and policies.
The IMF and the World Bank have failed in reducing the poverty levels and promoting development in the developing nations across the world, specifically in the African continent. They have turned out to be the instruments of the colony in the hands of few wealthy and powerful nations aimed at enhancing their interests. This practically means that the ultimate function of the two institutions has turned out to promote and protect the interests of the international capitalism. This is the main reason the two institutions have never been sincere in their fight against poverty and enhancing development. Moreover, they will always strive to stick to the power of influence, an aspect that is explained in their models of deception and manipulation. In addressing their programs failure, the institutions have perfected the art of changing rhetoric, which has never been truly reflected in their fundamental objectives and strategies.
Babb, Sarah, and Alexander Kentikelenis. “International Financial Institutions as Agents of Neoliberalism.”2016.
Bond, Patrick, and George Dor. “Neoliberalism and poverty reduction strategies in Africa.” EQUINET Discussion Number Paper 3 (2003).
Dembélé, Demba M. The International Monetary Fund and World Bank in Africa: a ‘Disastrous’ Record, 2007. Web. 14th April 2016.
Ismi, Asad. “Impoverishing a Continent: The World Bank and International Monetary Fund in Africa.” Toronto: Canadian Center for Policy Alternatives (2004).