Whose Institutions?

Notes from a journal on the creation of the international economic governance post WW2 and the influence of US power over these institutions.

The World Bank (WB) and International Monetary Fund (IMF) are controlled by highly-trained, independent economists – so why have they long been depicted as ‘US-serving control instruments over the economic and financial policies of other countries, especially the so called under-developed countries’? (Furtado, 1959)

Their policies have largely reflected US economic and strategic interests. It is wrong to assume theUShas ‘one-interest’ and this prevents the possibility that other nations/interest groups have influence over decisions.

US Power and the Creation of the WB & IMF

Europewas devastated post-WW2 and had ended up with a crippling continent-wide closed-trade regime. At Bretton Woods, economic officials met to agree on how to finance the reconstruction, stabilisation of exchange rates, promotion of international trade and how best to prevent a balance of payments crisis unravelling the system.

The British aim was to create an agency to which states could delegate monetary powers. It wanted a new supra-national unit of account and finance to be transferred virtually automatically to any nation in need, with no policy conditions attached.

The US took a different stance. It demanded an agency which could be politically controlled and would conform to US interests. It called for the use of the US dollar and gold standard as units of account and called for transfers on a discretionary basis (i.e. financial assistance only underUSagreement).

The difference in position can be attributed to the differing circumstances of the two states post-WW2. The UK was in debt and wanted protection from US imposed trade liberalisation. The US however longed to open up European empires previously difficult to trade with  and wanted to the lay down the conditions for European reconstruction.

The result of the meetings were that the US mostly got what it wanted. It was able to do this due to the hegemonic position it held (economically, politically & militarily). The timing also helped as Europe’s influence was minimised. The UShad become the only nation capable of creating a supra-national institution and it became a case of ‘are you in the club, or not?’.

“Even when co-operation is not in their interests, weaker states will bow to the agenda set by the hegemon, whose agenda is in turn set by domestic political calculations”

Keynes stated “the institutions look like becoming American concerns, run by gigantic American staffs, with the rest of us very much on the sidelines” Part of this reflected his distaste for the headquarters of the institutions being US-based.

US officials actually came out of the conference beleiving to have conceded ground on a number of issues. Faced with a number of possible global-order possibilities, why did theUSchoose the Bretton Woods agreement? For example, why would theUSactually delegate any authority to these institutions?

Institutionalist theorists believe states construct institutions which reflect their own interests. They make compromises on issues as the mutually-advantageous gains from the institution are greater than the lost ground in international negotiations.

The agreements were monumental. “These proposals go far beyond what, even a short time ago, anyone could have conceived of as a possible basis of general international agrement” (Keynes, 1944)

If all went well the IMF could be “truly international body for consultation and cooperation on monetary and financial problems which ould serve the purposes for which some had hoped, but had been disappointed, from the Bank of International Settlements”.

45 nations signed the agreements. The IMF would cover international monetary cooperation and the International Bank of Reconstruction and Development (WB) would facilitate international investment. Together the aim was “to raise the productivity, standard of living and conditions of labour”. The talks were heavily influenced by John Maynard Keynes (UK) and Harry Dexter White (US) – both were favourable to state intervention to improve economic welfare.

White’s personal convictions were very influential in shaping US preferences and support for creating multi-lateral institutions in the face of isolationist and hegemonic interests expressed by Congress. The Bretton Woods institutions offered idealistic internationalists a way to institutionalise US commitments to the world economy. The ideas that emerged not only reflected US/UK interests, but large scale new ideas about international economic governance which were perceived as necessary and attractive not just by individual statesmen but also by the public too.

Independence in the Original Desicion

‘Weighted’ voting systems reflected the importance of a state in the world economy. The US had the largest share. White was concerned with ensuring US allies got funding (e.g. anti Soviet/China). The US demanded the following bottom lines:

  1. The aggregate funding must not exceed $8 billion
  2. Russia must get no more than 10%
  3. Chinamust come 4th in the total aggregate amount
  4. Aggregate British Empire voting must amount to smaller than theUS

The notion of one state, one vote that had emerged in the UN General Assembly was used too. This is an example of where the US lost a little control to contribute to the ‘international nature’ of the institution.

Funding for the institutions required Congress approval, hence giving the US considerable power over funding. The IMF/IBRD were funded via paid in capital, retained earnings, repayments of loans and borrowing from world capital markets.

Keynes worried about how much control the US had over the IMF. He wanted a much less ‘motherly-figure’. However the US wanted control over how many was used to help ensure quick repayment.

The US would offer technical expertise and project overview/analysis to aid borrowing nations – the cost paid for the mark-up on loans. It was informally agreed that the WB President would be American and the Managing Director of the IMF would not be American. The institutions crucially should not obey to any government authority or influence.

The Purse Strings Are Pulled

The US and other powerful states soon began to exert their influence within the institutions. The amount of basic votes decreased over time and the US gained the ability to veto measures which required a special majority (either 70 or 85%). The US had 17% of votes, the combined total of UK, France and Germany was 15.89%.

The World Bank’s Expansioin and and International Development Assistance (IDA)

During the term of President Robery McNamara (1968-81) the World Bank saw a massive expansion. Lending increased three times, staff costs increased four times, administration budgets increased 3.5 times. Loans to developing nations began in 1960 under the title of IDA. This was funded by wealthy nations who would then apply conditions on future payments. This became a further area of control for the US. The US was the largest funder in 1960; Japan took over this position in 2005. Germany contributes 11.4%, the UK 8.1% and France 7.2% (IDA 2005).

The IMF Expansion

The IMF undergoes serious scrutiny from the US through the veto power and the Congress approval on funding. During the 1990’s, Congress as given influence on Fund conditionality which covered issues such as worker’s rights, the role of the private sector etc. Saudi Arabia and Japan became more powerful – they provide much of the Fund’s finances.

The Pressures of the Cold War and Beyond

The IMF and WB were sidelined by the US lending to the UK in the Marshall Plan (1947). The US Dollar became the key unit of currency, not the gold standard. When the WB was used by the US, it generally had geo-political motives during the CW period. For example, WB support was issued to Yugoslavia in 1948 when it broke free from Soviet power. The Bank also funded the Somoza regime (Nicaragua) and helped overthrow the Communist sympathiser, Guatemalan President Jacobo Arbenz. Iran was supported too to advance anti-Iraq interests. Indonesia’s General Suharto was also closely tied to WB work. There were no problems of conditionality when it conformed to US interests.

“No economic or technical assistance shall be supplied to any other nations unless the President finds that the supplying of such assistance will strengthen the security of the US” Mutual Security Act (1951).

This ran directly against the WB’s Articles of Agreements – Bank activities must be independent from political influence. Strom  Thocker argues that IMF loans represent a direct reflection of US interests.

There are 3 hypotheses:

1. Loans go to allies (known as ‘political proximity’)

2. Loans go to allies & are withheld from enemies (known as ‘political movement’)

3. Specific economic interests drive US policy (modern political economy & neo-Marxian position)

It is probably best to analyse describe US involvement during the CW period as political movement analysis. US influence clearly existed but often it can be hard to trace down.

The Limits of Geo-Politics 

It is very hard to imagine there being a specific US interest that is represented within these institutions. For example, the India during the 1960’s was the largest borrower from the WB and IMF. However at times it was strongly tied to the Soviet Union and opposed US intervention in Vietnam. For many states this would result in an end to IMF/WB aid and loans but this didn’t occur with India. This can largely be explained by US official’s investment in Indian agricultural reform and the US aid business interest in the nation. The Departments of State and Agriculture pushed for more aid and less conditionality, as opposed to the White House agenda.