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The World Bank and The IMF:
Twins or Rivals?


by Yubo Jiang
 

 

Both institutions, the World Bank and the International Monetary Fund, were established more than fifty years ago; and the foundations of both were expected to play roles in stabilizing the frustrated global economy and aiding post-war European countries as well as other developing countries for economic progress. In the first three decades, both institutions had their own respective functions and extensively engaged in different economic and financial activities. In general, the World Bank primarily concentrated on making long term loans to finance infrastructural projects in developing countries, as the IMF mainly provided economic consultation as well as short-term loans to both developed and developing countries (Driscoll). However, the distinctive differences started disappearing since the beginning of 1970s, as both began to involve in more and more similar economic activities. As such, these overlapping activities blurred the functions between the two institutions, in which case a restructuring reform might be required to avoid potential conflicts.

Although both organizations were not identical twins as they were born in the first place, the relationship between them was very close. According to the World Bank’s article of agreement, “in order for a country to be able to become a member of the Bank, it must be a member of the Fund” (Polak 1). There are two reasons behind this rule: First, it can prevent free ridership that could possibly enables members of one organization to misuse their rights in the world monetary market. Second, it is widely believed that a good lending of the World Bank heavily depended on a country’s stable monetary market, which can be secured by the efforts of the IMF (Polak 1).

 

The two institutions’ initial tasks were clearly classified and separated at their early age. The World Bank concentrated on two major tasks: reconstruction and development of industrial countries, especially post-war European nations (Driscoll). During its first two decades, according to Polak, “43 percent of its lending went to industrial countries in Europe” (2). These countries included Britain, French, as well as Germany that needed a great amount of funds to rebuild their economy. In addition to these European nations, many other loans were lent to Japan, New Zealand, as well as Australia. Evidently, the World Bank was very reluctant to lend their loans to developing countries during the early period.

On the other hand, the IMF was performing a very different function. As the center of the post-war international monetary system that was based on the fixed exchange rate, the IMF played a role as a guardian of the international monetary system and helped the member states to stick to the rules of the system. These processes were known as credit operations that helped both developing and developed countries to avoid unexpected monetary frustration (Moffitt 32).

 

The funding of the two organizations also differed significantly. The World Bank’s funds were most raised from international capital markets, but have no connection with any particular countries’ shareholding. Nevertheless, the members of IMF paid their contribute at a relatively equal amount according to their quota; but the funds were paid in their own currency. The quotas therefore determined each state’s credit line as well as voting rights in the organization. The fund sometimes borrowed money from the central banks of member states, but never from the capital markets (Polak 1).

The different functions and the different sources of funds clearly separated the two institutions’ financial fields during the early age. According to his book, Polak describes the two different fields as follows,

“For the Bank, this area was defined as the composition and appropriateness of development programs and project evaluation, including development priorities. For the Fund, it was exchange rates and restrictive systems, as well as maintaining financial stabilization programs” (5).

There is no doubt for both institutions to have their own respective and specified tasks.

 

Contrary to the initial financial fields the two institutions concentrated on, the distinctions of their tasks started to wither away with the changing conditions in the world economy. Since 1970s, the IMF’s major task credit operation faced the challenges from the new rise of commercial banks, which could make more loans to not only the developed but also the developing countries to stabilize the monetary system. Since the year of 1976, there was no industrial country that has had an arrangement with the IMF. On the other hand, the World Bank also faced the same challenge from these commercial banks. Lots of countries found that the loans from these commercial banks had better terms and lower interest rates. It directly caused some countries to turn their business partnerships with the commercial banks instead of the World Bank (Polak 7). For instance, Thailand and Malaysia borrowed money from Japanese banks and enjoyed lower interest rates. Fortunately, neither of them takes granted for the challenge and started to adjust their business and financial positions in the world market. As Jacques Polak states in his book, “in the Fund as well as in the Bank, the widening scope of concerns was felt as a natural response to the changed circumstances of members and a deepened understanding of the problems of development” (8).

Upon the new conditions, the situation stimulates both institutions to widen their respective functions and demand a combined application of macroeconomic stabilization, structural adjustment, and institutional reforms. A series of reform eventually led the Bank and Fund to the current structure. Since 1974, as being threatened by the rise of commercial banks, the IMF started moving toward the Bank’s Field. At the beginning, the Fund formed a sub-department that is called Extended Fund Facility (EFF). The EFF performs certain tasks as the Bank normally performs. Under the reform, the Fund offered much larger financial assistance and longer repayment periods to the developing countries (Polak 8-9).

 

The IMF stepped even further to create Enhanced Structural Adjustment Facility (ESAF) that actually replicated to a Bank structure and provided the near-zero interest rates loans to eligible countries. ESAF also widens its sources of funds though the IMF originally got money from the contributions of member states. Since 1986, ESAF accepts the loans that are offered by some countries capital markets at reasonable market interest rates. This transformation of IMF makes itself similar to many aspects of the World Bank (Driscoll).

As the Fund moves toward the Bank’s Field, the World Bank also moves toward the Fund’s field to stand for the new business challenge. The Bank recognizes the importance of correct macroeconomic policies that can offer a safe environment for investment and lending loans. Therefore, instead of standing aside, the Bank decided to directly involve in the activities of helping certain countries to build the stabilized economies, the tasks that are supposed to be performed by the IMF. A convinced example can be found in 1998, in which most Southeast Asian countries fell in financial crisis, the Bank as well as the IMF offered huge financial support to re-stabilize these countries economy.

Based upon the realization of the importance of correct economic policies, the Bank adjusted some of its lending rules and presented a new type of lending, structural adjustment lending. Before, being different from the Fund, the Bank’s loans were usually project-orientated in which all loans are offered upon the quality and feasibility of the investments and projects (Polak 10). However, structural adjustment lending is made upon the countries’ general economic policies as well as the quality of the projects itself. By doing so, it helps the Bank to avoid issuing bad and uncollectable loans to risky projects or projects in risky countries. At present, structural adjustment lending accounts for almost one fourth of the Bank’s total loans. The structural adjustment lending becomes virtually the same as most loans made by IMF (Polak 10).

 

With the new policies implemented by the IMF, two institutions are now having the identical conditionality of their loans to make. These somehow deviate from the original motivation and targets as the institutions were found, in which people believed there should be different criteria of qualification for issuing loans from the two. More seriously, as the two brothers moved their fields of operation increasingly toward each other’s area, many facets of their activities become to be overlapped. These have been or will be conflicts between the two institutions. For instance, each organization had its own client countries according to its goal and policies during early age; however, after a few decades, with the adjusted organizational goals and conditionality of issuing loans, the Fund and the Bank are actually competing against each other to keep their loyal clients (Moises). In certain areas, they are no longer complementary to each other as they are required to be in the first place.

Because of the blurred distinctions in the activities performed by the two institutions, the Bank and the IMF are getting serious critiques from many other financial institutions from different countries. One of the most rigid and serious critiques comes from Washington Consensus (Moises); and the problem of converged functions is used by the economists who advocate Washington Consensus as a weapon to attack the two institutions. The opinions raised from Washington Consensus dissent many of the current policies that are being stipulated and applied by the Fund and the Bank. Some economists even think that both are actually breaching the world economy (at least developing countries’ economy) instead of helping it out of trouble. It is noticeable that Joseph Stiglitz, the World Bank chief economist, resigned his position and publicly criticized the IMF for its irrational operations involved in the Asian Financial Crisis in the end of last century (Moises). All of these present the opposite mirror of the two institutions’ functions in the world economy.

 

In closing, after more than 50 years since their birth, the World Bank and the International Monetary Fund are no longer to perform their sole tasks as a bank or as a fund. As a matter of fact, the Bank is more likely running as a fund, while the fund is running lots of functions like a bank. The initial differences between the two have gradually disappeared through the last thirty years. Today, although they are facing certain critiques for some of their inconsistent policies that are not accepted by some economists, both are striving for a common goal to achieve the establishment of the stability in the world economy as well as the entire global economic wealth.

Works Cited

 

Driscoll, David. D. “The IMF and The World Bank: How Do They Differ?” Aug. 1996. 23 Nov. 2002. <http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm>

 

Moffitt, Michael. The World’s Money. New York: Simon and Schuster, 1995.

 

Naim, Moises. “Fad and Fashions in Economic Reforms: Washington Consensus or Washington Confusion?” 26 Oct. 1999. 20 Nov. 2002. <http://www.imf.org/external/pubs/
ft/seminar/1999/reforms/Naim.HTM#I>

 

Polak, Jacques J. The World Bank and The IMF: A Changing Relationship. Washington D.C.: The Brookings Institution, 1994.

 

 

 

 

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