Backgrounder

World Bank, IMF, WTO, what the ...?

There is no doubt that international trade has the potential to lead to an increase in prosperity and standards of living for all countries. Since the mid 70s East Asian countries like South Korea and Thailand have actively pursued a policy of participation in global markets. This has led to 400 million people being lifted out of poverty. In Bangladesh, the growth in the clothing manufacturing industry as a result of an increase in sales to overseas markets has led to the creation of over 1 million new jobs, mostly for women.

The news, however, is not all good. Despite the advances in some areas there are negative consequences in many countries. Stories of sweatshop labour, environmental destruction and unfair trade competition from the rich countries are all too common. This is not due to the expansion of world trade but more to do with the rules around that expansion. In the game that is trade, who makes those rules? And does this mean that whoever makes the rules gets an unfair advantage in the game?

The World Bank was formed after World War II and it was originally called the International Bank for Reconstruction and Development. Its original purpose was to help to finance the reconstruction of Europe after the War. Later it redefined itself as having a role in the elimination of world poverty. It now provides finance to developing countries for projects like dams, roads and power plants that should help to raise people's living standards.

The International Monetary Fund (IMF) arose at about the same time. Its purpose is to stop a global economic crisis like that which occurred in 1929 from happening again. Therefore when a country gets into financial difficulty, being unable to repay its debts, the IMF will lend it money at low interest rates so as to avoid serious financial collapse.

The World Trade Organisation (WTO) is an international body which exists to encourage countries to lower trade barriers like tariffs (Taxes on imports) and subsidies to local industry (giving them an unfair advantage in international trade). It was established in 1995 to continue on from GATT (General Agreement on Tariffs and Trade) which began in 1947 and had about 20 members. The WTO has 145 member countries.

So what's the problem? Consider a country that approaches the World Bank or the IMF for a loan. That country is heavily in debt and cannot obtain finance anywhere else. The country is desperate for finance. The IMF or the World Bank grants them a loan but with strings attached. They say it is for the good of the country so that they can avoid similar problems in the future. These institutions impose a whole lot of conditions on this country. These conditions are called Structural Adjustment Programs (SAP). This involves some very harsh economic medicine which is supposed to be about short term pain for long term gain. Most of the SAPs have negative consequences for the poorest people in the poorest countries in the world. For example, SAPs commonly require governments to cut their spending, which means government workers are sacked, leading to higher unemployment, as well as lower spending on government services like health and education leading to higher rates of sickness and illiteracy. SAPs also usually require governments to raise interest rates to stop inflation. This will raise the cost of finance for local farmers and businesses, causing many to go broke.

And finally, the IMF and the World Bank require these countries to cut protection to their local industries and open the country to imports. They have to follow the rules that the WTO sets down otherwise they don't get the finance that they desperately need. So the poorest countries in the world are forced to cut their tariffs and subsidies and compete with subsidised imports from the US or Europe. It is ironic that the rich countries don't have to follow the rules of trade that the poorest countries do. This has more disastrous consequences for those countries. Unfair competition leads to businesses and farmers unable to sell their produce and therefore creating even more unemployment and poverty.

Mexico provides an example of how a country that follows the rules as set down by the IMF and World Bank has seen little improvement in its living standards. In 1982 Mexico asked the IMF for assistance and received a $3.9 billion loan. Since that time Mexico was conscientious in following the IMF rules so well that in 1994 they were called "a model student" by the IMF and World Bank. They opened up the country to foreign trade and investment, they cut government spending, they raised interest rates and they signed a free trade agreement with the US. What has been the result?

Today Mexico has almost doubled its level of foreign debt since they started the process 20 years ago. Wages are lower in real terms, inequality is greater than it was, their currency has devalued and interest rates have risen, unemployment doubled, 12000 Mexican businesses filed for bankruptcy and those living in severe poverty (surviving on less than $2 per day) grew by 4 million people. What is the IMF's response? More of the same.

Why do global institutions continue to support these policies if the result is so awful? Is it so the rich countries can set up businesses in these countries free of control by the local government? To keep wages low for these foreign companies? To be able to dump excess produce on these countries? To keep the price of these countries' exports low? Plenty of advantages for the rich countries and very few for the poorest countries of our world.

The rules of the trade game are unfair and the referees (World Bank, WTO and IMF) make sure that the unfairness continues.

TEACHING AND LEARNING ACTIVITIES

Religion/ Social Sciences

1. Go to www.globalexchange.org/campaigns/wbimf/facts.html and answer the following:

   What will often happen to a democratic government if it tries to introduce the unpopular policies included in the SAPs?

2. In issue 52 of OzSpirit the issue of fair trade was discussed. In that article the point was made that some European cows were being paid more than many poor people in the world.
Watch an animation which looks at the life of one such "lucky cow" at www.cafod.org.uk/tradejustice/moostersmillions.shtml

3. Find out more about Mexico using your favourite search engine.

   Locate it on a world map.

   What is the name of the free trade agreement that Mexico is part of? List the other countries.

PARISH AND COMMUNITY GROUPS

Find out more about what the IMF and the World Bank do and how they make life worse for the poor in many countries of the South.

1. Go to http://www.aworldconnected.org/article.php/529.html

2. Join in the fair trade campaign by visiting www.maketradefair.com/ and sign the global petition.