Introduction
The international financial institutions were established during and shortly after the
Second World War. They laid down the foundation for prosperity currently enjoyed by countries
all over the world. The impact of these institutions is becoming more and more important in the
new world economy of the 20th Century. This paper describes the most important international
financial institutions of the United Nations System: International Monetary Fund (INF), World
Bank Group (WB) and World Trade Organization (WTO). Reference will be made to their
coherence and dissonance, and will offer the implications for future reforms.
What are they?
After the Second World War, the world economy was reconstructed by building up
global economic institutions to promote agreement on monetary, trade, and financial aid. The
global economic system was called the ：Bretton Woods System； which mainly included the IMF
(International Monetary Fund), the IBRD(International Bank of Reconstruction and
Development) and the ITO(International Trade Organization). The IMF was designed primarily
to ensure stable monetary relation among the major industrial nations. The essential purpose of
the IBRD was to stimulate development in the developing and underdeveloping countries. The
ITO was designed to reduce or eliminate barriers to trade and develop a set of rules to govern the
trade behaviour. (Table1 illustrates each institution.)
The financial institutions also have distinguished characters. As a result, they can be
analysed according to what is called the coherence and dissonance. The coherent cooperation,
for example, among the institutions is creating significant achievements and necessities. These
achievements and necessities started to become more visible during the 20th Century, when the
new world economy pressed for more influence on the financial institutions. Furthermore, the
past and present challenges allowed for these institutions to slowly modify the way in which they
conduct business. Dissonances of those institutions also will give implications for future
reforms, by combining the general characteristics of the new world economy with their effects.
Coherence of the International Financial Institutions
For over fifty years, the international financial institutions improved the economic
prosperity and created a stable and relatively wealthy world. First, the general characters and
achievements of each institution will be discussed. Second, the coherent cooperation among the
institutions will be addressed with the main argument that international financial institutions
provide workable and practicable solutions to the real world.
The IMF is an international organization of 182 member countries, established to
promote international monetary cooperation, exchange stability, and orderly exchange
arrangements to foster economic growth and high levels of employment, and to provide
temporary financial assistance to countries in need for balance of payments・ adjustment. Since
its establishment in 1946, it still holds the same purpose for the surveillance, financial
assistance, and technical assistance. The need for this institution was developed to meet the
changing needs of its member countries in an evolving world economy. Under the Articles of
Agreement, the principal function of the IMF is to supervise the international monetary system,
supply of liquidity and exchange rate. The IMF has played an important role in the stabilization
of the world economy. In Mexico, for example, with the debt crisis of 1982--the IMF played a
crucial role not only by developing a comprehensive aid programme for Mexico but also by
actively encouraging the international banking system and official creditors to contribute
towards financing the deficit. The IMF・s prompt action prevented serious disruption of the
international financial system.
The World Bank Group included the IBRD, the IDA (International Development
Association), IFC (International Finance Corporation), MIGA (Multilateral Investment
Guarantee Agency), and ICSIP (International Centre for Settlement of Investment Disputes).
The IBRD was the original institution of what is now the World Bank Group. It was founded at
the Bretton Woods Conference in 1944. The World Bank is the foremost international
development agency. The IBRD・s former function was to be the provider for the longer-term
funds. Providing nearly $16 billion in loans annually to its clients/countries, the World Bank is
now the largest source of the developmental assistance. World Bank uses its financial funds
and technology expertise to help each developing and underdeveloped country move towards a
path of stable, sustainable, and equitable growth in the fight against poverty. It also tries to act as
a catalyst in stimulating the flow of private capital towards developing countries. In addition, it
helps developing countries set up investment programmes and formulate specific projects.
Figure1 illustrates the achievement of the World Bank. Annually, World Bank grants loans
worth a total of $15 to $20 billion. The goal of the World Bank is to create ：a world-free of
poverty.；
The World Trade Organization (WTO) is a global international organization that deals
with the international rules of trade. At its core are the agreements, negotiated and signed by
the global trading nations and ratified by their legislatures. In 1947, twenty-three countries set a
vast number of bilateral tariff concessions that were written into a final act called the General
Agreement on Tariff and Trade(GATT). The ad-hoc conference functioned as a temporary
arrangement until the WTO came into operation. In 1993, with the GATT Uruguay Round
negotiation, the WTO was created as the umbrella organization for the GATT. The goal of the
WTO is to help producers of goods and services, exporters and importers conduct their
businesses and to improve the welfare of the peoples of the member countries. WTO・s belief is
that trade liberalization can help poor countries catch up with the rich countries. This fast
economic growth is believed to help alleviate poverty. For example, some 30 years ago, South
Korea was as poor as Ghana; today, however, it is as rich as Portugal all due to the help provided
by WTO. Furthermore, less developed countries that are catching up with the rich are those that
are open to trade. The more open they are, the faster they are converging. After eight rounds
of intensive negotiation, the WTO・s achievement is significant. According to International
Trade Statistics 2000, by the Secretariat published on 30 Nov. 2000, the world merchandise
trade will grow by about 10% in 2000, twice the rate recorded for 1999 and one of the highest in
the last decades.
The international financial institutions adhere to one basic principle which leads to their
coherent cooperation: they aim at the freedom of the international trade and capital movements.
As the IMF and World Bank act as the executive units that run the international financial system,
the WTO is the catalyst of the whole system. The IMF, just like the others, also plays a central
role in the international financial system. It is the last resort of the international capital flows.
The World Bank, on the other hand, is the group that stimulates the economic liberalization
movements in developng countries. The purpose of the WTO (GATT) is to spread the
conception of the economic liberalisation and globalization. In recent decades they have proved
that they are functional. They have helped to establish a common body of analysis of the way
economy functions and the way the market works. This has made it possible to overcome
differences of opinion and take joint action when needed. The institutions proved particularly
capable of decisive action in the case of unexpected crisis such as in Brazil and Mexico, during
the debt crisis of the 1980s, and East Asia financial crisis of the 1990s. Since the trend of
economic liberalism and globalization has spread globally, the need for consultation and
coordination at world level is constantly increasing. The three international financial institutions,
therefore, proved that they are necessary for the benefit of the world economy.
Dissonance of the international financial institution
Although the function of the international financial institutions is necessary for the
development of the world economy, their role has long been criticized. The analysis of their
weakness must combine the general characters of the new world economy. The general
characteristics of the new world economy are as follows: deepening of global economic
integration and political cooperation, enlarging of the unbalance distribution of wealth between
North and South, and worsening of the environmental crisis and social fluctuation. These three
primary characteristics can have an affect on each other. Furthermore, these issues have
challenged the legitimacy of the IMF, the World Bank and the WTO and created dissonance,
which includes: 1) voting share of the IMF and World Bank Group; 2) conditionality of the IMF
and political intervention of the World Bank; and 3) the challenges of the WTO. Table 2
illustrates this complex dissonance:
1. First, the most contentious dissonance is the flaw of legitimacy of each institution. The
international financial institutions are supposed to represent the entire world dealing with
the economic issues in a deepening integrated world. Unfortunately, the institutions have
long been taken as the ：rich men・s club.； Member states of the IMF and the World Bank
arrive at decisions by a voting system (Figure 2). They carry ultimate decision-making
power in the organizations just as shareholders do in large corporations. As a result,
many developing countries complain about the policies of the IMF and World Bank as
they become the ：rich men・s club.； Figure 2 shows that OECD countries controlled most
of the voting shares in each institution. This has weakened the legitimacy of the
institutions. Since the institutions are deemed as western-oriented, it is rarely possible for
them to bridge the gap between North and South.
2. Second, the political issues of the institutions are crucial for further cooperation between
North and South. The IMF・s conditionality and the World Bank・s political pressures are
just a few examples of the problem. The criticism of the IMF・s conditionality has two
dimensions: technical and political. Technically, the conditions which the IMF attaches
to its credit facilities cannot constitute a standard remedy, as the reasons for balance of
payments difficulties vary. In addition, the conditionality is always aimed at restoring the
domestic and external balance and prices stability. The programme design normally
involves fiscal and monetary policy measures, exchange rate policy, public sector reform,
trade liberalization and financial sector and labour market reforms. John Spraos argued
that ：by targeting policy instruments, such as the volume of credit and the public-sector
deficit, instead of genuine policy targets, conditionality reverses the natural priorities and
leads to inefficiencies.； Politically, conditionality puts huge pressure on the debtor
countries and twisted the policymaking. Often, an excessive government deficit is at the
root of the problems, in which case tax increases or expenditure cuts are unavoidable.
However, there is a common concept underlying most programmes; namely that, by
opening up the economy and allowing free market to operate at realistic prices, the
programs can offer the best chances for the economic development. Opening up the
market and operating at realistic prices are big pressures for the debtor countries・
authorities. The World Bank met the political problem, too. One danger threatening the
World Bank, perhaps more than other financial institutions, is the political influence over
lending. This came from various sides such as the left-wing criticism, which stresses on
large-scale projects, to right-wing criticism, which states that the World Bank hinders the
development of the private sector by emphasizing government projects. The political
influence on institutions gathered more complains from both the developed and
developing countries.
3. The economic liberalization and globalization that WTO has pursued for years creates
three dangers. The first of these is a political backlash against trade. The rising of
protectionism had proved that political rivalry among domestic groups will get worse
with time. The labour organizations and various groups on Seattle streets in 1999 had
proved that WTO had been trapped into chaos. The second danger is the social
disintegration. Dani Rodrik argued that ：a victory for globalization that comes at the
price of social disintegration will be a very hollow victory indeed.； The social pressures
unleashed by global economic integration will likely result in bad economics and bad
governance. The third danger is the environmental protection crisis. The nature of the
multinational corporations is profit-seeking. The developing countries pursue economic
interests without environmental protection concerns. Although the WTO has set
regulations and agreements of environmental protection, the private sector keeps seeking
any possible way to benefit from low marginal prices. Those profit-seeking activities will
harm the global environment and use up most of the natural resources.
&bsp; Conclusion
Although the international financial institutions were established to subordinate to the
United Nation system, they are actually not under the UN・s control. They have their own
budgets, finance resources, political supports and independent decision-makers. The coherence
of the international financial institutions came from the fact that because they have their own
power, without constraints from the world community, they can proceed with their own made
plans. Without the control from the United Nations, they lost the legitimacy to represent each
and every country in the world. The dissonance of the international financial institutions came
from this shortcoming. The dissonance of the international financial institutions will continue
unless the IMF, World Bank, WTO fully cooperate and act under the United Nations system. By
putting the decision-making back into the General Assembly and letting different voices
participate in the administration, the dissonance of the international financial institutions will be
resolved.