Moulding a new future

July 1, 2024 marked the 80th anniversary of the opening of the Bretton Woods Conference which birthed the World Bank (WB) and the International Monetary Fund (IMF)—the two major pillars of the international financial system set out at the United Nations in 1944. The US President Franklin D Roosevelt, supporting the creation of the IMF and the International Bank for Reconstruction and Development (IBRD-later the World Bank) said, in a message   to the Congress: “The point in history at which we stand is full of promise and of danger. The world will either move toward unity and widely shared prosperity or it will move apart into necessarily competing economic blocs.”

During the Bretton Woods negotiations, the British delegation – under the leadership of John Maynard Keynes – advocated the construction of a global clearing union to compensate for balance-of-payments disequilibria as well as the adoption of a truly international reserve unit. His idea of an international currency in ‘Bancor’ was also not accepted as these ideas clashed with the American hegemonic project and, in the end, a ‘gold-dollar standard’ was established. The Joint Statement  between the US and the UK, a compromise between their respective proposals, was released on April 21, 1944. This statement laid the groundwork for an agreement on the IMF and introduced the concept of “gold convertible exchange,” later modified to “gold convertible currency” in the working documents at Bretton Woods.

After eight decades of the creation of these two multilateral financial institutions, the global financial system is under serious threats. The world’s debt stock surged by over USD 12 trillion in the first three quarters of 2024 to a fresh record of nearly USD 323 trillion. In the United States, debt to GDP, a core metric that measures debt sustainability, reached roughly to 326 per cent and debt in emerging markets is approaching a record USD 105 trillion—a whopping 245 per cent of GDP. A report from the Institute of International Finance (IIF) found an increasing repayment risks of many countries, worldwide.

Primary objectives of Fund-Bank

Founded in 1944, the two institutions have complementary missions. The World Bank Group works with developing countries to reduce poverty and increase shared prosperity, while the International Monetary Fund serves to stabilise the international monetary system and acts as a monitor of the world’s currencies.

The World Bank Group provides financing, policy advice, and technical assistance to governments, and also focuses on strengthening the private sector in developing countries. The IMF keeps track of the economy globally and in member countries, lends to countries with balance of payments difficulties, and gives practical help to members.  Countries must first join the IMF to be eligible to join the World Bank Group. As of today, each of the institutions has 189 member countries.

The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. Its five institutions (IBRD, IDA, IFC, MIGA, and ICSID) share a commitment to reducing poverty, increasing shared prosperity, and promoting sustainable development. The World Bank’s subsidiaries—the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID)—focus on strengthening the private sector in developing countries.   

Present debt status

The International Debt Report (IDR) 2024, published by the World Bank Group, includes an analysis of end-2023 external debt flows and debt stock positions as well as the macroeconomic and debt outlook for 2024 and beyond. The key findings are:

• Debt servicing costs of low- and middle-income countries (LMICs), excluding China, reached an all-time high in 2023, double the level of a decade ago. Higher external debt levels—which also increased to an all-time high in 2023, to USD 8.8 trillion (including China)—coupled with elevated interest rates posed new and challenging debt burdens for these countries.
• The data indicate that the composition of LMICs’ external borrowing has changed markedly since the onset of the pandemic, with multilateral creditors significantly increasing their share of lending to LMICs amid slower lending growth from private creditors.
• The total debt servicing costs (principal plus interest payments) of all LMICs reached an all-time high of USD 1.4 trillion in 2023. For LMICs, excluding China, debt servicing costs climbed to a record of USD 971.1 billion in 2023, an increase of 19.7 per cent over the previous year and more than double the amounts seen a decade ago.
• Debt stock owed to multilateral creditors rose 6.8 per cent to USD 1.3 trillion in 2023, whereas debt stock owed to private creditors increased just 0.8 per cent.
• Total external debt stock of LMICs hit an all-time high of USD 8.8 trillion in 2023, up 2.4 per cent from the previous year. China’s external debt stock fell for a second consecutive year, decreasing 1.1 per cent to USD 2.4 trillion. China accounts for more than 27 per cent of the total debt stock of LMICs.
• Combined World Bank and International Monetary Fund long-term debt stock to LMICs has risen 63.1 per cent since the pandemic, more than nine times the growth of private lending to LMICs over the period.
• Interest rates on new loans from official creditors increased 2.1 percentage points to 4.09 per cent in 2023, and rates on loans from private creditors increased 1.37 percentage points to 6.0 per cent, the highest level since 2008.

In a paper titled “Avoiding ‘Too Little Too Late’ on International Debt Relief”, October, 2022, the United Nations Development Program (UNDP) took stock of the unfolding debt crisis across developing low- and middle-income countries. Using data on credit ratings, debt sustainability ratings, and sovereign bond spreads, the paper identified 54 developing economies with severe debt problems. They represented little more than 3 per cent of the global economy, and 18 per cent of the population, but accounted for more than 50 per cent of people living in extreme poverty – including 28 of the world’s top-50 most climate vulnerable countries.

According to the study, of all developing economies with a sovereign credit rating, 26–close to one third–were rated as either ‘substantial risk, extremely speculative or default’. The largest geographical subgroup among the 54 is Sub-Saharan Africa with 24 countries followed by Latin America and the Caribbean with 10 countries. Given the global outlook of low growth and high interest rates, the international community must urgently step-up debt relief efforts to avert a deepening development crisis, the UNDP study cautioned.

“Debt relief would be a small pill for wealthy countries to swallow, yet the cost of inaction is brutal for the world’s poorest. We cannot afford to repeat the mistake of providing too little relief, too late, in managing the developing economy’s debt burden,” said Achim Steiner, the UNDP Administrator. 

Criticism

It is alleged that since the start of the activities of the World Bank and the IMF, the major decisions of the Bank and the Fund have remained aligned with the orientations of the US government. At times, certain European governments (in particular the UK, France and Germany) and that of Japan have had a voice, but such cases are rare. An analysis of history since the end of the Second World War shows that until now, the US government has always had the last word where its direct interests are concerned.  

Critics like the Committee of Abolition of Illegitimate Debt (CADTM), a global think tank, contend that the World Bank, during the 1950s and 1960s, systematically granted loans to colonial powers  for projects that increased exploitation of natural resources and of peoples for the benefit of the ruling classes in the coloniser countries.

IBRD and IDA (International Development Association) provide financing, policy advice, and technical assistance to governments of developing countries. IDA focuses on the world’s poorest countries, while IBRD assists middle-income and creditworthy poorer countries. Thus, the World Bank Group has influence at all levels: (i) the imposition and financing of privatisation (World Bank); (ii) investment in the privatised company (IFC); (iii) insurance and guarantees for that company (MIGA); and (iv) arbitration if there is a dispute (ICSID).

Since the late eighties, the World Bank and the IMF have strengthened their ability to exert pressure on a great many countries by taking advantage of the situation created by the debt crisis of the 1980s. It is also believed that this increasingly close collaboration between the Bank, the IMF and the World Trade Organisation (WTO) is part of the Washington Consensus agenda.

The term Washington Consensus usually refers to the level of agreement between the International Monetary Fund (IMF), the World Bank, and the US Department of the Treasury on a set of economic policy recommendations for developing countries that became popular during the 1980s. The main agenda of the Washington Consensus is aimed at guaranteeing the US dominance worldwide, writes Eric Toussaint-an economic historian and the author of ‘Greece 2015: there was an alternative.’

The British economist John Williamson, who later worked for the World Bank, first used the term Washington Consensus in 1989. These institutions shared the view, typically labelled neoliberal, that the operation of the free market and the reduction of state involvement were crucial to development in the global South. With the onset of a debt crisis in the developing world during the early 1980s, the major Western powers, and the United States in particular, decided that both the World Bank and the IMF should play a significant role in the management of debt and in global development policy.

The Washington Consensus propagates a rigid belief that developing countries should adopt market-led development strategies that will result in economic growth which will “trickle down” to the benefit of all. The World Bank and IMF were able to promote this view throughout the developing world, including India, by attaching policy conditions, known as stabilisation and structural adjustment programs, to the loans they made.

Historically high public debt levels, combined with low growth, demonstrate the failure of these institutions to fulfil Fund Bank’s mandate. In the face of increasing inequality and a climate emergency, they have stuck to ‘tried and failed’ recipes such as austerity and market-based approaches which are widening the inequality gap to an alarming level. The IMF and World Bank’s call for more austerity and increased lending so that creditors can get their money back will only worsen the situation, states the European Network on Debt and Development (Eurodad).  

World Bank & IMF in India

As per IDR 2024, in 2010, India’s total external debt stock was USD 290.4 billion, which had risen to USD 646.8 billion in 2023. The long-term interest payment during this period had gone up from USD 4.7 billion to USD 22.5 billion. In 2023, the external debt stock as a percentage of export was 80 per cent and debt service as a percentage of export was 10 per cent. In 2023, 51 per cent of India’s external debt was provided by private creditors, bilateral debt consisted of 16 per cent and rest 33 per cent was provided by multilateral agencies (the World Bank 11 per cent, ADB 11 per cent and others 11 per cent. At the end of 2022, India owed USD 38.3bn to the World Bank. India’s outstanding balance is almost double that of the next biggest debtor, Indonesia, with USD 20.6bn. Bangladesh and Pakistan follow with  USD 18.2bn and USD 18.1bn of outstanding loans, respectively. Among the top ten biggest debtors to the World Bank, India topped the list in 2022.

Many World Bank projects created controversies, mainly due to non-involvement of the major stakeholders—the project affected people, while negotiating loans with the government. The recent controversies on the displacement of street vendors and slum dwellers while implementing the World Bank-funded projects, Jawaharlal Nehru Urban Renewal Mission (JNURRM) and Smart City projects, are cases in point. It may be recalled that in the early nineties, Narmada Bachao Andolan (NBA) stalled the World Bank funding in 1993 to halt further construction of major dams on the Narmada River, demanding transparency from the government and funding sources.

Three major IMF programs in India, from 1966 to 1991, stimulated the path to liberalisation. In 1966, IMF provided India with much-needed economic assistance after India agreed to devalue the rupee by 36.5 per cent. In 1981, when India faced an economic crisis again due to a Balance of Payment (BOP) deficit, the IMF issued a USD 5.8 million loan. In 1991, India saw no other avenues for economic relief and accepted emergency loans totalling USD 2.2 billion from the IMF. With no “soft options” left, newly appointed Prime Minister Rao assured the IMF that systematic policy changes would be introduced to deal with the BOP crisis. Thus, since the early 1990s, ‘Structural Adjustment Process’ (SAP) and ‘Liberalisation, Privatisation and Globalisation’ (LPG) programmes were initiated in India under the strict surveillance of IMF’s team of economists. India’s income inequality started widening after the economic liberalisation policies began in 1991. As economic growth accelerated from the “Hindu-rate” of growth, the rich became richer while the share of national income going to others declined. The gap between the two reached the highest level after the BJP came to power in 2014, writes The Wire. Now top one per cent in India holds 40 per cent wealth.

On the 80th anniversary of the Bank-Fund, more than 200 Indian Civil Society Organisations have demanded for a new democratic financial system. Organisations those are working for years with the project effected people, like National Hawkers Federation, Narmada Bachao Andolan, Bandi Mukti Committee and Centre for Financial Accountability, have organised the Independent Peoples’ Tribunal on the World Bank, in Kolkata, as a mark of protest.

 Need for an alternative financial system

Anti-debt activists argue that an alternative approach is required to end the vicious cycle of indebtedness while avoiding the trap of a politics of charity aimed only at perpetuating a worldwide system dominated entirely by capital and by a few major powers and transnational companies. The solution lies in the  setting up of an international system of redistribution of revenue and wealth in order to repair the centuries of looting to which the dominated peoples of the periphery have been and are still subjected. The World Bank and the IMF should be replaced with other international institutions that operate democratically, they argue. The new world bank and the new international monetary fund – whatever names they might be given – must have missions that are radically different from their predecessors’. 

As demand for an alternative financial system challenges US hegemony, it has infuriated the USA President-elect Donald Trump who threatened to impose 100 per cent tariffs against BRICS—a bloc of nine nations—if they act to undermine the US dollar. At a summit of BRICS nations in October, Russian President Vladimir Putin accused the US of “weaponising” the dollar and has specifically pushed for the creation of a new payment system that would offer an alternative to SWIFT—the global bank messaging network.

A modest change in the global payment system will not help the global economy to come out of the debt crisis. The only viable options are: one, debt cancellation of the global south, two, imposition of progressive wealth tax on filthy rich to mobilise the much needed resources for development, and reduce economic inequality, among the citizens, for a sustainable world.

Views expressed are personal