Institutions of Global Economic Governance

Global economic governance (Note: essay questions will not be set on the individual institutions of global governance)

Development and impact of global economic governance – Bretton Woods system, its aims and purposes; breakdown of Bretton Woods (implications); Washington consensus and its implications; success and failures of global economic governance (stability and growth in global economy; have crisis tendencies been contained?)

International Monetary Fund (IMF) – performance and impact of IMF (balance of payments crises; structural adjustment programmes (SAPS); strengths and criticisms; how IMF has responded to criticism; IMF and global economic crisis and pressure for reform, etc).

World Bank – performance and impact of World Bank (development and poverty-reduction programmes; SAPS; strengths and criticisms; how World Bank has responded to criticism; World Bank and global economic crisis and pressure for reform, etc). •

World Trade Organisation (WTO) – from GATT to WTO; role of WTO (‘liberalise’ world trade); performance and impact of WTO (‘Uruguay round’ of negotiations (1986-95); fate of ‘Doha round’); debating the WTO (strengths and criticisms; advantages and disadvantages of global free trade), etc.

Group of Seven/Eight (G-7/8) – role and significance of G-8; criticisms of G-8; role and significance of alternative G-20, etc.

UNIT THREE REVISION BY TOPIC: GLOBAL ECONOMIC GOVERNANCE QUESTIONS (Note only short answer questions can be set on the individual institutions)


Short Answer Questions

Explain the main criticisms of the IMF. (15 marks)

The International Money Fund is one of the key actors in the international political economy, and with particular relevance to development. The formation of the IMF stemmed in part because many believed that the Great Depression and World War II were partly caused by inflation, lack of currency convertibility and other economic problems that characterised the inter-war period (1919-1939). To address future economic problems the allies met in 1944 at Bretton Woods to set up the World Bank and the IMF.

Almost all countries are now members of the IMF, whose primary function is to maintain exchange rate stability by giving short-term loans to countries with balance of payments problems caused by trade deficits or heavy loan repayments. The IMF receives funds from wealthier members and in 2000 had $114 billion in reserve. During 2000 the IMF had $69 billion in outstanding loans to 96 member states, all of which were economically less developed countries (LDCs) or countries in transition (CITs) to a free-market economy, such as Russia and Poland.

The IMF loans money to states that are experiencing problems which are harming faith in their currency. This lack of faith in the currency causes instability because people both abroad and at home become less willing to accept the country’s money. To counter this instability the IMF loans a state hard currency (usually US Dollars) to support its currency or to restructure its international debt.

The IMF has played an important role in restoring monetary stability, particularly in LDCs and CITs, but also in ‘wealthy’ states such as the UK in the 1970s. However, there are many critics of the IMF, and in recent years it has become a focus of the struggle between the North and the South. There are two main controversies; vote distribution and Structural Adjustment Programs (SAP).

The vote distribution of the IMF’s board of directors is based on member-states’ contribution to the IMF fund. Thereby, the US has 18% of the votes, the EU has 31% (EU15) and Canada has 3%. This gives control to a few countries that constitute less than 10% of the IMF membership. Similarly, LDCs have little power in decision making.

The second criticism of the IMF is that it imposes unfair and severe economic conditions on already indebted and impoverished states. The SAP, to which recipients of IMF loans have to agree, require states to move towards capitalism by privatising state-run enterprises, reducing trade barriers and facilitating capital flows (thereby promoting foreign ownership of domestic firms), reducing social programmes to cut budget deficits (health and education thereby suffering) and devaluing currencies.

Critics of the IMF argue that the SAP violates state sovereignty and harms living standards by cutting social services and reducing growth in order to balance budgets. Defendants of the IMF counter such arguments by stating that the existing policies caused the monetary instability or crisis in confidence. It is only sensible, therefore, that the IMF requires financial reforms to address the underlying problems.

AO1: Comprehensive and detailed knowledge and understanding of criticisms of the IMF, including its role, the SAP and dominance of the IMF by the Global North who give most money but arguably do not understand the problems and development needs of LDCs.

AO2: Sophisticated analysis of the main arguments with assessment of their validity.

Explain the main criticisms that have been made of the World Trade Organization. (15 marks)

Key criticisms of the WTO include the following:

The WTO has been criticised in terms of its aims and underlying philosophy. In particular, global free trade has been seen to widen economic inequalities by giving dominant powers access to the markets of weak states while having little to fear themselves from foreign competition. Free trade, moreover, gives economies global markets rather than local needs, and tends to place profit before considerations of community, stability and workers’ rights.

Environmentalists have made particular criticisms of the WTO, arguing that free trade and economic deregulation tend to weaken environmental protection and preservation. The WTO’s principles fail to take into account the environmental impact of free trade and economic restructuring.

The WTO is often criticised for being undemocratic and for favouring the interests of rich and powerful state. This is evident in a lack of even-handedness, in that protectionist practices in the developed North, particularly in agriculture, have often been tolerated while they have been fiercely criticised in the developing South.

The WTO has also been criticised for being ineffective, in that the task of decision-making in the area of trade practices has often been frustratingly slow. This is evident in the faltering progress of the Doha Round of negotiations, which has been hampered by tensions between Northern and Southern states in particular.

Essay Questions

To what extent is global economic governance effective? (45 marks)

Global economic governance refers to the framework of coordination and management that is facilitated by bodies such as the World Trade Organisation, the International Monetary Fund and the World Bank.

This framework was established by the 1944 Bretton Woods Agreement, with the orientation of these institutions being shifted as a result of the collapse of the Bretton Woods system in the 1970s and the emergence of the ‘Washington Consensus’ in the 1980s.

Other key actors in this process include the G7/8 and increasingly the G20.  The purpose of global economic governance is to provide a stable framework for sustainable growth in the world economy.

Those who argue that it has been effective in these respects make a number of points, including the following:

The Bretton Woods system was effective in the early post-1945 period in ensuring no return to the ‘beggar thy neighbour’ policies of retaliatory protectionism that had contributed to the Great Depression of the 1930s.

The end of the Bretton Woods system and the rise of market-orientated policies under the ‘Washington Consensus’ laid the foundation for the accelerated globalisation that saw a significant expansion of the world economy from the 1980s through to 2007-08.

However, global economic governance has been criticised as ineffective on a number of grounds, including the following:

It has been viewed as inefficient as there are too many agencies involved in global economic governance with too little coordination among them.

The agencies tend to impose a ‘one size fits all’, neoliberal blueprint, which does not allow for sufficient flexibility to suit different circumstances.

In line with its free market principles, global economic governance provided a weak framework for regulating the world economy from the 1970s onwards, allowing unsustainable global imbalances to develop.

This was most evident in the global financial crisis that started in 2007/08 that led to a sharp down-turn in the world economy.

Global economic governance had failed, in particular, to regulate financial markets and banking systems, allowing unsustainable debt to accumulate with dramatic consequences.

Some have therefore called for a ‘new Bretton Woods’. However, this has so far led to little more than a change in voting arrangements on the IMF.

Global economic governance has also been criticised in a wider sense for, for instance, promoting inequality, damaging human rights, lacking transparency and democratic accountability, and for being an instrument of transnational corporations.

Student responses

Explain the main criticisms that have been made of the World Trade Organization.

The World Trade Organization was formed in 1995 as a replacement for GATT. Broadly speaking, the duty of the WTO is to establish and promote free trade, and to resolve disputes on economic issues between member states, and to ensure global economic stability. In other words, it establishes a framework for global economic governance. The role of WTO has however, come under many criticisms especially from critical theorists.

The criticisms on WTO has mainly arisen from the criticism towards free trade. Many argue that free trade does not necessarily mean fair trade. Free trade has been seen to widen economic inequality between states as it tends to result in winners and losers. TNCs and richer countries can easily overtake the market of the poorer countries as they have financial and resource leverages to do so. This results in the monopoly of western TNCs in the economy and the deterioration of the market within the poorer states. In addition, most of TNCs profit is sent back to the home countries, instead of being invested in the LEDC’s infrastructure. Thus, the rich becomes richer and the poor becomes poorer. Furthermore, free trade tends to prioritize profit before considerations of community, stability, worker rights, and environment. Many have criticized WTO’s principles for failing to take into account environmental degradation, worker’s rights abuses, and problem of cheap labour in China, which are mainly caused by free trade.

It has also been suggested that WTO tends to favour richer and more powerful states. As a supranational body, WTO has a degree of power to impose its will on states. This is mainly reflected in its ability to force nations to open up their markets by removing tariffs and quotas. While developing countries have been subject to such policies, protectionist practices are still highly evident in the richer countries. For instance, the use of tariffs on various raw materials in USA has never been criticized by the USA although it does not reflect free trade principles. Many have also suggested that WTO is ineffective, in that resolving disputes over trade practices has been frustratingly slow. This is evident in the faltering progress of the Doha Round negotiations, which has been hampered by tensions between Northern and Southern states in particular. Additionally, much of WTO time is taken up by agricultural disputes between developed countries, particularly over Europe’s Common Agricultural Policy (CAP). In other words, WTO has been ineffective in resolving economic issues within developing countries.

The WTO is indeed created to promote better global economic stability. However, there have been many criticisms that suggests WTO is a problematic body. The first is that it ignores the consequences of free trade on LEDCs which are often unable to compete in the global market. Secondly, it has been accused to be biased in favour of western developed countries

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