Tuesday, May 29, 2007


by Thomas Riggins

The Wolfowitz scandal has raised some questions about the relevance of the financial institutions set up to stabilize the world economy after W.W.II. It was in 1944, just before the end of the war, at Bretton Woods, N.H. that both the International Monetary Fund and the World Bank were set up.

Some critics maintain that in today’s world of Globalization these institutions, along with the World Trade Organization (the successor to 1947’s General Agreement on Tariffs and Trade, G.A.T.T.), are becoming increasingly irrelevant.

Last Wednesday a major article appeared in the “Business Day” section of The New York Times addressing just this issue. (“Cracks in the Financial Foundation: Roles of 3 Institutions Questioned in a Changing Global Economy,” by Steven R. Weisman, 5-23-2007).

For one thing, their roles don’t seem to be as important as they once were. World Bank loans, for example, to poor countries only account for about 7% of the aid they get from all sources. There are also questions being raised about the Bank’s policy of loaning money to midlevel developing countries.

Some eyebrows are being raised over $40 billion in loans to China (which has a trillion dollars as reserves). The Chinese, in fact have loaned out some $20 billion of their own to poor nations in Africa. The Bank likes these loans because it knows it will get paid back with interest and it uses this money to bankroll its staff and research projects. But is it really helping the poor?

Robert E. Rubin (a past Secretary of the Treasury) is quoted as saying, “The Bretton Woods system has become outmoded. It has served us [i.e., Western capitalists] very well for a long time, but these institutions haven’t changed with the times. They need to be rethought and restructured.”

The Wolfowitz scandal didn’t help. Eckhard Deutscher, one of the Bank’s directors, says, “The biggest challenge of the World Bank is to restore its credibility. But the international community also needs to look at the whole system. There are governance problems across the board.

It has been a tradition that the head of the Bank is nominated by the US President. But what happens, as with Wolfowitz, when an incompetent President nominates an incompetent political loyalist? Wolfowitz has resigned, but Bush will get to name his replacement. Many of the international directors would like to revisit the nomination process. Kenneth S. Rogoff, a Harvard professor, maintains that, “The Wolfowitz situation exposed what an antediluvian system the bank has. But I’m worried that this crisis is going to set back the reform process.”

Many think the Bank has really fallen down on the job of helping the poor. These critics, looking at the China situation above, want the Bank to quit loaning money to middle income countries, and to begin just giving outright grants to the poor countries. At the present time about 93% of the aid that poor countries get from the governments in the more developed world is coming from some 230 different international agencies. The Bank’s role is rather modest in comparison. Everyone seems to agree that the Bank has become, in some sense, “marginal” but still important.

The same can be said about the International Monetary Fund. Former Secretary of State (and Secretary of the Treasury as well) George P. Shultz is quoted as saying, “In the past I have called for the abolition of the I.M.F. If it disappeared tomorrow, I don’t think people would miss it very much.”

The I.M.F. you may recall, gained notoriety for insisting that Asia and Latin American countries seeking aid sould cut back on all the programs they had for helping poor people-- so called “austerity measures” were insisted upon, leading to social unrest. The Fund is unpopular at the present time, basically because there is a booming global economy, at least for the capitalists. But this is capitalism, after all, and the good times won’t last forever.

Another Harvard professor admits as much. Richard N. Cooper maintains that, “We happen to be in a very quiet time at the moment. People are saying ‘Who Needs It [the I.M.F.]?’ I am morally certain that financial crises are not a thing of the past, and that we’ll see crises in the future. The I.M.F. is the obvious collaborative instrument to deal with them.” But what about the policy of “austerity?” That might just start off a revolutionary spark.

Finally, one last institution seems on the verge of a breakdown. This is the World Trade Organization (W.T.O.). The W.T.O. dates from 1995 when it replaced the G.A.T.T. But it has been bogged down in getting a new international trade regime in place for the last five years--- ever since it began talks in 2002 in Doha, Qatar.

These talks are on the verge of failure because the Third World nations are putting up stiff resistance to rules the U.S. and Europe are trying to push through which will significantly damage poor nations to the advantage of the rich.

“Many trade experts fear,” the article reports, “that if the talks fail, it could lead to a reversal of 60 years of opening the trading system to more goods and services.”

What is the issue? The U.S. and Europe want to protect their own domestic markets and at the same time are insisting that Third World countries open their domestic markets to them. This would lead to the destruction of small and midlevel producers throughout the Third World whose domestic markets would be taken over by First World producers who would simultaneously be blocking the entrance of Third World products into the markets of the First World.

As the Times reports, “The Doha talks are at an impasse because the United States and Europe are refusing to lower barriers on farm goods and both are demanding that India and other exporting countries lower barriers of their own.”

This is a typical capitalist squabble. One that the imperialist powers are used to winning. But they have not been able to advance their cause for the last five years. Third World bourgeoisies are turning out to have more staying power against the imperialist bourgeoisies than had been expected. This too is one of the major reasons that the international financial tools of the West, hammered out at Bretton Woods in 1944 are finding themselves to be increasingly irrelevant.

Thomas Riggins is the book review editor of Political Affairs and can be reached at pabooks@politicalaffairs.net.

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