Impact of WTO,IMF and World Bank in International Trade

Impact of WTO, IMF and World Bank in Promotion Of International Trade

                                      By Achuth Kylas*

Introduction: A historical recap:

            The WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was established after World War II in the wake of other new multilateral institutions dedicated to international economic cooperation - notably the Bretton Woods institutions known as the World Bank and the International Monetary Fund. The Bretton Woods Conference of 1944 recognized the need for a comparable international institution for trade (the later proposed International Trade Organization (ITO)) to complement the International Monetary Fund and the World Bank.[1] Probably because Bretton Woods was attended only by representatives of finance ministries and not by representatives of trade ministries, an agreement covering trade was not negotiated there.[2]

In early December 1945, the United States invited its war-time allies to enter into negotiations to conclude a multilateral agreement for the reciprocal reduction of tariffs on trade in goods. In July 1945 the United States Congress had granted President Harry S. Truman the authority to negotiate and conclude such an agreement. At the proposal of the United States, the United Nations Economic and Social Committee adopted a resolution, in February 1946, calling for a conference to draft a charter for an International Trade Organization (ITO). A Preparatory Committee was established in February 1946, and met for the first time in London in October 1946 to work on the charter of an international organization for trade; the work was continued from April to November 1947[3]. At the same time, the negotiations on the General Agreement on Tariffs and Trade (GATT) in Geneva advanced well and by October 1947 an agreement was reached: on October 30, 1947 eight of the twenty-three countries that had negotiated the GATT signed the "Protocol of Provisional Application of the General Agreement on Tariffs and Trade"[4].

In March 1948, the negotiations on the ITO Charter were successfully completed in Havana. The Charter provided for the establishment of the ITO, and set out the basic rules for international trade and other international economic matters. The ITO Charter, however, never entered into force; while repeatedly submitted to the US Congress, it was never approved. The most usual argument against the new organization was that it would be involved into internal economic issues[5].On December 6, 1950 President Truman announced that he would no longer seek Congressional approval of the ITO Charter[6].In the absence of an international organization for trade, countries turned, from the early fifties, to the only existing multilateral international institution for trade, the "GATT 1947" to handle problems concerning their trade relations. Therefore, the GATT would over the years "transform itself" into a de facto international organization. It was contemplated that the GATT would be applied for several years until the ITO came into force. However, since the ITO was never brought into being, the GATT gradually became the focus for international governmental cooperation on trade matters[7]

Seven rounds of negotiations occurred under GATT before the eighth round - the Uruguay Round - concluded in 1994 with the establishment of the World Trade Organisation (WTO) as the GATT's replacement. The GATT principles and agreements were adopted by the WTO, which was charged with administering and extending them.

The World Trade Organisation:

            The World Trade Organization (WTO) is the only body making global trade rules with binding effects on its Members. It is not only an institution, but also a set of agreements. The WTO regime is known as the rules-based multilateral trading system. Thus the WTO was formed and ever since has it performed its functions which are:

            1.To oversee implementing and administering WTO agreements;

            2.To provide a forum for negotiations; and

            3.To provide a dispute settlement mechanism.[8]

Through these functions the WTO seeks to achieve certain objectives which can be extracted from its preamble :

            Preamble (extracts)

            “The Parties to this Agreement,

            Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full   employment and a large and steadily growing volume of real income and effective             demand, and expanding the production of and trade in goods and services, while           allowing for the optimal use of the world’s resources in accordance with the             objective of sustainable development, seeking both to protect and preserve the      environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development,

            Recognizing further that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development[9]”.

In short the objectives can be capsuled as follows:

1. Raising standards of living;

2. Ensuring full employment;

3. Ensuring large and steadily growing real incomes and demand; and

4. Expanding the production of and trade in goods and services.

            These objectives are to be achieved while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, and while seeking to protect and preserve the environment. The preamble also specifically mentions the need to assist developing countries, especially the least developed countries, secure a growing share of international trade. However, since its creation the WTO’s emphasis has slipped from concentrating on these public interest goals to seeing itself primarily as ‘an organization for liberalizing trade,’ and declaring that ‘the system’s overriding purpose is to help trade flow as freely as possible.’[10]This has been the source of one of the fundamental tensions surrounding the mandate and activities of the organization. Some (such as developing countries and non-governmental organizations) would like to see added emphasis on the public interest goals, whilst others (private companies and some industrialized countries, for instance) favour faster removal of obstacles to free trade.

Today, an increasing number of voices are being raised to underline that free trade should not be an end in itself, but rather a tool to achieve equitable development and a better world. That the WTO’s public interest objectives remain out of reach of many has drawn criticism that the organization is dominated by rich countries, functions in a secretive manner, and helps feed the greed of the rich in the name of trade liberalization.

The World Commission on the Social Dimension of Globalization, stressing the need for a higher objective for the WTO , emphasized that:

            Certain principles other than just fair market access must also be respected in    order to make the global trading system fully fair to all. One such principle is that             trade liberalization should not be enthroned as an end in itself. It is but a means      for achieving ultimate objectives such as high and sustainable growth, full            employment and the reduction of poverty. As such, trade policies should be framed with these ends in mind and be evaluated accordingly.[11]

This deviation of the WTO from its desired path has been subjected to many criticisms like;-

            That the purpose of the world trade regime is to raise living standards all around             the world rather than to maximize trade per se has never been controversial. In   practice, however, these two goals promoting development and maximizing trade                       have come to be increasingly viewed as synonymous by the WTO and multilateral

            lending agencies, to the point where the latter easily substitutes for the former …            the net result is a confounding of ends and means.[12]

And;

            Asia’s experience [of gradual liberalization only after an initial period of high       growth] highlights a deeper point. A sound overall development strategy that             produces high economic growth is far more effective in achieving integration with      the world economy than a purely integrationist strategy that relies on openness to           work its magic. A relatively protected economy like Vietnam is integrating with        the world economy much more rapidly than an open economy like Haiti because    Vietnam, unlike Haiti, has a reasonably functional economy and polity.[13]

Thus it can be seen that WTO’s criticisms are many ie. be as the principles may be however, in reality, power politics has meant that the WTO has received criticized by various groups and third world countries for numerous things, including:

* Being very opaque and not allowing enough public participation, while being very welcoming to large corporations. (That doesn’t help the claims of free, open and democratic!)

* That while importing nations cannot distinguish how something is made when trading, though it sounds good at first along the lines of equality and non-discrimination, the reality is that some national laws and decisions for safety and protection of people’s health, environment and national economies have been deemed as barriers to free trade. Take the following as a very small set of examples:

1. Countries cannot say no to genetically engineered food

2. Or milk that contains genetically engineered growth hormones known to cause health problems

3. Or trees that have been felled from pristine forests and so on.

4. Guatemala took efforts to help reduce infant mortality, in accordance with the World Health Organization’s guidelines, and to counter aggressive marketing by baby food companies aimed at convincing mothers their products are superior to    the more nutritious and disease-protecting breast milk for their babies. The result? The affected corporations managed to take this to GATT (the predecessor to the     WTO) and get a reversal of the law amidst the threat of sanctions. Profits    prevailed.

 5. Canada complained to the WTO about France’s ban on asbestos. (The previous       link also makes the point of how the victim’s views are not heard in WTO    proceedings, nor ar they part of the debate, even though there may be thousands         of them.)

 6. The United States’ attempt to ban shrimp caught using apparatus that were    harmful to endangered sea turtles has been ruled as WTO-illegal, forcing the US   to reverse its decision.

 7. That instead of respecting the reasons why there has been special and differential treatment for developing countries, rich countries instead want to push     poor countries to reciprocate equally, in what would therefore actually be an unequal result (as it would maintain the unequal terms of trade.)

*A number of countries have also spoken out against the WTO saying that there needs to be more co-operation between the North and South (a general term to refer to the Rich and Developing countries, respectively) with regards to international trade.

-During the week of May 20, 1998, celebrations marked 50 years of multilateral           trade. However, as the following link mentions, the African nations did not feel that there was much to rejoice at and said that it was a party where only the rich      nations has something to celebrate[14].

-Most people in the world have not benefited from the current form of   “multilateral” trading systems.[15]

-At a Mercosur (South America’s Southern Common Market) summit, then South        African President, Nelson Mandela, had spoken of the need to ensure that there is             more fairness in the globalization process. Mercosur is the world’s fourth largest    economic power, after the United States, European Union and Japan.

Thus one can see that even though the existence of  an international organisation is much needed in this world, the WTO fails to meet this requirement..

International Monitory Fund (IMF)

            The International Monetary Fund was formally created in July 1944 during the United Nations Monetary and Financial Conference. The representatives of 44 governments met in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire, United States of America, with the delegates to the conference agreeing on a framework for international economic cooperation.The IMF was formally organised on December 27, 1945, when the first 29 countries signed its Articles of Agreement.

            The main objective of the IMF is to stabilize exchange rates and assist the reconstruction of the world's international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances.

            The IMF describes itself as "an organization of 186 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". With the exception of Taiwan (expelled in 1980),North Korea, Cuba (left in 1964), Andorra, Monaco, Liechtenstein, Tuvalu and Nauru, all UN member states participate directly in the IMF. Most are represented by other member states on a 24-member Executive Board but all member countries belong to the IMF's Board of Governors.

            The main objectives of IMF can be stated as such :

            1) Promoting international monetary cooperation.

            2) Facilitating the expansion and balanced growth of international trade.

            3) Promoting exchange stability.

            4) Assisting in the establishment of a multilateral system of payments and

            5) Making its resources available (under adequate safeguards) to members        experiencing balance of payments difficulties.[16]

            Generally, the IMF is responsible for ensuring the stability of the international monetary and financial system - the system of international payments and exchange rates among national currencies that enables trade to take place between countries. The Fund seeks to promote economic stability and prevent crises; to help resolve crises when they do occur; and to promote growth and alleviate poverty. It employs three main functions:

            * Surveillance

            * Technical assistance

            * Lending to meet these objectives.

Surveillance: This involves collaboration between the IMF and its member nations. The IMF continues to assess the economic conditions of its members and offers in-depth advice to help them formulate sound economic policies.

Lending: Financial aid is provided to member countries who are struggling with balance of payment problems. Through Exogenous Shocks Facility (ESF) and the Poverty Reduction and Growth Facility (PRGF), the IMF helps its members and even collaborates with the World Bank to lend money to them.

Technical Assistance: The IMF offers technical assistance in areas such as banking, fiscal and economic policies as well as exchange rate policies. It also helps its member nations to fight threats such as terrorism and money-laundering.

Criticism :

            Not unlike the WTO , the IMF has also been criticized severely for its actions,

"The interests of the IMF represent the big international interests that seem to be established and concentrated in Wall Street."

                                    — Che Guevara, Marxist revolutionary, 1959[17]

            Criticisms from economists have been that financial aid is always bound to so-called "Conditionalities", including Structural Adjustment Programs. It is claimed that conditionalities (economic performance targets established as a precondition for IMF loans) retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries.[18]

One of the main SAP conditions placed on troubled countries is that the governments sell up as much of their national assets as they can, normally to western corporations at heavily discounted prices.

            That said, the IMF sometimes advocates "austerity programmes," increasing taxes even when the economy is weak, in order to generate government revenue and balance budget deficits, which is Keynesian policy. Countries are often advised to lower their corporate tax rate. These policies were criticised by Joseph E. Stiglitz, former chief economist and Senior Vice President at the World Bank, in his book Globalization and Its Discontents[19]. He argued that by converting to a more Monetarist approach, the fund no longer had a valid purpose, as it was designed to provide funds for countries to carry out Keynesian reflations, and that the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community".

            Argentina, which had been considered by the IMF to be a model country in its compliance to policy proposals by the Bretton Woods institutions, experienced a catastrophic economic crisis in 2001, which some believe to have been caused by IMF-induced budget restrictions — which undercut the government's ability to sustain national infrastructure even in crucial areas such as health, education, and security — and privatization of strategically vital national resources[20].Others attribute the crisis to Argentina's misdesigned fiscal federalism, which caused subnational spending to increase rapidly[21].The crisis added to widespread hatred of this institution in Argentina and other South American countries, with many blaming the IMF for the region's economic problems.[24] The current — as of early 2006 — trend towards moderate left-wing governments in the region and a growing concern with the development of a regional economic policy largely independent of big business pressures has been ascribed to this crisis.

            Another example of where IMF Structural Adjustment Programmes aggravated the problem was in Kenya. Before the IMF got involved in the country, the Kenyan central bank oversaw all currency movements in and out of the country. The IMF mandated that the Kenyan central bank had to allow easier currency movement. However, the adjustment resulted in very little foreign investment, but allowed Kamlesh Manusuklal Damji Pattni, with the help of corrupt government officials, to siphon off billions of Kenyan shillings in what came to be known as the Goldenberg scandal, leaving the country worse off than it was before the IMF reforms were implemented. In an interview, the former Romanian Prime Minister Tăriceanu stated that "Since 2005, IMF is constantly making mistakes when it appreciates the country's economic performances"[22].

            Typically the IMF and its supporters advocate a monetarist approach. As such, adherents of supply-side economics generally find themselves in open disagreement with the IMF. The IMF frequently advocates currency devaluation, criticized by proponents of supply-side economics as inflationary. Secondly they link higher taxes under "austerity programmes" with economic contraction.Currency devaluation is recommended by the IMF to the governments of poor nations with struggling economies. Some economists claim these IMF policies are destructive to economic prosperity.

World Bank:

            The World Bank is one of two major institutions created as a result of the Bretton Woods Conference in 1944. The World Bank (WB) is a multinational corporation aiming at the alleviation of poverty. It facilitates various economies of the world in following sustainable economic growth. The World Bank comprises of the following two institutions:

-International Bank for Reconstruction and Development: The IBRD focuses on low-income economies that have little access to global credit markets.

-International Development Association: The IDA focuses on helping the poorest nations.

            The World Bank sees the five key factors necessary for economic growth and the creation of an enabling business environment as:

1.Build capacity: Strengthening governments and educating government officials.

2.Infrastructure creation: implementation of legal and judicial systems for the encouragement of business, the protection of individual and property rights and the honoring of contracts.

3.Development of Financial Systems: the establishment of strong systems capable of supporting endeavors from micro credit to the financing of larger corporate     ventures.

 4.Combating corruption: Support for countries' efforts at eradicating corruption.

  5.Research, Consultancy and Training: the World Bank provides platform for    research on development issues, consultancy and conduct training programs (web   based, on line, tele-/ video conferencing and class room based) open for those who are interested from academia, students, government and non-governmental  organization (NGO) officers etc.

            The Bank obtains funding for its operations primarily through the IBRD’s sale of AAA-rated bonds in the world’s financial markets. The IBRD’s income is generated from its lending activities, with its borrowings leveraging its own paid-in capital, plus the investment of its "float". The IDA obtains the majority of its funds from forty donor countries who replenish the bank’s funds every three years, and from loan repayments, which then become available for re-lending.

            The World Bank also distributes grants for the facilitation of development projects through the encouragement of innovation, cooperation between organizations and the participation of local stakeholders in projects. IDA grants are predominantly used for:

-Debt burden relief in the most indebted and poverty-stricken countries

-Improvement of sanitation and water supply

-Support of vaccination and immunization programs for the reduction of communicable diseases such as malaria

-Combating the HIV/AIDS pandemic

-Support of civil society organizations

-Creating initiatives for the reduction of greenhouse gases.

            According to the World Bank, in virtually all successful assistance projects the country itself was the driving factor. The Bank therefore works to help governments lead and implement their own development strategies and thus take a stronger hand in their own future development. The strategy was initiated by the former president of the bank, James Wolfensohn. Since 1999, it has followed a set of philosophies known as the Comprehensive Development Framework. These philosophies state that

 -Development strategies should be comprehensive and shaped by a long-term   vision

 -Development goals and strategies should be “owned” by the country, based on local stakeholder participation in shaping them

 -Countries receiving assistance should lead the management and coordination of aid programs through stakeholder partnerships

 -Development performance should be evaluated through measurable results on the ground in order to adjust the strategy to outcomes and a changing world

Criticism:

            The World Bank has long been criticized by a range of non-governmental organizations and academics, including its former Chief Economist Joseph Stiglitz, who is equally critical of the International Monetary Fund, the US Treasury Department, US and other developed country trade negotiators, and indigenous rights groups, such as Survival International.Critics argue that the so-called free market reform policies—which the Bank advocates in many cases—in practice are often harmful to economic development if implemented badly, too quickly ("shock therapy"), in the wrong sequence, or in very weak, uncompetitive economies. A number of intellectuals in developing countries have argued that the World Bank is deeply implicated in contemporary modes of donor and NGO-driven imperialism and that its intellectual contribution functions, primarily, to seek to blame the poor for their condition. One of the strongest criticisms of the World Bank has been the way in which it is governed. While the World Bank represents 184 countries, it is run by a small number of economically powerful countries. These countries choose the leadership and senior management of the World Bank and as such, their interests are dominant within the bank. In 2008, a World Bank report which found that biofuels had driven food prices up 75% was not published. Officials confided that they believed it was withheld from publication to avoid embarrassing the President of the United States, George W. Bush.[23]

Thus it can be seen that none of the above stated organisations are beyond imperfections and criticisms even though they are all important to the development of the world as a whole.