Cambodian Economic Vision

The Economic Miracle of East Asia and its Impact on the Region

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Whilst the world described the East Asian economic growth as a miracle, some countries in South-East Asia have lagged behind, especially the countries in Indochina such as Cambodia, Laos and Vietnam. Just a few decades of economic struggle after World War II, countries in East Asia managed to lift a high percentage of their people out of poverty and are now considered middle-income countries. The fast economic growth in South Korea, Japan, Taiwan, and Singapore has provided advantages for economic development in the entire region. The high level of growth of countries in East has pushed the price of goods and the cost of labour up. Many investors and industries both local and international started to move their investments to other places, which had cheaper labour costs. This move has provided some advantages for countries in South-East Asia such as Malaysia, Indonesia, Thailand and Philippines. Out of all sectors, manufacturing became the most important contributor to growth in these economies and helped to increase the annual GDP growth rates, which exceeded 6% and 7% in the periods 1970-80 and 1980-93 respectively (Ishak Shari: 2000). However, there are some countries in the South East Asia region, including Cambodia, Laos and Vietnam, who are less fortunate, which has caused them to lag behind significantly.

Economic Development in South East Asia:
Many countries in South East Asia have integrated into the global community since the 1980s. For the first time in history, individual countries has embraced and adopted global economic liberalisation, driven by the powerful process of globalisation. As a result, countries such as Thailand, Malaysia, Indonesia and the Philippines have experienced fast economic growth from the 1980s to 1990s (Thomas R, L et. al: 2000). However, it is unappreciative to count the economic growth in some parts of Southeast Asia without considering the impact of the economic miracle in East Asia and its influence of the South East. After several decades of economic development, countries such as Japan, Taiwan, South Korea and Singapore have pushed the price of goods up and in turn the cost of labour. In the case of Japan, the Jen devaluation imposed by the US in the Plaza Accord pushed the price of labour and goods up so that the goods from the US could compete more effectively with Japanese goods in the world market. In the first phase during the 1960s and the 1970s, Japanese investors started to relocate their industrial plants to South Korea and Taiwan in order to seek cheaper costs of labour (Thomas R, L et. al: 2000). Nevertheless, a few decades of economic growth in Korea and Taiwan have, for the same reasons as in Japan, led to demands from workers for higher wages, better working conditions and better living conditions. The higher labour costs and the higher cost of transport of goods made in Korea, Taiwan and other East Asian tigers has forced many investors to reconsider the relocation of their industrial plants and investments to other places where they can find cheaper transport and labour costs.

Countries in South East Asia were targeted by industrial plants and the relocation of direct foreign investment from countries in the East because they have compatible natural and human resources and cheaper labour. In the mid 1980s and 1990s there was an increase in the number of direct foreign investments in Indonesia, Malaysia, Thailand and the Philippines from around the world. Most of the industries and investments were from Japan, Taiwan, South Korea and Singapore and employed vast numbers of people (Thomas R, L & Ulack, R: 2000). The fast flow of direct foreign investments inside and outside Southeast Asia provided a continuous increase in foreign exchange, helping to grow the GDP and expand their domestic markets.

The IMF (cited in Thomas R, L & Ulack, R: 2000: 189) indicates that the trade between six countries in Southeast Asia grew significantly in the 1990s. The trade between Thailand, Singapore and Malaysia in the 1990s was higher compared to the others. Trade between Singapore and Malaysia was worth $16,820 million compared to $5,845 million between Singapore and Thailand. Trade between Indonesia and Singapore was also high, $4,708 million, compared to $911 million between the Philippines and Singapore and $721 million between Brunei and Singapore.

Unfortunately, the three countries in Indochina: Cambodia, Laos and Vietnam were excluded from the ASEAN trade deal during this time because they were not yet members of ASEAN. Cambodia in particular, was in political transition and was still entrenched in civil war.

In order to look into the economic growth of countries in Southeast Asia more specifically, it is worth discussing the fast economic growth in Thailand. The Thai economy has developed rapidly along with the Malaysia and Indonesian economies.

Thailand:
Like most developing countries in the region, Thailand depended strongly on agriculture. Before the integration into the global economy, Thailand was an agrarian economy. In 1980 most Thai people were farmers. Agriculture accounted for 75% of total employment and it was responsible for 23% of Thai GDP (James A. Hafner 2000: 434-469). However, the search for cheaper wage rates and transport by investors from countries in East Asia and the rest of the world provided Thailand with the potential economic growth through direct foreign investments which included industrial and service sectors. The Industrial sector in Thailand grew from 27% of GDP to 39% of GDP between 1980 to 1993 (James A. Hafner 2000: 434-469).

The growth of the industrial and service sectors resulted in providing a significant number of jobs for the Thai people. This continuous growth not only added to the value of GDP and reduced poverty in Thailand but also helped it to expand its internal market. In the 1990s the Thai economy boomed, fuelled by strong domestic demand, which enabled industries to increase all sorts of goods and increase Thailand’s exports to foreign markets. Thailand stood at the top of the region as regards textile and sportswear exports, computers and other components. The growth of knowledge in agriculture and modern technology helped to increase the yield of agricultural crops, especially rice and rubber, and increase fishery production. In 1996 Thailand had $750 million cost assembly plants, doubling its share to 10% of the Asian auto market in 2005 (James A. Hafner: 2000). From 1980 to 1993 the growth rate of Thai exports was 15.5% the highest compared to 12.7% in Singapore, 12.6% in Malaysia and 6.7% in Indonesia (James A. Hafner: 2000).

Thailand’s GDP between 1980 and 1993 was $124,682 million the second highest after Indonesia, and two times higher than Malaysia and nearly three times higher than Singapore and the Philippines. The service sector accounted for 51% of GDP; the industrial sector shared 39% with 28% of manufacturing and 10% for the agricultural sector. Compared to other countries in table 2, Thailand had the highest GDP growth rate at 8.2%, seven times higher than the Philippines (Thomas R, L & Bowen, J 2000: 160-162). However, Thailand’s GDP growth rate from 2000-2005 was 6-7% and dropped to 4.5% in 2006 due to political instability (military coup in 2006) (Thailand Economic Monitor: 2006).

Development and Environmental Concern

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The evidence of serious environmental problems is caused by development and industrialisation. Despite the fact that, environmentalists have brought these concerns to the table in foremost debates, the solution towards what it called sustainable development remains unclear amongst policy makers. There are only limited answers to the contradictions between economic development and environmental protection. Most developing countries do not have much choice, they have to choose economic growth as their priority in order to solve the immediate concerns of their people’s needs. Since the majority of people in developing countries live in poverty, governments are forced to choose economic growth over environmental concerns.

Even though there is a well established environmental movement, which has warned the world about environmental destruction, this movement has only chipped away at the surface of this enormous problem. A large number of lives are at risk in developing countries from Brown environmental problems. The lack of an international body to enforce environmental standards around the world makes regulation impossible. The persistency of deep levels of poverty in developing countries, together with the refocusing of attention to the Green Agenda by the developed world, in order to avoid costs with regulations that threaten their competitiveness, may not leave a large number of people alive to see the effects of the global warming.

It is tempting to conclude that Globalisation and Sustainable Development are incompatible; Globalisation is a fundamentally economically driven process backed by the World Bank, the IMF and the WTO, and many MNCs, who are happy to promote blithely optimistic pictures of the effect of Globalisation on the environment. Sustainable Development is the name for diverse and diffuse policies, without effective processes for implementation and enforcement. Sustainable Development policies can claim small successes, as with the CFC international agreement; but Sustainable Development stands the greatest chance of being implemented where concerned individuals and local organisations advance it.

Impact of Industries on Environment in Developing countries

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In line with the concerns of economic policy makers, it is believed that the concepts of development and sustainability are always contradictory. Most developing countries such as China and India have adapted the global economic policies without considering its impact on the environment. Todd M. Johnson (1997: 5-7) has argued that the immeasurable benefits brought by Chinese economic growth have improved many social indicators such as poverty reduction and better health care. However, this fast economic growth has also caused very serious environmental damage. According the World Health Organization’ s report (WHO): “ In many areas in China, the surface and the ground water have increasingly polluted by emission of industrial waste, municipal sewage and agricultural runoff “ (Todd M. Johnson: The World Bank 1997: Overview). The emergence of the issue over environmental degradation has caused global concern, particularly in the new heavy industries set-up in developing countries.

The environmental issue seems to be a less immediate concern for countries during their economic transition. Some countries depend heavily on Heavy Chemical Industries (HCI) to increase revenue. Syrquin and Shenry (1989) have shown that HCI accounts for one-third of manufacturing output in large countries at $300 per capita GNP (Richard M. Auty 1994: 183-185). Countries like China, Brazil, South Korea and India are competing to attract HCI to invest in their countries in the hope that their economic performance can be improved (Richard M. Auty 1994:142). Again the environmental concern is not the priority in the agenda of economic policy makers.

In the case of China, industry is the engine for economic growth, which accounted for 48 per cent of GDP in 1995. But this engine is highly polluting which has caused serious health risk to Chinese people. The National Environmental Protection Agency estimates that discharge from industries in China account for more than 70 per cent of national pollutant emissions (Todd M. Johnson: The World Bank 1997: 57). Another report conducted by the Foundation for International Training, a Canadian NGO, showed that a survey of 116,300 Small and Medium-Sized Enterprises (SMEs) in Jiangsu province, China found 67% were causing serious pollution while only 4% appeared to be pollution free (UNEP 2003: 4-5).

However the SMEs have played a crucial role in driving the world economy. It is estimated that 90% of world business are SMEs, which cover 50-60% of total employment. As a result, SMEs consequently degrade the global environment. In India, it is estimated that SMEs produced 65% of industrial waste (UNEP 2003: 4-5).

The other main problem, which has led to environmental destruction, is the lack of social responsibility amongst the policy makers. The lack of pressure groups, who are concerned with environmental problems, has pushed the environmental agenda far from the policy makers attention. The government and politicians seem to be reluctant to interfere with this sensitive issue. As R.J Johnston has argued “ the government and politicians generally, are particularly receptive to cases brought to them if they believe that there are political benefits to be gained from acting- or political costs to be incurred from not acting” (R.J Johnston 1989: 171-173)-

How Compatible is Globalisation and Sustainable Development?

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This section outlines the relationship between Globalisation, Sustainable Development and Environmental concerns. Globalisation and the environment can only be linked through the concept of Sustainable Development; globalisers by themselves are unconcerned as to the environmental effects of Globalisation.

Truman’s inaugural Presidential Address in1949 brought Development to the centre stage of international relations; he described making scientific and industrial progress available to underdeveloped areas, by democratic fair dealing, not foreign exploitation (Esteva, quoted in Allen and Thomas 2000:5) This was in part a response to the threat of Communism and Cold War, and it initiated intense rivalries between the Communist and Free worlds, for influence with the non-aligned Third World. Esteva (quoted in Allen and Thomas 2000:5) regards Development at this time as US hegemony, whose ideals and programs would control development everywhere.

Success can be claimed for the Asian Tigers, Hong Kong Singapore, South Korea and Taiwan, Plus China. However Latin America, Central Asia, Sub Saharan Africa all have very low or negative growth rates. Africa particularly is suffering the ‘threefold humanitarian crisis’ of ‘deepening poverty, social disintegration and environmental destruction’ (Korten, quoted in Allen and Thomas 2000:6)

In 1987 concern for the environment and international development led to the Brundtland Commission report. Sustainable development was defined as:
‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’ (1987:Our common future: World Commission on Environment and Development)
quoted in Lechner & Boli 2000.

This concept is elastic, vague and potentially contradictory. Potter et al (2004) quote O’Riordan as saying that ‘Sustainable Development can mean everything or anything you want’ (227). It has been ‘described as a move from the conquest of nature to the managing of the commons’ (Kingsbury 2004). The process of managing the commons involves among other things, the use of resources. Kingsbury (2004) questions the sustainability of the world. If the entire world were to use energy at the rate that the developed world currently uses it, a five times increase would be needed. We need to take into account too that world population has increased from 1.2 billion to 6 billion in the last 100 years, and world consumption is doubling every thirty years (269).

Potter et al (2004) shows us that resources can be looked at simply as things in themselves, or as valuable according to the functions they can perform, depending upon how human ingenuity can put them to good use. For instance, genetically modified crops are more efficient because they can produce more crops on less land; against this it is argued that there are potential threats to ecological balances, and health; that there are small real economic advantages; and that they subordinate the farmer to the agribusiness by producing sterile seed, so the farmer must buy new seed each year (230).

They show us that the use of resources depends on the concentration of resources and skills, and on the possibility of restricting sale, as with OPEC; and that scarcity makes for ingenuity, so that now 75% of lead used in manufacture in the USA is recycled and 50% of the iron and steel (242).

Redclift (2002) shows us the many conflicting meanings of Sustainable Development. Sustainable use of natural resources? What principles the use of resources is to be governed? Sustaining present levels of production or consumption? (276)
He shows that economies can appear more sustainable than they are, when environmental costs like toxic waste and ‘dirty’ technology are passed to developing countries. Furthermore, we can spoil the world for future generations (277).

In the 1992 World Bank World Development Report (cited in Meier and Rauch 2000: 520) sought by its policies to attack the underlying causes of environmental damage. It aimed to
encourage efficiency, leading to less waste, less use of raw materials and more innovation; and
correct price distortion caused by government subsidies.
The Report refers to the environmental Kuznets Curve. As wealth increases, pollution increases too; wealth ultimately reaches the point where concentrations start to decline. The Report seeks to show that the environment is best protected through IMF and World Bank policies, and that in general, the richer societies are, the more they are likely to take care of their environments. It successfully turns a blind eye to any question of limits to exploitation of resources or to the growth of demand.

The question then arises, how does the concept of Sustainable Development relate to Globalisation? Dauvergne (2005) shows us that Globalisation can be presented in very different lights as to its effect on the environment.

On one side, standards of living have continued to rise generally under the influence of Globalisation, we are not running out of energy or natural resources, air and water are becoming less polluted, the green revolution has made food plentiful and cheap, it is just poorly distributed, and that world life expectancy has increased from 30 years in 1900 to 66 years in 2001.

Free trade can rid the world of poverty, hence can end deforestation, desertification, the exhaustion of natural resources, the pollution of waterways, poor government and insufficient inward investment. The environmental Kuznets Curve means that as incomes rise, citizens insist on better environmental conditions; Japan’s growth brought acute pollution, which led onto large improvements. Free trade brings about the transfer of technologies from North to South; more goods are produced with fewer resources, promoting growth and income; so more can be spent on Sustainable development.

Dauvergne shows that this denies the limits of resources implied by the projected growth of world population from 9 billion in 2002 to 12 billion in 2050. Economic growth is unsustainable; agriculture and natural resources extraction must reach a limit. Continuing growth and consumption makes an ever increasing impact on the environment, and causes the depletion of resources like fish, forests, wetlands.

He doubts the environmental Kuznets curve, (eg that growth must lead to lower pollution). As he says,
Some societies never move beyond massive pollution.
Heedless development ignores irreplaceable losses in biodiversity.
Cumulative ecological change may have catastrophic consequences.
Clearly, so far growth has not led to carbon emissions reduction.
Globalisation has increased inequality; from 1980-2000 per capita consumption in Africa has declined by 15%; while the USA contains 5% of world population but owns 30% of the world’s resources.

Similarly, free trade
may force down ecological standards in the race to compete;
and it could be interpreted as meaning that the North is free to exploit the South.
If efficiency can produce environmentally better products, if many more are produced, environmental damage still rises.
The crude price mechanism does not reflect ecological and social costs.
Trans-national corporations (TNCs) may conform to strict standards in developed countries, but exploit lower environmental protections in developing countries, eg. Bhopal, or promote themselves aggressively (BAT, Nestle).

McGrew (2000) shows us how developing states have been responding to Globalisation. They make use of the rules of international structures, especially the World Trade Organisation (WTO), working collectively to advance development. The Group of Seventy Seven (G77) has applied pressure to get changes in international economic organisations. The G22, a group of developing nations, demands more say in IMF rules, and the G15, a group of leading developing states, asserts the right to act as an alternative to the G7 group of industrialised countries.

Developing countries have also sought to achieve development policies through forming regional trading groups to have some protection from competition as well as enhancing their collective bargaining power.

McGrew describes a ‘Globalisation from below’, whereby citizens groups challenge neoliberal policies and build international alliances; they aim to make markets work for people, empowering people, achieving security and sustainability; however these groups are diverse and some are reactionary and racist (360)-

The IMF, World Bank and its controversy

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There is a lot more evidence to back up the achievements made by the IMF and World Bank. Nevertheless, these two global financial institutions face many criticisms from researchers, scholars, politicians and people around the world. Every year there are always massive protests against them, where they hold their annual summit. They criticize the IMF and World Bank for their unpopular policies and conditionality imposed on the poor, the failure of poverty reduction that they have promised, their slow intervention during economic crisis and their ignorance over the exploitations of TNCs in underdeveloped countries. The leadership structure of the IMF and the World Bank is believed to be unfair. This can be seen clearly by the dominance of the west and several powerful states that have political power and economic strength within both these institutions. The benefit was unequally distributed to member states. Although, the majority of members are from developing countries, these countries seem to have less of a voice in decision making in relation to the major policies because the quota and vote system depends on economic strength. The five main dominant states of this institution are the US, Japan, France, the UK and Germany who hold majority votes and the US is the only state to hold the power of veto. The management of this institution does not represent its beneficiaries as a whole and its low neutrality is foremost criticized. Why are these two international development spheres so controversial?

Firstly, we have to look at the leadership of the IMF and World Bank as described earlier. It would seem that these two international institutions were constructed to serve the interests of strategic regional powers which already have the most. The voices of the developing countries hardly reach the top levels of management. The US is mainly accused of having influence on policy and ideology. Sach has argued, in the Development Dictionary (1995) and Escobar in this early work (1984), that in the past 40 years of development is a direct continuation of the colonial project. The ideas of modernisation after World War II were built on the assumption that the rest of the world could follow the western example, and the US portrayed itself as the ‘ Beacon on the hill’ (Knut G Nustad (2001): 450).

Secondly, one needs to observe the operations of these internationals institutions and their applications in the real world. We need to address the affects of these policies set up for developing countries and the conditionality attached for the borrowing countries. This can be shown through the examples of Sub-saharan African countries who have accepted the structural adjustment policies of the IMF and the World Bank. The IMF and the World Bank believed that structural adjustment would help to solve the difficult problems faced during the crisis in the 1980s. But the results were not as positive as predicted. They have made the situation in these countries much more precarious. This dissatisfion is acknowledged even by the multilateral organization itself. The estimation made by Hewitt de Alcantara and Dharam Ghai illustrated that per capita income, in the region as a whole, declined by 30 per cent in the period of 1980-8. Even though this predicament is due in part to the civil wars that have raged in many African countries, their international economic environment, as arbitrated through SAPs and debt management policies, can be mainly attibuted for their failure (Hoogvelt 2001: 181-182).

In the book titled ‘ Unholy Trinity’ written by Richard Peet (2003) it is demonstrated that the conditionality attached with the loans, imposed on the governments during the crisis, in order to implement a set of economic policies, has proved to be a disastrous policy (Peet 2003:56-57). No matter what the context of the poor borrowing countries are, the IMF constantly calls for scale down of tariff barriers on imports, the removal of state subsidies, privatisation, deregulation, investment liberalisation and the creation of a friendly-market oriented economy. These policy changes are called for in order to encourage foreign investment which will, it is believed, create employment opportunities. By this means the country will open its door to a competitive global market which significantly increase economic growth. In this case, the question needs to be asked whether the IMF and World Bank implement its good will policies on behalf of poor’ interests or for the benefit of investors and private enterprises. Furthermore, some commercial banks rely on the IMF to expand their market loans and ensure that the loans are repaid.

The commercial banks and first world countries needed the IMF to guarantee debt repayment, and the IMF could do this by stabilisation and the structural adjustment measures imposed as conditions for loans ensured by the states. As a result, the benefits would be retained by the commercial banks whilst vulnerable Third world countries would be left with heavy debts (Peet 2003: 56-89).

Once again, the structural adjustment set by the World Bank in the 1980s was outreached to the African countries during the deteriorating situation. According to Brown (1995): most African countries were desperate for help to restore this worsening situation. The World Bank then offered its help, but only on the condition that individual states which were ready to adjust to the requirements of the international financial institutions (Barrate Brown 1995:65-67). The attachment of policy conditions anticipated that the country members would be on the right track towards good economic performance by opening up all economic activities. However this theory did not always work as expected. Too many requirements for the economic puppet countries to complete have left them exhausted. Bird, G (2001:6) points out that

The relationship between the Fund and client countries envisaged in the Articles of Agreement, two features of IMF programmes emerge by which they may be judged. Firstly, borrowing from the Fund should be a low frequent event. Countries should spend only relatively short periods of time under Fund programs and should not have a succession of them. Second, since conditionality is the mechanism through which the Fund seeks economic performance, it might be assumed that the programs have to be implemented and carried through to completion (Bird, G 2001:6).

Thirdly, another important aspect to view this controversy is the failure of the IFM and World Bank to compromise on its debt cancellation, in particular to the countries in crisis. Jeffrey Sachs (2005) tried to advise the IMF team to terminate its claim from Bolivia to resume the debt servicing after a year delay during the crisis and collapse of tin prices. The crisis had destroyed macroeconomic stability of Bolivia in 1985 (Sachs 2005: 99). He was surprised to see how reluctant the IMF mission chief was regarding the debt cancellation. Even though, they were aware that the resumption of debt servicing would lead Bolivia into a political crisis, the IMF team still thought that debt cancellation was unacceptable and such a programme would never be sent to the board for approval, saying that the Citibank would have a veto over an IMF policy on debt cancellation (Sachs 2005: 100). They argued that the making an exception for Bolivia to cancel its debt would set as a bad example for other larger debtors such as Argentina, Brazil and Mexico. Nonetheless, at the end of this furious advocacy and debate, the IMF cancelled the Bolivian debt. This, Sachs believed, might be due to their recognition that there was an excessive influence by the international banks on debt policy, and that this is needed to be reviewed (Sachs 2005: summary 99-101).

The role and the operation of the IMF and the World Bank since the beginning of the crisis in the 1980s

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The world economy in the 1980s was described as being in a depression. When many developing countries’ economies were in turmoil, essential steps were taken to prevent economic uncertainty by seeking financial assistance. The International Monetary Fund (IMF) and the World Bank then was a target for these demands. However, the appropriateness of the IMF’s policies in developing countries was the subject of fierce debate. Since then the turmoil and the controversy have intensified further (Killick 1984:The IMF and Stabilisation: Introduction and summary I).

During the early stages of its operation, both the IMF and the World Bank provided loans to countries that needed financial help for reconstruction after World War II and the newly independent countries from the colonies. The IMF provided funds to support these countries facing balance of payment difficulties while the World Bank granted loans for the reconstruction of infrastructure, power stations etc. In the 1970s and the 1980s the World Bank redirected its lending programme to promote education and health in most countries in need of funding. The IMF and the World Bank were progressively active in the 1980s during the debt crisis. To deal with this crisis many African countries decided to borrow money from the World Bank as well as governments from the west. The western commercial banks came to play a crucial role in providing loans to some developing countries such as Latin-America (The IFM and the World Bank: Trevor’s lecture Oct 2006).

The developing countries are the main clients of the IMF and World Bank. The IMF functions to assist any countries facing serious payment disequilibria by providing the support through stand-by arrangements. The fund could guarantee to its members that it would be able to borrow foreign exchange during their time of need. According to Sutton (1984): of the 114 new Stand-bys approved by the Fund in 1976/77- 1981/82, 108 were in the developing countries. Nonetheless, the relationship between the fund and its developing country members is not always an easy one. The main points of contention are the conditions attached to the use of some fund credits. The accessibility of the fund resources to a member depends on its quota to the fund, which equals up to 25% available without condition and the rest is subject to condition. The member states can also access the fund with low conditionality in the Compensatory Financing Facility, which is accessible through the core of the agreed programme, which comprises of a number of performance criteria. The appreciation to the continuation of the fund is qualified upon the progress in the fulfilment of the criteria imposed (Sutton 1984: 3-4).

Since the beginning of its existence, the US has influenced most of the initiations including policy and it has played a major role in convincing and lobbying others to agree on one common decision. The IMF itself seems to act as a mechanism which is able to transmit the US’ ideological and spirit across the globe. Kiely (2005) argues that the US has laid its political and economic spheres by the creation and the unification of itself into the International Institutions.

In the political sphere, the US would join the new United Nations, and in the economic sphere, there was to be commitment to (managed) free trade. For free trade to be advanced, there would have to be an internationally acceptable currency to pay for internationally traded goods. (Kiely 2005: 89)

However, the US has illustrated its good will which is committed to the improvement of developing countries. Firstly, the US engaged in pushing the colonial states to become independent by providing the political support and the technical and financial assistance through the provision of aid which is considered to be a vehicle for development and reconstruction (Kiely 2005). The generosity of US support together with the emergence of nationalist movements enabled many countries to gain independence. The fund was made available, on demand, for developing countries to reform their economies and resolve their payment deficit problems.

Despite the appreciation of this benevolence, one may never forget the underlying reasons behind this generosity which critics are always keen to point out. The US is an industrial country with huge commodity, productivities. The US needs to expand its market abroad in order to improve its economic performance and help US traders to increase their revenue. This is a one of the reasons why the US provides Marshall Aid to help less developing countries. Furthermore, the US was also deeply concerned about the threat from the spread of communism which would challenge its market’ extension (Kiely 2005:88-95).

In order to tackle the serious macroeconomic struggle, the IMF and World Bank created the structural adjustment programmes (SAPs). The IMF and World Bank use SAPs as a base for their lending to underdeveloped countries dealing with macroeconomic imbalance with certain conditions attached. The Structural Adjustment Programmes are both embraced and criticised from people with different perspectives. Woodward (1992) emphasises that SAPs are designed to enable the adjusting country to change the structure of its economy in order to meet the long-term needs of efficient utilisation of production and to insure sustainable economic development (Hoogvelt 2001). There is a belief that the adoption of the SAPs would create the necessary conditions for sustainable economic growth because it is a process of reshaping the Third World’s market to be more market-oriented economies which countries should undoubtedly follow. The capacity for the IMF and World Bank to assist developing countries is greater under the capitalist system. In Mexico, the IMF and World Bank had its role in the frontier of the crisis, while Mexico first declared a moratorium on its international debt payments (Hoogvelt 2001: 180). In the third world, the IMF and World Bank used the package of SAPs to persuade many developing countries to adopt free trade policies during the 1980.s This was for the purpose of promoting an open and free competitive market economy with less supervision from the nation states in the hope that these countries would help to facilitate economic growth and reduce poverty. Adrian Leftwich indicates that since 1980, the loans of structural adjustments increased sharply amongst the developing countries. Between 1980 and 1990, World Bank structural adjustment loans increases from 7 to 187 in sixty countries (Hoogvelt 2001: 181).

Mohan (2000: 24-26) provides evidence to show that the growth of SAPs is increasingly high between 1980- 1991. In the period between 1980-82 the average yearly value of adjustment loans was $190 million, rising to 468 million in the period of 1983-85; $124 million for 1986-88 and up to 10,025 million until 1991. (Structural Adjustment: Mohan, Brown, Milward and Williams 2000: 24-26).

Most newly independent states are actually the main actors of increasing the popularity of this international institution. During the colonial period, the colonial states were subservient to imperialist forces established to serve the interests of the colony. Since independence, most countries’ economies are unstable which led to the crisis in 1970s, in particular the oil crises, which pushed most counties into deep recession and initiated the debt crisis and the subsequent need for multilateral borrowing. (Mohan 2000: 4).

The structural adjustment programmes are thought to be a channel of development. The conditions attached are designed to encourage improved economic performance. It always requires the borrowers to adjust their economic structure such as the adaptation of free trade policies, the reduction of tariffs, deregulation, privatisation, market liberalisation and the elimination of any trade’s barriers to enable the countries to attract more foreign investments. This is possible only if the countries are strongly committed to the interests of their own people, as a whole. As Synge has observed, countries such as Kenya and the Ivory Coast have been successful in attracting the investment of multinational corporations and building up their agricultural exports. Others, such as Ghana and Zambia apprehended the revenues of exporters and channeled them into a multitude of government-owned import-substituting firms, whilst Nigeria’s faith in economic nationalism meant that the government controlled capital markets to subsidize investments by private businessman and local corporations, thereby promoting the formation of indigenous bourgeoisies (Mohan 2000: 5). This strategy can only truly work if individual governments are committed to change in the interest of their own people. Not all countries are willing to make the commitment, and some states use the false promise of conformity to the IMF and World Bank strategies simply to obtain aid and loans. According to Stiglitz (2002): the IMF has blamed the Asian nations’ institutions for being dishonest, rotten and breaking their promises, he believes the governments are corrupt both secretly and openly and that essential reforms are needed (Joseph Stiglitz 2002:90).
In most developing countries where agriculture is the only valuable asset in their economy, there is a necessity for foreign investment and exports. When there are vast investments in agriculture and rural infrastructure, this can significantly increase agricultural productivity. This has been a key turning point in the development of some Asian countries, who have used this increased productivity to increase their agricultural exports, using this as a mechanism for economic growth (Mohan 2000: 6). In contrast, strong intervention in the economic policies of some African countries led to the deficiency of investment in rural sectors which resulted in a decline in agricultural productivity and general poor economic performance.This in turn led to the fall in GNP for Sub- Saharan African states from US$200,080 million in 1980 to 156,313 million in 1990. This is in contrast to the GNP in other third world regions such as East Asia and the Pacific which rose from US$ 528,189 million to US$874,990 million, Latin America from US$690,342 million to US$1,057,666 million, Southeast Asia from US$220,757 million to US$374,433 million for the same period (Mohan 2000:6).

Even Stiglitz who is sceptical about world integration and describes the era of globalisation as a period of dissatisfaction, has pointed out some positive outcomes the global force has produced through free international trade. What we can see now is far better than the world centuries ago. Is this not the result produced by the effort of these international institutions? When international trade helps economic development, country’s exports greatly assist with economic growth. This is evidently proved by the economic growth seen in Asia where the standard of living of people is considerably higher than it was in the past. The movement of new technology and knowledge left the world less isolated (Joseph Stiglitz 2002: 3-7). People seem to enjoy working in the transnational corporations where benefits are much better than working in the agricultural sector. Even though people in developed countries obviously see some exploitation such as human rights abuse and cheap labour, they still accept it as an opportunity for growth and they embrace this development.
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How and Why the IMF and the World Bank have come to play an increasingly important role in the third World since the 1980s

2007-11-23T06:24:00.000-08:00

In the period during World War II most countries took part in the war and countries affected by the war were under internal pressure to stall their economic growth. Most countries were unable to stabilise their economies. Kiely (2005) describes the world economy between the wars as having a characteristic of depression, a breakdown in world trade, and competitive currency devaluation (Kiely 2005: 88). After the war there was an international effort to avoid its repetition. That was the settlement of international institutions to bring countries across the globe, particularly the major players of the economic sphere, to work closely together in the hope that the world economy would be more secure.

This intention, as a result, brought some countries to the meeting in Bretton Woods, the United States, to discuss crucial issues and how the world can work together in order to tackle the enormous consequences and problems brought by the war and find an effective solution which can provide for a more protected post- war era. As a result of the meeting, in 1944, an agreement was made to create the International Monetary Fund (IMF). The World Bank was also established (IMF’s Website, 2006) in the same year.

This essay will discuss how and why the IMF and World Bank have come to play such an important role in economic development since the 1980s. The controversy regarding the policy, sub-institutions and the conditions attached to the developing countries will be argued from different perspectives. The debate over the criticism will also be illustrated. During the lifetime of these two international institutions, there have been satisfactory successes in reconstructing and developing countries after the wars and the effort to alleviate poverty in the impoverished countries. Nevertheless, there are a lot flaws that sceptics advise them to reform without any hesitation, including the structure of the board, the policies and the conditions which they have set on behalf of the poor.

The International Monetary Fund (IMF):
The IMF was created in July 1944 by the formation of 45 governments in Bretton Woods, New Hampshire, in the northern United States. Member states initiated an agreement on International Economic Cooperation and set up a framework to prevent the re-emergence of the devastating economic policy that led to the economic depression in the 1930s (What is the IFM: 2006). Since 1945 to 2005 the IMF’s membership has gradually grown, voluntarily joined by the states of former colonies, the former Soviet bloc, Latin American and Asia. According to the IMF website, today the IMF has expanded its membership to 184 countries until June 2006 (IFM, 2006).

The World Bank:
At the same time as the establishment of the IMF, the World Bank was created and it currently has the same number of country members. However, the World Bank has different mandates from the IMF. The World Bank claims itself to be an international agency that was established for the purpose of reconstruction and development in the post-war era and its loans were first provided to the European countries and Japan. Then by the early 1960s, the World Bank had redirected its lending to the newly independent and emerging nations of Africa, Asia, Latin America and the Middle East and the transition counties of Central and Eastern Europe in the 1990s (IFM: 2006). Since its mission has been broadened, the overarching goal of its work is poverty alleviation along with debt release, good governance and the lending project (World Bank: 2006).

Structure:
There are lots of criticisms over the formulation of the IMF and World Bank’s structure and the question still remains, who really drives the IMF and World Bank and do the policies set by the IMF and World Bank favour the interest of the developing members or the foreign investments. In the theory its member countries, through the board of the governors, who is from each member country, govern the IMF and the World Bank. This board meets annually to decide on major policies and provides the power to the executive board or executive director to operate. The executive board and executive director are responsible for the day-to-day work and recruit staff internationally (Who runs the IMF: 11). The World Bank and the IMF work very closely together and cooperatively set-up guidelines to run its process and both complement each other’s work. The World Bank focuses on long-term development and poverty reduction, while the IMF’s concern is on macroeconomic and financial issues (IMF: 2006). Under the Articles of Agreement of International Bank for Reconstruction and Development (IBRD), to become a member of the Bank a country must first join the International Monetary Fund (IMF) (World Bank: 2006).

The IMF’s voting system is considered as a non-democratic one as its member countries’ quotas and votes are based on its economic strength. According to Peet, R (2003), the IMF has five major shareholders who politically and economically influence on the framework of the IMF (Peet, R, 2003: 57-60). The US holds 17% of the votes and has veto power while Japan and Germany have 7%, France and the UK have 5% along with China, Russia and Saudi Arabia. The rest has less than 30% of the vote and the west controls 62% of the total vote. Despite this, there is an attempt by China, Mexico, RoK and Turkey for the reformation of the structure of the IMF, in an attempt to increase quotas. However, the west still has a 57% majority vote (IFM and World Bank: Trevor’s lecture: Oct 2006). The purpose of the IMF and the World Bank:

The purposes of the International Monetary Fund are:
(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.(ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
(v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
(vi) (From IFM’s website )In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article (The IMF: Article I).

The mission of World Bank:The mission of the World Bank is to help developing countries and their people reach the goals by working with our partners to alleviate poverty. To do that we concentrate on building the climate for investment, jobs and sustainable growth, so that economies will grow, and by investing in and empowering poor people to participate in development (World Bank: Challenge).