In 1944 delegates from 45 countries met in Bretton Woods, USA, to discuss ways to prevent the economic and financial problems of the 1920s and 1930s from happening again. It was decided to found the International Monetary Fund to guarantee a stable monetary system and the World Bank to help to rebuild Europe after World War II.

The intention was also to create/establish an organization involved with international trade, the International Trade Organization (ITO). However, this did not happen. Instead, countries negotiated regularly from 1947 onwards in the name of the General Agreement on Tariffs and Trade (GATT).

International Monetary Fund

The goal of the International Monetary Fund (IMF) is to guarantee a stable international monetary system. To achieve this the IMF gives financial support to its members that have balance of payment problems. All of its members, also the rich countries, can apply for this kind of support. In order to get this support a country has to formulate a programme to prevent the same problems from happening again in the future. Another important task of the IMF is monitoring economic policies of its members. Twice every year the IMF gives her judgement as well as recommendations regarding the economic policy of every one of its members.

The most important source of capital for the IMF is the quotas of its members. Every member is given a quota that is based on the size of that country's economy. Accordingly, the richer a country the bigger its quota. These quotas are also the basis, amongst other things, for the voting power of a country. Consequently, it is the rich countries that decide what the IMF's policy will be. For example, the USA, the biggest economy in the world, has more than 17% of the votes, while developing countries have almost nothing to say about IMF's policy.

World Bank

At the time of the founding of the World Bank its aim was to finance the rebuilding of post war Europe. Over the years its focus has moved towards developing countries. Nowadays the World Bank's goal is to assist in the economic and social development of developing countries.

Criticism of the World Bank and the IMF

Criticism of the World Bank and the IMF encompasses a whole range of issues. Although there is a big difference between the two regarding their openness and responsiveness to criticism, whereby the World Bank is a lot more willing to listen and cooperate, as twin Bretton Woods institutions they cooperate on major issues like the debt problem. Consequently, most points of criticism go for both of them.

Firstly, the guiding principles behind World Bank and IMF policies are those of neoliberal economics, ie the idea that free world markets for goods, services and capital will bring the greatest economic growth and that economic growth will bring prosperity to the majority of the people. This neoliberal policy is forced upon developing countries through structural adjustment policies (SAPs). SAPs usually mean a reduction in government spending, devaluation of currency, trade liberalization, removal of price controls and subsidies, privatization of state companies.

A reduction in government spending usually means less spending on health and education, leading to higher user fees and reduced access to these services for the poor. Especially women are affected by this, since a cut in government spending on education and health often means a heavier work load for them.

Devaluation is meant to stimulate exports because it lowers the price of export products. However, as this strategy is applied to a large group of countries that produce similar products, in effect it stimulates countries to produce more for a market that is already satisfied. Moreover, devaluation leads to higher import prices. Since imports often make up a large part of developing countries' economies, this can be harmful for them.

Trade liberalization often harms small producers and farmers since they are not able to compete on the world market, especially not with often heavily subsidized agricultural products from developed countries.

These measures generally increase inequality between the poor and the rich. Whereas the rich are able to profit from liberalization, the poor have difficulties facing increased competition and are adversely affected by reduced social sector spending and food subsidies.

Moreover, reducing the role of the government in economic life in general means that the government is less capable of protecting people and their environment. Many infra-structural projects financed by the World Bank have social and environmental implications for the populations in the affected areas. For example, World Bank-funded construction of hydroelectric dams in various countries, have resulted in the displacement of indigenous peoples of the area.

Secondly, most developing countries hold little voting power in both institutions and therefore have little say in the policies that affects them the most. Decisions are made and policies implemented by leading industrialized countries - the G7 - because they represent the largest donors. Many developing countries are completely dependent on the World Bank and the IMF for capital since other parties are often unwilling to provide them with funds because of their enormous debt burdens. These developing countries therefore have no other choice but to accept the conditions attached to World Bank and IMF loans. As a result, the governments of the developing countries are forced to implement neoliberal policies, which often go much further than the policies of the developed countries.

World Trade Organization

The World Trade Organization (WTO) is the successor of the General Agreement on Tariffs and Trade (GATT). Between 1947 and 1994 eight negotiation rounds were organized in which countries negotiated on lowering tariffs and other trade barriers. During the GATT Uruguay Round, which started in 1986, it was decided that is was time to supplant the GATT with a real trade organization. This happened on January 1 1995, when the WTO started work.

Responsibilities of the WTO include:

the implementation and control of agreements on trade in goods and services, and intellectual property rights;
facilitating negotiations on international trade;
settling disputes regarding agreements reached during the Uruguay Round.

The highest decision-making body within the WTO is the ministerial conference, which meets every two years. At the ministerial conference in Seattle in 1999, it was tried to come to an agreement on a new negotiation round. Due to the big difference in opinion between the developed and the developing countries, this did not happen.

After the debacle in Seattle the developed countries were more prepared to meet the demands of developing countries and in November 2001 at the ministerial conference in Doha (Qatar) the delegates managed to agree on a new round of negotiations on world trade. On some topics negotiations started straight away, on other topics negotiations will start after the next Ministerial Conference in 2003. The whole negotiation round should be completed in 2005. It was emphasized that this new round should be aimed at sustainable development and that the concerns of developing countries should play a more important role in this new round of negotiations than in previous ones. An important issue for the developing countries is the link between environment and labour conditions and trade, because this is often misused by developed countries to bar products from third world-countries who are not (yet) able to meet these standards. However, according to critics it remains to be seen whether the western countries will really take into consideration the concerns of developing countries.

It is estimated that protectionist measures of western countries, particularly regarding agriculture and textile, cost the developing countries USD 200 billion a year. Protectionist measures include:

subsidies on products to lower the price of the product;
non-tariff barriers such as conditions on food safety or environmental standards.

Another point of concern is intellectual property rights. First of all there is the concern that intellectual property rights make products too expensive for people in the developing world. This point is especially raised in relation to HIV/Aids medicines. Another point of concern is the link between the agreement on trade-related aspects of intellectual property rights (TRIPS) and the convention on biological diversity. Several natural products used as medicines in the developing countries are now patented. Due to high prices they have become too expensive for the traditional users of these products.

Other points of criticism on the WTO are that developing countries have little say in the negotiations. Agreements are reached by consensus, and this means that a lot of pre-negotiations between different groups of countries take place before an actual agreement is reached. Developing countries, especially the smaller ones, often do not take part in these pre-negotiations, either because they are not invited, or because they do not have the required knowledge and manpower to effectively defend their interests.

Debt crisis

Background

The debt crisis is the interplay of different forces. At the beginning of the 1970s western banks had huge sums of dollars at their deposit from oil-producing countries. These banks wanted to earn revenue on these sums and were looking for profitable lending opportunities. These they found in third world countries.

In 1973 the oil producing countries raised oil prices. This led to decreasing growth in the world economy and world trade. Export income for many countries, among which developing countries, started to decline. Moreover, for countries that had to import oil, increased oil prices also meant a rise in import expenditures. A lot of third world countries, whose economies were doing well but who wanted money to maintain development and meet the rising costs of oil, started to lent money from western banks. Banks lent lavishly and without much thought about how the money would be used or whether the recipients had the capacity to repay. third world governments, on their part, were pleased to take advantage of loans at very low interest rates - below the rate of inflation.

Although most countries intended to use the money to improve standards of living in their countries, in the end, little of the money borrowed benefited the poor. About a fifth of it was used to buy arms, often by oppressive regimes. Many governments started large-scale development projects, some of which proved of little value. All too often the money found its way into private bank accounts.

At the beginning of the 1980s, interest rates in the US began to rise. Also the dollar increased in value. Many loans had a variable interest rate, a short maturity and had to be paid back in dollars. This meant that countries had to pay more and more on their loans. This often meant countries had to borrow even more money just to pay off the interest.

In 1982 Mexico told its creditors it could not repay its debts. The ensuing debt crisis had two consequences. First of all, the whole international credit system was threatened. Banks ran the risk of going bankrupt which would lead to the bankruptcy of other banks. Secondly, this formed a threat to the economic development of the poor countries.

In the first years after 1982 most efforts were aimed at preventing the international financial system from collapsing. The IMF played a leading role in this. As a condition for a rescheduling of their debts the IMF asked governments to impose very strict economic programmes on their countries. These programmes were called structural adjustment programmes (SAPs).

SAPs consist of measures designed to help a country repay its debts by earning more hard currency - increasing exports and decreasing imports. Governments implementing SAPs usually have to:

spend less on health, education and social services, which often means people have to pay for these services;
devalue their national currency in order to make the goods they export more attractive. In practice this often means export earnings are lowered while import expenditures are increased;
cut back on food subsidies, which often means these goods become (too) expensive for the poor;
cut jobs and wages for workers in government industries and services;
encourage privatization of public industries, including sale to foreign investors.

In a few countries SAPs appear to have had some good effect. However, in most they have worsened the economic situation, but because for most developing countries other sources of borrowing money have gone (commercial banks will not lend them any money anymore), they do not have any other choice than to agree with IMF's conditions.

In the mean time banks increased their reserves for non-repaid debts and by 1985 it became clear that a collapse of the international banking system had been prevented. However, most developing countries at that time still had huge debts. The World Bank and IMF, with their preferred creditor status, insisted that their payments be met. Countries were forced to take out new loans and divert aid from governments just to pay off the interest on old debt. Their debts increased even further.

In 1970 the developing countries had debts amounting to USD 63 billion. By 1980 this had increased to USD 587 billion. After that it further increased to USD 1460 billion in 1990 and USD 2528 billion in 2000. Every year developing countries pay more than USD 350 billion in debt service. Debt repayments make up over 50% of government expenditure in many of the poorest countries in Africa and Latin America, and have dwarfed spending on health and education. Moreover, these debts hamper economic development, since governments do not have the money to make the necessary investments.

The HIPC initiative

In 1996 the IMF and the World Bank launched the HIPC initiative. It is an attempt to reduce the external debt of world's poorest countries with the heaviest debt burdens, the "heavily indebted poor countries", or HIPCs. HIPCs are low income-countries with an unsustainable debt, meaning debt-to-export levels are higher than 150%. At this moment there are 42 HIPCs, 34 of them located in Africa.

To apply for debt relief under the HIPC initiative, countries have to prepare and implement a Poverty Reduction Strategy Paper (PRSP). In a PRSP countries have to lay down how they want to reduce poverty in their country. In the development of a PRSP government should cooperate with, amongst others, civil society. The idea is that the poor should have a say in the measures taken to fight poverty.

Criticism and proposals

Although the HIPC initiative has been welcomed by many parties, there also remains criticism on the way the debt crisis is handled. Firstly, there should be more debt relief. A lot of countries with high debts do not apply for the HIPC initiative. Moreover, even those countries that do apply and go through the procedures, will not all end up with a debt that can be labelled sustainable.

Secondly, there is criticism on the PRSPs. Countries have to complete a PRSP before they are eligible for debt relief. However, implementing a PRSP means, for a lot of countries, accruing more debt. Another point of critic on the PRSPs is that, although the idea behind the PRSPs was that civil society would be involved in the design, this is often not the case. Moreover, it is also questioned whether the PRSPs are really government owned, as they were meant to be, since the World Bank and the IMF still have to approve the plan.

Other points of criticism are that 20% of all debts are the result of loans to corrupt regimes. A large amount of the money lent went to private bank accounts, mostly in western countries. Creditors should admit that they are partly to blame for this and help in finding a solution for these so-called illegitimate debts.

Also, it is the rich countries that decide in the process of debt relief. Countries with debt have little choice but to submit to the demands of creditor countries.

Lastly, there is criticism on export credit insurance guaranteed by the governments of exporting countries. Exports to poor countries can be insured, so that in case the customer does not pay the exporter still gets his money. The aim of these insurances is to promote export. When the insurance has to be paid (because a customer does not pay) the government of the exporting country can decide to deduct the amount from the development budget for the country in which the customer is based.

Speculative capital

Every day USD 1.8 to USD 2 trillion (a trillion is 1,000 billion) changes hands on global foreign exchange markets. This is more or less fifty times the total worth of goods and services produced per day in the industrial countries combined. Only a very small part, less than 5%, of global trade in foreign exchange is related to goods and services. The rest is of a speculative nature, buying and selling money for profit's sake. To maximize profits large sums of money change hands a few times a day.

The foreign exchange trade relies on currency exchange fluctuations. Only when exchange rates fluctuate, traders in the currency markets can make a profit. Therefore big traders not only bet on fluctuations but also try to influence exchange rates. This can result in basically healthy economies collapsing over a very short time frame. When this happens it is the poor who suffer the most. Estimates suggest that in the first few months of the Asian currency crisis more than 10 million people lost their jobs. Millions more have been affected in the aftermath - pushed into poverty and debt. Governments have had to divert resources from social programmes to prop up their currency.

In 1972 the American economist and Nobel laureate James Tobin proposed a small tax of 0.1 to 0.25% on currency trades across borders. This Tobin Tax can be enacted domestically by national legislatures, but will require multilateral cooperation to be effectively enforced.

Marginally increasing the cost of trading in currencies would make this trade a lot less interesting. Because the profit margins in currency trading are small, huge sums of money are needed to make this trade interesting. A small tax would therefore minimize the profit and could stop a lot of the damage that short-term money causes to poor economies.

On the other hand, because the tax would be so small, it would hardly affect regular currency transactions, that are made to purchase currency for trade in goods and services, investments and holidays abroad.

Another benefit of the Tobin Tax that is often mentioned, is the amount of money it would raise, which could be used to fight poverty. Estimates range from USD 50 to USD 300 billion. Others, including Mr Tobin himself, mention that if the Tobin Tax would be successful in bringing back the size of trade in foreign currency, there logically would be a much smaller amount to tax. Consequently, if the Tobin Tax would be successful, the amount raised would be much smaller than the estimated USD 50 to USD 300 billion.

A second, more recent, proposal comes from Paul Spahn, professor at Frankfurt University. He proposes a two-layer system. To generate income there will be a minimal tax of 0.001% on all foreign exchange transactions. This would not lead to a significant reduction in currency trade, but would raise USD 5 to 20 billion a year in tax revenue. Besides this small tariff, there will be a second, much higher tariff, which would apply in times of excessive currency volatility suggesting speculative transactions.

One of the main points of criticism against this tax is that it only makes sense if it is implemented in all countries, or at least by the US, Japan and the EU. Spahn argues that the implementation in one time zone would be enough. Thus the implementation of the tax by for instance the EU together with the Swiss Franc would be feasible.

Corruption and money laundering

Corruption

Corruption is mostly defined as the abuse of public office for private gain.

Corruption has a lot of consequences that can be detrimental to economies. First of all corruption undermines the rule of law and harms the reputation of, and trust in the state.

Secondly, corruption increases public investment while decreasing its quality and productivity. To make things worse, corruption tends to discourage investments in operation or maintenance, further undermining the quality and sustainability of the initial investment.

Thirdly, corruption dampens economic growth through many channels. It reduces government revenue, therefore limiting the state's capability of investing in education, health, infrastructure, harming the country's social and economic development. A large portion of how corruption hampers growth, however, is through its deterring effect on private investment because it increases the uncertainty of doing business. Levels of investment, both, foreign and domestic depend on the quality of the business environment of a country. The business environment among others is a function of the rule of law, in particular the stability of rules and regulations governing business transactions, political stability and transparency.

The harmful effects of corruption are especially severe on the poor. Directly, since it is the poor who rely most on the provision of public services (whose price is increased and quality lowered by corruption) and who are least capable of paying the extra costs associated with bribery and fraud. Indirectly, because corruption has implications for a country's ability to attract investment, for the effectiveness of its institutions, for income generation through taxation and hence in the end for economic growth and poverty alleviation.

In short, it increases wealth for the few at the expense of society as a whole, leaving the poor suffering the harshest consequences.

Awareness is growing about the detrimental effects of corruption. More and more steps are therefore undertaken at all levels to fight corruption. AnCorR Web is the OECD's anti-corruption ring online: "a comprehensive world wide information resource on corruption and bribery".

Money laundering

Money laundering and corruption are closely intertwined. Money laundering is the process whereby the illegal origins of money are hidden and the money is made to appear earned in a legal way. This money can be made through drugs and weapons trafficking, prostitution but also corruption.

Due to the fact that money laundering is an illicit activity it is of course not known how much money is involved. Nevertheless, the IMF estimates that it would be somewhere in between 2 and 5% of global Gross Domestic Product. For 1996 this would amount to something between USD 590 billion and USD1.5 trillion.

The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.

The economic and political influence of criminal organizations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society. Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generated it and enables criminal activity to continue.

In response to mounting concern over money laundering, the financial action taskforce on money laundering (FATF) was established by the G7 summit in Paris in 1989 to develop a coordinated international response. Members of the FATF include 29 countries. Its secretariat is housed by the OECD. One of the first measures taken by the FATF was the development of forty recommendations which set out the measures national governments should take to implement effective anti-money-laundering programmes and have come to be recognized as the international standard for anti-money-laundering programmes. The FATF publicizes names of tax havens whose conduct is deemed non-cooperative in the international fight against money laundering and who are threatened with international sanctions if they do not take action.

Moreover, international organizations, such as the UN have taken steps to address the problem. Following the creation of the FATF, regional groupings such as the EU and the Organization of American States have established anti-money-laundering standards for their member countries.

Capital flight, tax havens and offshore financial centres

Capital flight

Capital flight is the movement of large sums of money from one country to another to escape political or economic turmoil or to seek higher rates of return. For example, periods of high inflation or political revolution have brought about an exodus of capital from Latin America to countries that are seen as a safe haven, such as the United States.

It is difficult to measure offshore holdings, but estimates have been made. The IMF estimates that citizens of developing countries amassed about USD 250 billion worth of foreign assets between 1975 and 1985, compared to a total foreign debt of these countries of about USD 800 billion. It is especially Africa that has a large proportion of wealth held overseas.

Notwithstanding definitional problems, there is ample evidence that the amount of capital flight is significant. Between 1982 and 1991, capital flight from severely indebted, low-income countries in sub-Saharan Africa was about USD 22 billion. For Africa the average capital flight/debt ratio was over 40%, but much higher for some countries (94.5% for Nigeria, 94.3% for Rwanda, 74.4% for Kenya and 60.5% for Sudan). In relation to GDP, capital flight was estimated as high as 133% for Nigeria, 102% for Sudan and 58% for Kenya, respectively.

Capital flight has some very negative consequences. Firstly, any amount of money sent abroad cannot contribute to domestic investment. Capital flight means less domestic saving and therefore less money to make domestic investments. In African countries the level of investment on average is lower than in other developing countries. Besides an underdeveloped financial system and unstable macro-economic and political circumstances, this is due to a lack of domestic savings.

Secondly, income and wealth held abroad often is not taxed. Thus, potential government revenue is reduced. Thirdly, income distribution is negatively affected by capital flight since it is mostly the rich who are able to ship their savings abroad, not the poor. When a shortage in funds leads to a devaluation, this effect is strengthened.

What to do to stop capital flight? The best way to do this is to deal with its causes. There are various causes. Economic causes include macroeconomic policy errors that cause inflation and exchange rate misalignment (generally currency overvaluation), financial sector constraints and/or repression, fiscal deficits. Corruption is another cause of capital flight. Corrupt government officials for instance transfer illegally acquired assets to accounts abroad. In the case of Africa most of the capital flight appears to have originated from illicit diversion of public funds, rather than to have been constituted by business incomes seeking economic stability to high yields abroad. Other factors that could diminish the amount of capital flight include greater political stability and effective property rights.

Another measure could be capital controls. However, imposing controls during or just after a capital flight episode can have an adverse effect since controls further reduce confidence in local financial markets and make capital that has flown less likely to return. Capital controls encourage black markets for foreign currency and other costly methods of evasion. Even the most draconian measures to limit capital flight often fail. Capital flight from the Weimar Republic continued in 1931, despite the fact that capital expatriation was made an offence punishable by death.

Another strategy that governments can use to limit capital flight is to make holding domestic currency more attractive by keeping it undervalued relative to other currencies or by keeping local interest rates high. The drawback to this approach is that raising interest rates and making imported equipment more expensive can reduce domestic investment.

Another option is to reduce the tax benefits of capital flight by having rich and poor countries adopt new tax treaties and exchange data on income paid to foreigners.

Tax havens and offshore financial centres

A tax haven, or offshore financial centre, is a jurisdiction with a relatively favourable economic and financial regime. Because of low tax rates, lenient regulation, special facilities or secrecy such a centre attracts many funds from overseas. As long as regulations are applied and monitored, this need not be a problem. However, the danger lies with offshore centres that are lax with international regulations and launder criminal funds. Tax havens include well-known havens such as the Bahamas, the Cayman Islands and Monaco, but also lesser known ones such as the Netherlands.

Estimates are that USD 5,000 billion runs through tax havens of which USD 500 billion is of questionable origin.

There are a number of negative aspects related to tax havens. First of all, they offer companies and (mostly wealthy) individuals the opportunity to evade taxes. This means governments have less money to invest. This can be detrimental especially for developing countries. A second negative point is that some tax havens offer the opportunity to launder money from criminal activities, for instance corruption, illegal weapons or diamonds trade, drugs trafficking. It is estimated that during the Abacha regime in Nigeria USD 55 billion of government funds was transferred to foreign bank accounts. A third aspect, and one that worries rich countries the most, is financial instability. Due to the secrecy related to offshore activities, it is often difficult to trace the flows of funds. Related to the fact that huge sums of money are involved, this might cause financial instability. The Financial Stability Forum (FSF), founded by the G7 in 1999, deals with financial stability.

Financing for development

In September 2000 the general assembly of the UN adopted the Millennium Declaration, with eight goals regarding development that should be met by the year 2015. The most important of these goals is to halve world poverty by the year 2015. According to World Bank calculations an estimated extra USD 50 billion is needed annually to achieve this goal. This would mean a doubling of the present global budget for developmental aid.

From March 18 to 22 2002 an international conference on financing for development was held in Monterrey, Mexico. During this conference ways were discussed to finance the millennium goals. Besides generating money, another aim of the summit was to achieve other ways of cooperation between the north and the south, in which ownership of the developing countries would be important.

At the conference issues relating to the mobilization of domestic and foreign financial resources, trade, official developmental aid, debts and the international monetary, financial and trade system were discussed.

Mobilizing domestic financial resources

The bulk of a country's development capital comes from within its own borders. Effective legal institutions, systems of taxation, public administration, and financial infrastructure are required for public and private funds to be mobilized and deployed efficiently so as to enhance social and economic advancement.

Mobilizing foreign direct investment and other private inflows

In addition to domestic resources, most developing countries need to tap foreign capital to meet key investment needs. Increasingly, this means attracting private finance from abroad, such as foreign direct investment, portfolio investment and bank loans. A key challenge is to increase the magnitude and broaden the reach of these flows, while at the same time containing their volatility.

International trade

Trade can be a major channel to promote economic growth and thereby eradicate poverty. However, many developing countries have so far received only meagre benefits from opening up their economies. Products from developing countries are often banned on the markets of the rich countries. Moreover, the western countries often dump their overproduction with subsidy on the markets of developing countries. This costs the developing countries billions of dollars.

Official development assistance (ODA)

Over the years ODA has declined. However, it remains essential for the development of many low-income countries. In 1970 the developed countries agreed to spend 0.7% of their gross domestic product on ODA. So far only five countries manage to achieve this: Denmark, Luxembourg, The Netherlands, Norway and Sweden. In 2000 the EU reached a figure of 0.33% of GDP. If the rich countries would hold to their promise there would be USD 100 billion extra a year (double the amount needed to reach the millennium goals).

Debt relief

Although a significant step has been taken with the HIPC initiative, heavy debt burdens continue to stunt development in many developing countries. More has to be done to solve the present debt problems and to prevent developing countries from falling into the debt trap again.

International monetary, financial and trading systems

The severity and increasing frequency of financial crises since the founding of the Bretton Woods system have led to calls for reform to the international financial architecture. One challenge is to find ways to strengthen developing countries' participation in the internationals economic process. The other is to increase coherence among the key institutions in the areas of international finance, money, trade and development. In this regard the UN should be able to play a more effective role in the international economic arena.

Results

Before the conference there was already agreement on the concluding resolution. The most remarkable result of the conference was that the USA declared to increase its ODA. However, critics state that even then the ODA of the USA stays way below the agreed upon 0.7% (in 2001 ODA from the USA was 0.1% of GDP). Moreover, it is feared that the USA will make ODA an important aspect in its battle against terrorism.