The world bank and the International Monetary Fund are two international organisations that
receive a fair bit of criticism for being overly powerful empires used by the wealthy
and influential to squash poor and developing nations.
And as we will explore a lot of this criticism isn’t entirely unfair either.
But part of the problem stems from the average individual not knowing what the world bank
is and what they do, which means at best they only hear about the issues that make headlines,
or at worst they don’t hear anything about it and go grr, banks are bad, so a bank for
the entire world must be the biggest baddest bank of all.
And as we have said, they might not be wrong, but before we get the pitchforks out it’s
time to learn how money works, and thoroughly investigate what these institutions do, what
they are supposed to do, and why everybody seams to be angry at them all the time.
If you enjoy this video please consider liking and subscribing.
Ok so they world bank and the international monetary fund are often confused for one another,
and in fairness they are similar in a lot of ways.
Both of them were started as financial arms of the United nations in the mid 1940’s
as a response to the financial factors the led to world war 2.
They are also both something that most people won’t have anything to with in their day
to day lives, unless they were to become a very senior politician or bureaucrat.
But here is the general breakdown.
Both of these institutions exists to facilitate a healthy world economy because it became
obvious to most nations that the best way to maintain peace and prosperity in their
own country was to ensure that neighbouring countries and potential trading partners with
also peaceful and prosperous.
Now the world bank achieves this by providing very cheap finance to low and middle income
countries.
The bank will write loans to places like developing African or Asian nations in the hope that
this money can be used to purchase infrastructure and technology to make the transition from
a poor country dependent on farming, to a wealthy economy fuelled by manufacturing.
This is great in theory because sometimes the hardest part of growing a strong industrial
sector is getting the initial capital needed to get the ball rolling, but there are some
problems.
The first big one is corruption.
To speak… candidly… the leaders of these low and middle income countries have been
known to take a bribe or two.
Sometimes there is no guarantee that this money will be put towards productive purposes
like building shipping ports and electric grids, and even if it is, the contracts to
do so will be given to whoever offers the biggest bribe, rather than whoever presents
the most competitive proposal.
For this reason the world bank has introduced far more stringent controls on loaned money
in recent years, which leads us on to a different problem.
By dictating how this money can be spent and who it can be spent the borrowing nations
give up a fair bit of their autonomy when taking out these loans.
It’s like making a deal with the devil.
Your country gets the money that it needs to pull itself out of poverty, but it’s
going to be done in the way that the world bank dictates.
Now the logical follow up question to this is, who is it that dictates the world bank?
The answer is the people who provide it with funding, or more specifically the nations
that provide it with funding.
Given that more prosperous and industrious countries tend to be good for the entire global
economy the member nations of the UN have agreed to provide funding to this organisation.
But their influence over the decisions of the world bank are directly proportional to
how much money they provide, so a nation like the USA has much more influence over the policies
of the world bank than say a nation like Mali.
This obviously becomes a very powerful tool for geo-politics and while the bank does try
to maintain a level of independence and autonomy, they are ultimately beholden to the governments
that write their checks.
This give and take relationship extends beyond just influencing who gets how much funding
and under what conditions as well.
You see while the core responsibility of the world bank might sound very noble, it is not
a charity, and they are not shy about letting people know that.
They also have a responsibility to generate returns for their investors, the member nations
of the organisation.
Now given that they charge zero percent interest to risky up and coming nations with a high
risk of default these returns are always negative, the US for example expects to get back about
80c of every dollar they put into the fun, but something is still better than nothing.
This money can in turn be reinvested and reinvested again and again so more good can be done with
the same initial investment.
But this multiplying effect doesn’t work if the money does not get repaid.
That means that the world bank is often in the unfortunate position of being a debt collector,
which is not a great look on the global stage when you are collecting debts from poor and
starving nations that may or may not have asked for the loans in the first place.
This really is a difficult problem, if these loans never get repaid, then not as much good
could be done with reinvested funds, and contributing nations would be less likely to invest in
the first place.
On the other hand, demanding debt repayments can end up doing more hard than good to the
poor and struggling countries.
Now so far all of these concerns could theoretically be alleviated with careful management, but
there is one other key point of controversy that put’s the world bank in the crosshairs
of public distain.
One of the largest receipients of the world banks foreign development loans is China.
Now I don’t know if you guys have noticed, but china is f____g loaded.
While their citizens might not yet enjoy the same standard of living us people in the west,
the government is unbelievably wealthy and can really raise all the money it could ever
possibly need for it’s extensive infrastructure projects without the help of the World Bank.
But…
Because china is still technically classed as a “developing country”, it can still
access these funds for certain uses, what’s more is that given how large china’s population
is and how good they are at working this system, they are the largest beneficiaries of the
world banks zero interest loans.
Where a regular nation like lets say Germany would have to issue government bonds and pay
interest, China has been able to basically get away with using the world bank like a
giantzero interest credit card.
Great for them, but a bit concerning to other stakeholders who were promised that their
money would be going towards up and coming economies rather than the worlds second largest
one.
Now a lot of these same criticisms are true for the International Monetary Fund, but for
slightly different reasons.
You see where the world bank is responsible for lending money to promising nations in
need of a kick start, the international monetary fund serves two slightly different roles.
The first is to consult with member nations and provide advice on key economic developments,
this role becomes especially important for nations in crisis.
The idea is that this organisation can leverage the experience of respected global economists
to ease issues before they have the chance to spread from nation to nation, something
that is increasingly likely to happen in our globalised world.
Nations like Haiti received advice from the international monetary fund following the
devastating earthquake that rocked the nation in 2010.
The idea of this advice is that most countries will hopefully only have to deal with event’s
like this once in a generation, so it is unlikely they will have financial experts with experience
in these types of situations on call.
Instead by having a team at the IMF who gives advice on all similar tragedies to a host
of different countries around the world, they can be guaranteed that they are been given
advice that has been tried and tested.
Now this of course extends to more than just disaster recovery plan, the IMF has been known
to mediate trade disputes, assist with foreign exchange developments and provide frameworks
for trade deals.
All very helpful stuff especially when dealing with issues as complicated as these, that
also have repercussion that could literally throw the world into a recession.
This advisory role is actually the primary directive of the international monetary fund,
but it’s not what makes the headlines, instead it’s second responsibility is what get’s
all the attention.
Being a lender of last resort.
The IMF will lend money to distressed nations to give them the capital they need to alleviate
any domestic financial issues before those same issues have a chance to spread amongst
neighbouring countries or trade partners.
Again the world is an increasingly interconnected place and sometimes it is better to write
a risky loan to a country to put out an economic fire before it has the chance to spread.
Now you might say, well isn’t this just what the world bank does?
And while it is very similar, and for what it’s worth the two entities raise money
in a similar way as well, the difference is who is getting these loans.
The world bank gives loans to poor countries so they can hopefully become rich through
wise investments.
Whereas the international monetary fund gives money to rich countries which have made bad
investments and need money in order to not become poor.
This does not mean it is any less controversial though.
Back in Haiti, when plain economic advice didn’t work out the IMF gave the nation
a loan to help fund rebuilding programs.
Almost a decade on and Haiti was still struggling to pay for these loans, and rebuild at the
same time.
There was a worldwide debate about what to do with this loan with two basic schools of
thought.
The first side argued that the IMF was not a charity, and while this loan was taken out
during desperate times it was still a loan and still needed to be repaid.
Forgiving this debt would be unfair to all other nations that did repay their debt and
it would also be unfair to nations that may need this money in the future but wouldn’t
be able to access it because well it wasn’t paid back to the fund.
Just as many people argued against this point saying that demanding repayments on this loan
at the time would have put the nation in a position where it had to decide between feeding
it’s people and paying it’s bills.
An uncomfortable debate either way, and of course there is the IMF right in the middle
of it, ready to be villainised no matter what they do.
Now, while these lending practices do get a majority of the attention in the press,
(and I definitely encourage you do ready up on it yourself if you are interested) it’s
actually not the most sinister thing the International Monetary Fund does.
As we saw earlier their primary role is simply giving advice, but they are giving advice
to distressed nations, distressed nations normally have debt burdens to other countries,
rich countries like china and America.
Since these same rich countries are the ones funding this “free” economic advice, there
is a much higher chance that this advice will include the role out of austerity measures,
(as in raising taxes and lowering government spending) to pay off their loans as a priority,
even if those actions would cause far more problems for the local economy.
For reference most economists would actually recommend doing the opposite during an economic
downturn, like what we saw across the world in 2020 during the fallout of the coronavirus,
but that kind of more prudent approach means that bonds might go unpaid, and if bonds don’t
get paid the people that own those bonds are going to be very unhappy, those same people
are the ones that pay the advisors at the IMF in the first place.
So this begs the question, are the world bank and the IMF an evil empire?
Simply tools for modern day colonialism under the guise of globalisation?
Well no, not really.
Overall they do provide a good service that is more often that not a win win for the countries
involved, but you never really hear about that, because well… it’s boring.
Nobody really cares until something goes wrong, and when it does these large, mysterious,
powerful entities that above individual governments are the logical place to point the finger
of blame whether it is deserved or not.
But let us know what you think in the comments section below, it helps out the channel and
it would be really interesting to see, and if international high finance has piqued your
interest, then you might be curious to learn how a jellyfish has secretly been used for
decades as a global reserve currency.
For videos like that one, this one and many more, make sure to subscribe to keep on learning,
how money works.