Download International Institutions and Developing Countries: Privileges, Reforms, and Consequences and more Lecture notes Literature in PDF only on Docsity!
“Globalization, Development, and International Institutions: Normative and Positive Perspectives.” By Helen V. Milner Princeton University September 14, 2005
Books focused on in this review: Easterly, William. 2001. The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics. Cambridge MA: MIT Press. Pogge, Thomas. 2002. Stiglitz, Joseph E. 2002. World Poverty and Human Rights Globalization and Its Discontents. Cambridge UK: Polity.. NY NY: Norton. Stone, Randall. 2002. Lending Credibility: The IMF and the Post-Communist Transition. Princeton NJ: Princeton University Press. Vreeland, James. 2003. The IMF and Economic Development. Cambridge UK: Cambridge University Press. I thank David Baldwin, Chuck Beitz, Robert Keohane, Erica Gould, Steve Macedo, Lisa Martin, Thomas Pogge, Tom Romer and Jim Vreeland for invaluable comments. I also received much useful advice from seminars at Princeton University and the Rockefeller Foundation’s Bellagio conference center.
Introduction At the conclusion of World War II, several international institutions were created.
to manage the world economy and prevent another Great Depression. These institutions include the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (now called the World Bank), and the General Agreement on Tariffs and Trade (GATT), which was expanded and institutionalized into the World Trade Organization (WTO) in 1995. These institutions have not only persisted for over five decades, but they have also expanded their mandates, changed their missions and increased their membership. They have, however, become highly contested. As Stiglitz notes, “International bureaucrats—the faceless symbols of the world
economic order—are under attack everywhere….Virtually every major meeting of the International Monetary Fund, the World Bank and the World Trade Organization is now the scene of conflict and turmoil.”^1 Their critics come from both the left and right wings of the political spectrum. Anti-globalization forces from the left see them as instruments for the domination of the developing countries by both the rich countries or the forces of international capitalism. Critics from the right view these institutions as usurping the role of the market and easing pressures on developing states to adopt efficient, market-promoting policies. These debates often occur in a highly ideological and polemical fashion; they would benefit from being more informed by social science. By reviewing some of the recent social science literature, this essay addresses three questions: what has been the impact of these institutions on the developing countries, why have they had this impact, and what should be their role in the development process. Conventional wisdom in international and comparative political economy has held that international institutions, like the IMF, World Bank, and WTO (and its predecessor, the GATT), have been largely beneficial for the countries in them. These institutions, it is claimed, constrain the behavior of the most powerful countries and provide information and monitoring capacities that enable states to cooperate.^2 All states involved are better off with these institutions than otherwise. Recently, however, evidence has mounted that these institutions may not be so beneficial for the developing countries. Discerning the impact of these institutions requires that one address difficult counterfactual questions.^3 Would the developing countries have been better off if these
institutions for the developing countries. This debate involves the extent of moral obligations that the rich countries and the institutions they created have regarding the poor countries, ranging from a limited “duty of assistance” to a cosmopolitan striving for equality. Combining normative and empirical scholarship may be unusual, but it may be fruitful. As Beitz claims, “reflection about reform of global governance is well advanced in other venues, both academic and political, almost never with the benefit of the moral clarity that might be contributed by an articulate philosophical conception of global political justice.”^5 The paper has eight sections. Following this introduction, I present a brief summary of the main arguments in the books focused on here. Then I delineate the role these institutions have played in the developing countries. Next I discuss evidence about the progress that the developing countries have made lately. In the fifth section, I review the four major arguments proposed by theories of international institutions to explain their existence. The sixth section examines reasons why these institutions may have failed to produce as many benefits for the developing world as the theories imply. The next section explores recent normative literature on the role of international institutions. The conclusion returns to the question of institutional reform, bringing the normative and positive analyses together. These topics are vast and cannot possibly be covered in their entirety. The goals are three: to provide an overview of recent empirical research on the impact of the IMF, World Bank and WTO on the developing countries, to connect this research better to theories about international institutions, and to see if a blending of normative and positive analyses can advance discussions about these institutions. My conclusions are three: 1.
we need more empirical analyses of these institutions and their impact on the poor countries; 2. given the findings of existing research and changes in the world since they were created, these institutions need reform; and 3. systematic proposals for their reform can be usefully derived from a combination of normative and empirical analysis. A Brief Review of the Books. This essay is not intended as a traditional book review. It addresses the question
of what has been the impact of the major international economic institutions on the developing countries. The books that are its focus are all critical of how the effects of globalization have been managed over the past 20 years. None attacks globalization itself, but each points to different problems with the ways international institutions have affected the developing countries. I briefly sketch the arguments in each book below. But since this is not a traditional book review, I focus on the arguments they make that are relevant to the main theme of this essay. Stiglitz’s Globalization and Its Discontents is intended as a “fair and balanced” account of the IMF; it is an indictment by a policy insider. Stiglitz, a Nobel Prize winner and former chief economist for the World Bank, angrily claims that the IMF has mismanaged the globalization process for the LDCs. Driven by a “market fundamentalist” ideology and special interests (“global finance”) in the advanced industrial countries, IMF officials have imposed the wrong policies on the LDCs and worsened their economic and political situations. He argues that the IMF’s single-minded concerns about inflation and fiscal rectitude have been inappropriate for many countries and have neglected economic growth and employment. His solutions involve changing “bad habits” within the IMF via increased transparency and accountability and reducing
worsening inequality in addition to reducing growth. He blames the IMF for loaning to such countries and, like Stiglitz, for imposing conditions that prioritize controlling inflation and government spending. Like Stiglitz, he believes that IMF should become more transparent, more attentive to the costs of its programs for labor and the poor, and more inclusive of the LDCs’ concerns and priorities. Lending Credibility by Randall Stone, a political scientist, also finds fault with the IMF. But Stone is most concerned with the interference produced by the powerful advanced industrial countries, especially the US. He shows that the IMF can only be successful in its mission to reduce inflation and find macroeconomic stability when powerful countries do not intervene to undermine the Fund’s conditionality. Unlike Stigltiz and Vreeland, he argues that reducing inflation and deficits is and should be a priority, a position consistent with the IMF’s own mission. Using a formal model to understand IMF interaction with LDC borrowers, he argues that in internationally powerful countries and ones that receive American support, IMF programs tend to fail because they are not credible. These countries receive loans but deviate more often from the IMF’s conditions and thus fail to control inflation. Outside interference and politics undermine the IMF; its own policies are sound and effective. He focuses much on issues of compliance, while neglecting questions about why countries ask for loans in the first place. His book’s strengths are thus Vreeland’s weaknesses, and vice versa. Stone’s solution is to push for greater IMF autonomy, almost the exact opposite of Stiglitz’s and Vreeland’s. World Poverty and Human Rights is a collection of essays written by a philosopher, Thomas Pogge. It combines normative and empirical analysis to argue that
the developed countries and the international institutions they established are harming the poor countries and have an obligation to stop such harmful behavior. In the interdependent world we live in, the advanced industrial countries support an international system that makes coups, civil war and corruption in LDCs not only possible but likely. By upholding a government’s privileges to borrow and assign rights for domestic resources—no matter how bad the government is, the rich countries encourage a free for all for control of developing countries. Failure to recognize the rich nations’ role in harming the poor countries depends on the “explanatory nationalism” that dominates current research and thinking. Pogge’s main innovations are empirical, noting that the resource and borrowing privileges conferred by the international system on the leaders of poor states constitute a causal link from rich countries who maintain that system to the misery of the poor, and normative, founded upon his insistence on negative duties (do no harm) rather than positive ones (do good). Pogge opines for a reform of global institutions so that they do no harm, or at least less. That these institutions leave the poor better off than a world without them is not enough for him; one must ask if institutions with better effects for the poorest could feasibly be designed at little cost to the rich. His answer is yes, and he provides a number of interesting ideas, including a global fund for democracy, to help the poorest. Like the other authors, Pogge does not call for the dismantling of current international institutions; he calls for their reform and for changes in the behavior of developed countries running them. The Role of the International Economic Institutions.
had programs with sixty countries, or more than one third of the developing world.^8 These changes made the IMF more similar to the World Bank. Formed after World War II, the Bank concentrated mostly on reconstruction and later on development; in 1960, with the formation of the International Development Association (IDA), the Bank moved further toward economic development programs.^9 Many countries over the years have received both IMF and World Bank loans and often simultaneously.^10 The World Bank also gives interest-free loans and grants (similar to foreign aid) to the poorest developing countries. This aid has been heavily used in Africa; indeed, in 2003, 51% of it went to Sub-Saharan Africa. This overlap of missions, proliferation of adjustment loans, and expansion of conditionality are central issues today. The WTO’s central mission has been to promote trade liberalization by fostering negotiations among countries to reciprocally lower their trade barriers and providing information about countries’ trade policies. Membership in the GATT/WTO has grown importantly over the years, from a mere 23 in 1947 to 146 countries in 2003.^11 Like the IMF and World Bank, the GATT was originally a negotiating forum for the developed countries; its impact on the developing countries has grown slowly over time. The liberalization of trade policy has become an accepted doctrine for most developing countries; barriers in the developing world have fallen significantly since 1980.^12 In addition, the WTO’s mission has increasingly involved the connections between domestic policies and trade barriers. With significant lowering of tariffs and quotas, many domestic policies such as intellectual property laws, environmental policy, domestic subsidies, and tax laws, are now seen to affect trade flows and hence to reside
within the WTO’s jurisdiction. As with conditionality in the monetary domain, the attack on trade barriers has increasingly brought this international institution into contact with domestic politics. The GATT/WTO system has sponsored numerous trade negotiation rounds over the past fifty years. The most recently concluded negotiations, called the Uruguay Round, ended in late 1994 with the debut of the WTO and accords lowering trade barriers and extending agreements into other areas such as intellectual property and foreign investment. This system relies on reciprocity, attempting to balance countries’ gains and losses. The WTO is now conducting the new Doha Round of trade negotiations, which is intended to address the problems of the developing countries more directly. The Experience of the Developing Countries. Debate over these institutions has arisen from the seeming lack of progress in the developing world. Except for the World Bank, the original and primary mission of these institutions was not promoting growth in the developing world. Nevertheless, since the change in their roles from the 1970s onward, they have increasingly been judged by their impact on the poor. Fairly or not, the question has been whether these institutions have fostered development.^13 Each of these institutions has promoted the adoption of market-friendly policies, and part of the reaction against them has been connected to these policies. “The widespread recourse of indebted developing countries to structural adjustment loans from the Bretton Woods institutions in the aftermath of the debt crisis of the early 1980s played a pivotal role in the redefinition of trade and industrialization strategies. Prominent among the conditions attached to these loans was the liberalization of policies
in the 1990s at 1.8%; the developing countries grew at 0.7% and 1.7%, respectively.^22 Moreover, if one excludes East Asia where the growth was extraordinary (5.6% in the 1980s and 6.4% in the 1990s), the developing countries grew much slower than the developed ones. Thus they have been falling further behind the rich countries, increasing the gap between the two. As Lant Pritchett has shown, over the period 1820 to 1992 the divergence in incomes between the world’s rich and poor has grown enormously.^23 In 1820 the richest country had three times the income that the poorest did; in the early 1990s this number was thirty.^24 Much of this divergence is due to the rich countries’ rapid growth.^25 Economic crises among the developing countries have also proliferated after the 1970s. In addition, the debt problems of many developing countries have increased. “Total debt of developing countries increased until 1999 and then stabilized at about $ trillion as of last year [i.e., 2003]. Furthermore, while debt has declined as a proportion of GDP, it remains high at some 40 per cent, and the ratio of debt to exports at 113 per cent. More importantly, the net resource transfer --the resources available for use after paying interest--has been negative in recent years for all regions. These magnitudes suggest that it is difficult to consider current levels of debt sustainable and helping growth.”^26 The performance of the developing countries has not been uniformly poor, however. From 1960 to 2000, life expectancy increased from 46 to 63 years in the developing world. Child mortality rates were halved in the same period, as were illiteracy rates.^27 Poverty as a percentage of the developing countries’ populations has declined recently.^28 Including China where the declines have been enormous, the percentage of people in the developing countries living on the poverty threshold of $1 a
day has fallen from over 28% in 1990 to below 22% in 2000.^29 The percentage living on $2 a day in the developing world also fell from 61% to 54% in this period.^30 Unfortunately, the absolute numbers of the desperately poor have not fallen much, if at all, because of high growth population rates.^31 The developing countries have also upgraded their role in the world economy. They now are producers and exporters of manufactures, and not primarily of primary products. In 2000, about 64% of low and middle income countries’ exports were manufactures, while only 10% were agriculture. And their share of world trade in manufactures rose over this period from 9% to 26%.^32 Especially in East and South Asia, the developing economies have become tightly integrated into the world production and trading system led by multinational corporations. This increase in the value-added and the diversification of developing countries’ production and trade has been a boon for many. This mixed record of economic outcomes has raised questions about the impact of these international economic institutions. But one must pose the counterfactual to assess their impact: would the performance of these countries have been better, the same, or even worse had these institutions not existed? Theories about the Functions and Benefits of International Institutions. Many International Relations scholars have argued that countries should benefit from these institutions. States rationally decide to join them; therefore, they join only if the net benefits are greater than those offered by staying out of the organization. Membership is voluntary. The net utility derived from joining could be negative, but less negative than that incurred by remaining outside the institution. As Gruber has argued, if
Nevertheless, critics maintain that developing countries have not gained much from the GATT trade rounds; most of the gains have gone to developed countries. Some scholars even allege that the trade rounds have allowed the developed countries to exploit the developing ones by engaging them in unfair agreements. As Stiglitz says, “previous rounds of trade negotiations [in the GATT/WTO] had protected the interests of the advanced industrial countries—or more accurately, special interests within those countries—without concomitant benefits for the lesser developed countries.”^36 The unbalanced outcome of the recent Uruguay trade round is an important issue. “Several computable general equilibrium models have shown that the Uruguay Round results disproportionately benefit developed country GDPs compared to developing countries, and that some developing countries would actually suffer a net GDP loss from the Uruguay Round—at least in the short run.”^37 Developing countries have raised concerns about the equity of the outcome of this (and other) rounds. “With hindsight, many developing country governments perceived the outcome of the Uruguay Round to have been unbalanced. For most developing countries (some did gain), the crux of the unfavourable deal was the limited market access concessions they obtained from developed countries in exchange for the high costs they now realize they incurred in binding themselves to the new multilateral trade rules.”^38 Others note that asymmetric outcomes are an intrinsic part of the GATT/WTO bargaining process. “[Trade] rounds have been concluded through power-based bargaining that has yielded asymmetrical contracts favoring the interests of powerful states. The agenda-setting process (the formulation of proposals that are difficult to amend), which takes place between launch and conclusion, has been dominated by
powerful states; the extent of that domination has depended upon the extent to which powerful countries have planned to use their power to conclude the round.”^39 The counterfactual one must pose is the following: without the GATT or WTO would the developing countries be better off if they had to negotiate bilaterally with the large, rich countries? Multilateralism seems well-suited to giving the developing countries a better outcome than would such bilateral negotiations.^40 “Multilateralism ensures transparency, and provides protection – however inadequate – against the asymmetries of power and influence in the international community.”^41 It may not only place some constraints on the behavior of the large, developed countries, but it may also encourage developing countries to realize their common interests and counterbalance the rich countries. By giving them more political voice than otherwise, institutions like the WTO may enhance their capacity to influence outcomes. Evidence of the constraining power of the IMF or World Bank is less apparent. Decisions in the IMF and World Bank are taken by weighted voting, with the rich countries-- and especially the US-- having the lion’s share of votes. Since the end of the fixed exchange rate system in the early 1970s, these institutions have basically collected funds from the developed countries and private capital markets to give to the developing ones under increasing conditions. Conditionality has been designed by these institutions with the tacit support of the developed countries and it has been negotiated with the poor ones. Since the late 1970s few, if any, developed countries have not been subject to IMF programs; only the developing world has. Article IV of the IMF charter requires surveillance of all members and discussion of the problems in their fiscal and monetary policies. But since the late 1970s, de facto this has not applied to the developed
countries the IMF gave more and imposed lighter conditions on those states with stronger political ties to the US.^48 Further, he shows how this political process undermines the credibility of the IMF’s position and induces the recipient countries to ignore its conditionality. His research, however, does not really address the question of whether the IMF’s presence affected the overall amount of lending or the allocation of those loans, relative to a situation where the Fund did not exist. These counterfactuals are essential for addressing questions about these multilateral institutions, but they are difficult to assess.
2. Providing Information and Reducing Transaction Costs. Following New Institutionalism theories, some argue that a major reason for these institutions is the lowering of transaction costs and the provision of information to facilitate multilateral cooperation in an anarchic world. As Keohane writes, international institutions “facilitate agreements by raising the anticipated costs of violating others’ property rights, by altering transaction costs through clustering of issues, and by providing reliable information to members. [They] are relatively efficient institutions, compared to the alternative of having a myriad of unrelated agreements, since their principles, rules, and institutions create linkages among issues that give actors incentives to reach mutually beneficial agreements.”^49 For him, international institutions also reduce uncertainty by monitoring the member states’ behavior and allowing decentralized enforcement often through reciprocity strategies.^50 Scholars, such as Anne Krueger, have suggested just such an informational role for the IMF and World Bank.^51 Surveying and reporting on the policy behavior of member countries, providing information about the likelihood of crises, and being a
repository of expert information are key roles for these institutions. The Meltzer Commission also emphasizes this role, and the most severe critics on the right imply that the IMF and World Bank should give up all roles except monitoring and providing expert information to member states. Others have noted the expertise role of the IFIs. “The World Bank is widely recognized to have exercised power over development policies far greater than its budget, as a percentage of North/South aid flows, would suggest because of the expertise it houses. … This expertise, coupled with its claim to ‘‘neutrality’’ and its ‘‘apolitical’’ technocratic decision-making style, have given the World Bank an authoritative voice with which it has successfully dictated the content, direction, and scope of global development over the past fifty years.”^52 The WTO has also been seen as an information provision institution. It monitors and reports on the compliance of states with the commitments they have made to each other. This task reassures other member countries and domestic publics about the behavior of their political leaders, making cooperation more likely and sustainable.^53 Informational arguments suggest that all states gain from participation in such institutions.^54 This mutual gain explains the voluntary participation of states in these multilateral forums. The expectation would be that developing countries join largely for these informational benefits. But there remains the issue of who provides what information for whose benefit. Are the developing countries providing more information than otherwise? Are the principal beneficiaries private investors in the developing countries and/or in the developed world, other domestic groups, or the institutions themselves? Do the IMF and World Bank provide the developing countries with useful information about other members or with expertise that would otherwise be unavailable?
