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Multilateral development assistance

Introduction

This lesson looks at the roles of the IMF and the World in promoting economic development.  Under the old syllabus this page was covered under unit 4.6.

Enquiry question

Understanding the role of the IMF and the World in promoting economic development.

Lesson time: 100 minutes 

Lesson objectives:

Examine the current roles of the IMF and the World Bank in promoting economic development.

Understand that in some cases countries have become heavily indebted, requiring rescheduling of the debt payments and/or conditional assistance from international organizations, including the IMF and the World Bank.

Compare and contrast the extent, nature and sources of ODA to two economically less developed countries.

Teacher notes:

1. Beginning activity - begin with the opening question and then discuss this as a class.  (Allow 5 minutes in total)

2. Processes - technical vocabulary - the students can learn the background information from the videos, activities 1 - 4 and the list of key terms.  (Allow 5 minutes to read the key terms)

3. Learning the theory - activities 1 and two describe the role of the two organisations.  (20 minutes)

4. Developing the theory - activities 3 and 4 focuses on criticisms of the two organisations, or more specifically on the structural reform packages imposed as a condition of many loans.  While both videos are critical of the organisations try to encourage your students to question (though not necessarily disagree) with the perspectives.  (20 minutes)

5. Applying the theory - activity 5 focuses on Turkey, a middle income country that recently (in 2000) required a bailout loan from the IMF.  As part of the package they were forced to implement structural changes to their economy. (10 minutes)

6. Case studies - activities 6 - 8 focus on nations at the beginning of their development journeys - Vietnam and Rwanda.  How have both nations benefitted from adopting Washington consensus policies? (25 minutes)

7. Link to the assessment - activity 9 consists of a reflection exercise on this topic.  (15 minutes)

Beginning question

Explain the difference between the IMF and the World Bank and the role both play in development within LEDCs.

The main difference between the International Monetary Fund (IMF) and the World Bank lies in their respective purposes and functions. The IMF oversees the world's monetary system's stability, while the World Bank's goal is to reduce poverty by offering assistance to middle-income and low-income countries.

Key terms:

IMF - an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

World Bank - an international financial institution that provides interest-free loans and grants to the governments of poorer countries for the purpose of pursuing capital projects.

Structural adjustment policies (SAPs) - fiscal and monetary conditions imposed on nations (usually LEDCs) that wish to access funds from the IMF or the World Bank.  These are often imposed to ensure that the borrowing nation to ensure that they are in a position to repay the loan.

Hot money flows - capital flows into nations with higher interest rates and / or expected changes in exchange rates.  This provides a source of foreign capital for the nation.

The activities on this page are available as a PDF file at:  Multilateral development assistance

Activity 1: The difference between the World Bank and the IMF

(a) Why were both organisations set up and when?

After WW2 there was a consensus that the old system had failed and the agreement was reached to create both institutions.

(b) Explain the role of the World Bank.

The bank was set up to oversee and finance the reconstruction of European economies after the war.  Much of their current projects are focused on Africa and East Asia, nations requiring long term development.

(c) Explain the role of the IMF.

The role of the IMF is to oversee a mechanism enabling stable echange rates.  They are also tasked with providing loans to nations with debts on a short time basis.  They provide bail out funds to indebted nations e.g. Greece and Pakistan.

(d) What are some of the criticisms of both organisations.

Both institutions have been criticised for ignoring the environmental costs associated with a development project, while the funds they provide have also been criticised for being difficult to repay and forcing unsustainable debts on nations.

Activity 2: When a nation requires a bailout

The following video illustrates a developing nation, Pakistan who have taken a series of bailouts from the IMF.  Why has the nation requested funding from the IMF?

When a nation, particularly an LEDC, has a short term currency crisis preventing it from paying its short term debts and import expenditures.

Activity 3: Features of structural adjustment policies

The following video highlights some of the features of SAPs.  Use the information from the video to answer the questions that follow:

(a) Why are the policies of the two organisation sometimes called the Washington consensus.

Both organisation were established by the USA and Europe and as such mirror the free market, economically liberal policies of those continents.

(b) Describe some of the features of SAPs

Tight monetary policy, including higher interest rates to attract ‘hot money’ flows. 

Fiscal controls involving significant cuts to public expenditure, the reduction of subsidies as well as raising additional revenue from tax collection.

The removal of trade barriers to protect domestic firms and a greater emphasis on developing a comparative advantage, through increased trade. 

Generating greater efficiency within the public sector by privatising public companies and other state assets.

The removal of ‘capital controls’ which prevent foreign firms from repatriating their profits made in the country.  This is designed to encourage foreign owned multinationals to invest.

(c) Explain some of the crticisms of SAPs identfied in the video.

While the measures probably make sense long term they come with a short term cost in the form of lower pubic spending and tighter monetary policy.

(d) Why might many of the funds available to LEDCs come from organisations such as the IMF or the World Bank?

The IMF is often referred to as the lender of last resort and nations will generally only approach the organisations, given the strings attached, when other sources of funds have been exhausted.

Full details of the ‘standard’ reform package for developing countries in crisis

The Washington consensus, first used by British economist John Williamson in 1989, included the following ten specific policy recommendations:

  1. Fiscal policy discipline, meaning the avoidance of significant fiscal deficits relative to GDP.
  2. Diverting funds towards services with a track record of improving development e.g. primary education, primary health care and infrastructure investment.
  3. Broadening the tax base and adopting moderate marginal tax rates.
  4. Market determined interest rates .
  5. Market determined exchange rates.
  6. The removal or at least reduction of tariffs and other barriers to trade.
  7. Liberalization of inward foreign direct investment.
  8. Privatization of state enterprises.
  9. Abolition of regulations that impede competition.
  10. Legal security for property rights.

Activity 4: Criticism of SAPs

Watch the following short video which highlights the social and economic cost to the citizens of a nation, forced to adopt structural adjustment policies, as part of a programme to obtain funding from the IMF / World Bank.  Outline some of the sacrifices made by the nation and answer the question are SAPs, imposed by the creditor fair?

As a result of the SAPs the government was forced to reduce subsidies paid to the agricultural sector, which has reduced incomes and production levels in the farming sector.  The commentator, Dr. Augustin Wambo Yamdjeu, makes the very plausible claim that the IMFs blanket implementation of the structural adjustment programs has not worked in this example because while subsidy reductions may be effective in some cases (perhaps in Latin America or Asia) they are inappropriate in the case of Africa.

Activity 5: A focus on Turkey

An example of a developing nation forced to implement a SAP reform packages was Turkey in 2000, when the middle income nation was awarded a $7.5 billion loan package to prevent a further deterioration of the country's finances.  The loan was made on the condition that the government implemented a range of reforms designed to liberalise the economy of Turkey. The loan was repaid in 2013 and the nation was free to pursue its own economic policies. The following table illustrates the performance of the economy under the liberalisation reforms and the period immediately afterwards:

GDP growth (average %)

Exchange rate to US $

Inflation %

Unemployment rate %

2000 - 2002

2.25

1.65

53

8.2

2003 - 2005

8.1

1.29

8.9

10.5

2006 - 2008

4.3

1.4

10

10.6

2009 - 2011

4.9

1.55

7

11.9

2012 - 2014

(loan repaid)

6.3

2.09

9

9.8

2015 - 2017

2.75

3.5

9.25

11.5

2017 - 20192.05.51513.5

Using the information illustrated on the table evaluate the effectiveness of the IMF imposed reform package on the Turkish economy.

Contrary to some of the criticisms of the IMF and the reform packages are not supported by the example of Turkey, whose economy has struggled since the reform package was abandoned at the end of 2013.

Activity 6: A focus on Rwanda (Africa's Singapore)

Use the information from the following video to answer the questions that follow:

(a) Is there a link between the paternal dictatorships of both Singapore and Rwanda that have contributed to the success of both nations.

Possibly, both nations have made political stability one of the cornerstones of economic policy.

(b) What other similarities in the policy of both nations are highlighted in the video?

Both nations built a national airline to improve business communications.

Both nations are located centrally in their prospective continents.

political stability

Both nations have prioritised ease of business to attract FDI.  Rwanda has been ranked by far the easiest place to do business in Africa.

Spending on key infrastructure including human capital.

Activity 7: A focus on FDI in Vietnam

The following video focuses on the role of FDI in Vietnam.  Using the information from the video answer the questions that follow.

(a) How much FDI has the country attracted in recent years?

$ 250 Billion by 2017.

(b) Which policies has the nation employed to attract large quantities of FDI.

Macroeconoic stability, investments in infrastructure and education.

(c) How has this investment helped the nation develop?

Primarily through increases in exports.  Foreign MNCs contribute 25% of the nation's exports.

Activity 8: Reflection questions on multilateral development assistance

a) Describe two features of structural adjustment policies 

The adoption of tighter monetary policy, including a policy of high interest rates and tighter controls on the money supply.  This is aimed at stabilising the currency value by attracting ‘hot money’ flows. 

Cuts to public expenditure, the reduction of subsidies as well as raising additional revenue from tax collection.  LEDCs wishing to obtain finance from either the World Bank or the IMF must demonstrate that they can operate within a budget.

The removal of trade barriers to protect domestic firms and a greater emphasis on developing a comparative advantage, through increased trade. 

A programme of privatisation of public companies and other state assets, opening up domestic markets to foreign businesses and encouraging competition in the economy.

The removal of ‘capital controls’ which prevent foreign firms from repatriating their profits made in the country.

(b) Based on the knowledge gained from this lesson, do you believe that the World Bank play a positive or negative role in promoting economic development in Africa?

Arguments in support of the World bank include:

That the institution acts as a lender of last resort to LEDCs unable to obtain funds from alternative sources.  This provides those nations with essential funds which can then be used to promote investment, job creation and growth. The concessional loans provided to LEDCs come at lower rates of interest than borrowing from other unscrupulous sources.

The Bank supports sustainable development by prioritising finance for projects which offer sustainable development, infrastructure, projects which promote economic growth and projects supporting development of human capital.

Limitations of the the World bank include:

As the lender of last resort, the World bank sometimes imposes damaging conditions on the borrowing nation, called SAPs, which have been blamed for worsening the plight of some African nations.

The priorities of the World bank are heavily influenced by the US and a small number of other rich nations that provide most of the World Bank’s funds.  It is the interests of these nations that generally take precedence over the needs of LEDCs, which contribute less to the Bank.

Some World Bank projects also fail, leaving the African nation in further debt but no obvious benefit from the original loan.