The G7 drives the engine of neo-liberal globalization and controls the most powerful institutions of global finance and trade. It is impossible to speak of the impact of the G7 without discussing the impact of the Bretton Woods financial institutions: the World Bank and the International Monetary Fund (IMF).
The World Bank and the IMF were created in 1944 by the leaders of the 44 nations at a conference in Bretton Woods, New Hampshire. Unlike the UN which was also set up at that time, the World Bank and the IMF were controlled by “one-dollar-one vote”, rather than “one-country, one vote” system of governance. This ensured that the US and other developed nations would maintain the most control and influence.
The G7 collectively have almost half the votes of both organizations. The United States alone has a veto over decisions regarding the mandates and structure of the organization, as changes to the Articles of Agreement require 85% of the votes.
IMF Voting Shares World Bank Voting Shares
The World Bank
The World Bank, or International Bank for Reconstruction and Development (IBRD), was set up to facilitate countries’ access to international financial markets. Countries could borrow more cheaply from international capital markets via the IBRD, its shareholders (participating countries) would act as the guarantor for the loan.
The IBRD lent large sums of money largely for mega-projects, as the logic of the day was that economic growth required infrastructure, and that in turn would lead to development. The growth that occurred at this time did not trickle-down. Instead, many of these projects exacerbated local poverty and the environment. Through support for large hydro-electric projects, the Bank contributed to the forced re-location of millions of people, and the flooding of millions of hectares of arable land and whole ecosystems.
The World Bank Group is actually made up of five organizations:
- The International Bank for Reconstruction and Development (IBRD) provides loans and development assistance to middle-income and some poor countries.
- International Development Association (IDA) focuses on the poorest countries to which it provides near zero-interest loans.
- International Finance Corporation (IFC) finances private sector investments and provides technical assistance to governments and businesses.
- Multilateral Investment Guarantee Agency (MIGA) encourages foreign investment in developing countries by providing guarantees to foreign investors against loss caused by non-commercial risk.
- International Centre for Settlement of Investment Disputes (ICSID) provides international facilities for arbitration of investment disputes.
In the face of the debt crisis in the 1980’s, the focus of the Bank shifted to support for structural adjustment, a set of policy choices that favour foreign creditors, foreign investors and foreign investment. Because of the burgeoning Third World debt crisis, the Bank began attaching conditions to their loans that generated government surpluses and promoted exports in order to release resources for debt payments to Northern banks that were afraid of default.
World Bank and IMF both impose Structural Adjustment Programmes (SAPs) on developing countries. SAPs include measures to:
- Privatize industries, including necessities such as healthcare and water;
- Cut government spending and imposition of user fees;
- Liberalize trade;
- Liberalize investment markets, which leads to unstable trading in currencies;
- Lower labour standards;
- Raise interest rates as part of a strict anti-inflationary monetary policy;
- Raise the cost of basic goods through “market-based pricing”.
SAPs have evolved to cover more and more areas of domestic policy, not only fiscal, monetary and trade policy but also labour laws, health care, environmental regulations, civil service requirements, energy policy and government procurement. SAPs have a severely negative impact on social programs and self-sufficiency amongst countries in the South.
The International Monetary Fund
The IMF is one of the most influential institutions in the world. 2,500 IMF staff dictate the economic conditions of life to over 1.4 billion people in 75 developing countries. The IMF’s primary task was originally to monitor and manage a system of stable exchange rates in which the value of all the world’s currencies was based on gold and the US dollar, as was the agreement at Bretton Woods. The second major function was to provide countries with short-term financing from its vast reserves of foreign currencies and gold to help member states overcome short-term balance of payments deficits and support their exchange rate values.
The US, faced with inflation and balance of payment problems brought on by the Vietnam War, unilaterally abandoned the Bretton Woods system of fixed exchange rates in 1971. A system of floating rates was created, in which speculation plays a central role in setting currency levels, and the IMF found itself increasingly obsolete.
With the emergence of the Third World debt crisis in the 1980s, the IMF took on a larger and larger role in imposing austerity conditions on countries in financial difficulties. While its involvement with poor countries had previously been short-term, the IMF increasingly assumed that crises were the result of systemic problems that required long-term “adjustment.” In 1986, the IMF began lending to the poorest countries and forcing them to accept SAPs conditionality as part of their loans.
G7 Support for SAPs
Despite following the IMF and World Bank SAP prescriptions, developing country growth stagnated in the 80’s. Their debt load doubled to over $1.5 trillion by decade’s end, climbing further to $3.0 trillion by the end of the 1990s. The restructuring of economies and conditions meant that from 1984 to 1990, private banks, primarily in G7 countries siphoned off $178 billion dollars from developing countries, while many countries were unable to provide adequate health care or education. Despite the horrible impact on the lives of millions of people in developing nations, the G7 fully supported the imposition of SAPs by the World Bank and IMF, and given their control of the institutions, this support was key:
“…developing countries, particularly debtor countries, can fit themselves to play a fuller part in the world economy by adopting effective structural adjustment policies, coupled with measures to mobilize domestic savings, to encourage the repatriation of capital, to improve the environment for foreign investment, and to promote more open trading policies.” -1986 Tokyo G7 Summit Communiqué
“We support the central role of the IMF through its advice and financing and encourage closer cooperation between the IMF and the World Bank, especially in their structural adjustment lending” -1987 Venice G7 Summit Communiqué
“We are encouraged that many indebted countries have begun the difficult process of macroeconomic adjustment and structural reform necessary for sustained progress” -1988 Toronto G7 Summit Communiqué
A recent study concluded "there is a positive linear relationship between the number of years that countries implement adjustment programs and increases in debt levels... [SAPs are] likely to push countries into a tragic circle of debt, adjustment, a weakened domestic economy, heightened vulnerability, and greater debt."
A Crisis of Legitimacy and Failed Reform Efforts
Given their dismal record, the G7 and the Bretton Woods Institutions faced a crisis of legitimacy at their 50th birthday in 1994. Social movements around the world said 50 Years is Enough – of secrecy, mega-projects, structural adjustment, privatization, and resource flows from the South to the North. In response to the 50 Years is Enough followed by the Jubilee 2000 movement for debt relief, the G7 was forced to make concessionary statements on debt relief and SAPs.
Unfortunately, the promises made at G7 Summits have not resulted in substantial changes for the world’s poor. G7-backed reforms do not address the fundamental problems of the world economy but are intentionally set-up to manage crises, without fundamentally altering the power enjoyed by the richest industrialized nations. Despite the disaster of SAPs, the G7 continues to trust World Bank and IMF remedies, including conditions on loans, for the plight of developing nations:
“We will encourage the Bretton Woods institutions to develop a comprehensive approach to assist countries with multilateral debt problems, through the flexible implementation of existing instruments and new mechanisms where necessary…and to continue concessional ESAF [Structural Adjustment] lending operations.” -Halifax 1995 Summit Communiqué
“With full implementation of programmes agreed with the IMF we are confident that stability can be restored.” -Birmingham Summit 1998
“We invite the World Bank and the IMF to work together to develop a set of policies and practices that can be drawn upon, by donors and borrowers alike, in the design of adjustment programs that ensure the protection of the most vulnerable” -Koln 1999 Summit Communiqué
In 1996, the World Bank and the International Monetary Fund announced the Highly Indebted Poor Country (HIPC) Initiative, which saw minimal debt reduction for a select few countries after the countries completed successfully six years of structural adjustment. In 2002, citizen’s groups around the world called for complete debt relief for the poorest countries and said HIPC is “a failure”. while the G7 applauded the results, saying at the Genoa Summit in 2001 that “the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative is a valuable contribution to the fight against poverty.”
After intense criticism of structural adjustment, the Enhanced Structural Adjustment Facility was renamed the Poverty Reduction and Growth Facility in 2000. The IMF argues that they are now taking poverty into account. The PRGF has been quickly dubbed the Poverty Growth Facility, however, as lending from this facility since 2000 still requires countries to privatize, liberalize and adopt economic austerity measures.
Recommendations - The G7 must:
- immediately cancel the debt owed bilaterally and to the Bretton Woods institutions;
- end structural adjustment programmes as currently constituted;
- change the governance structures to ensure equitable participation of developing countries in decision-making and full transparency;
- stop all World Bank support for socially and environmentally destructive projects such as oil, gas and mining activities and all support for projects such as large-scale dams that include the forced relocation of people.