The Global Emerging Market in Transition: Articles, Forecasts, and Studies

International Monetary Fund and the World Bank: The Advantages and Shortcomings

INTERNATIONAL MONETARY FUND AND THE WORLD BANK: THE ADVANTAGES AND SHORTCOMINGS In 1944, the Soviet Union had the opportunity to become a founding member of the IMF and World Bank. Joseph Stalin sent representatives (including the father of Victor Gerashenko, the current head of the Central Bank) to several meetings. Stalin ultimately decided that these institutions were too imperialistic for USSR participation. So, for the next 48 years, the Soviet Union remained outside the circle of legal, international, economic, and financial institutions. But when the Soviet Union was near collapse, the Soviet and then Russian leaders rediscovered the IMF and World Bank. They saw them as two of the major sources for additional out-of-pocket expense money, and these institutions began to look more attractive. Russia Joins International Business Institutions For Russia, an historic event occurred in 1992: it became a member of the IMF and World Bank. This membership was important not only for monetary reasons, but also because it was a major indication of Russia’s movement toward supporting civilized, modern, international business. In April 1992, leaders of the Western countries, including President George Bush and Prime Minister Helmut Kohl, initiated action to provide Russia with $24 billion in aid. In July 1992 the IMF met to decide whether to issue this money to Russia. Although the aid was approved, the bureaucratic mechanisms of these institutions were not much better than the communist bureaucratic mechanisms, and so a substantial portion of the money, as of August 1994, has still not been issued. In The Kvint Newsletter, 1, No. 1 (August 1994). imf and the world bank 65 The major problem of any large organization, like this multilateral institution, is its mechanisms for implementing its programs. As expected , they are oriented toward working only with governments, not with private companies and entrepreneurial institutions in recipient countries. As a result, the money often flows to inexperienced governments in which there are few people who understand a capitalist economy. Unique Problems, Standard Approach An important role of the IMF and the World Bank was in developing an economic and business information system in Russia. For example , these institutions created a system for calculating economic indicators . In addition, membership in the IMF and World Bank gave Russia access to many advisers who had tremendous influence on the activity of the Russian government. Unfortunately, these organizations had only a primitive understanding of the way business is conducted in Russia, especially during the initial transition years, 1991–93. Thus, their recommendations did not provide the desired results and, in some cases, were counter-productive. One dramatic example is the policy recommendations the IMF advisers gave to Acting Prime Minister Gaidar. As expected, the initiatives of Gaidar and Jeffery Sachs of Harvard ‘‘liberalized’’ prices prematurely, before the demonopolization of the economy, conversion of the military industry, and privatization. Prices for all basic needs such as meat, milk, and clothes jumped sky-high. People lost the ability to feed their families. IMF ‘‘experts’’ exacerbated the situation by recommending that the Russian treasury not print new ruble bills. As a result, companies had no currency to pay salaries, and serious deflation occurred. Later the government had to issue, on a monthly basis, more money than was ever in circulation. A serious problem with organizations such as the IMF and World Bank is that they attempt to remedy a country’s specific problems with a generic set of recommendations and solutions. Ideas that might work well in Poland, for example, will not necessarily produce results in Russia. The Poles, in contrast with the Russians, have a memory of capitalism. Communism was instituted in Poland 45 years ago, compared to 73 years ago in Russia. But the biggest differ- 66 understanding the global emerging market ence is that in Russia there was no private economy at all, while in Poland about 40% of the economy was private. This advantage enables capitalist systems to take root more in Poland than in Russia, a subtle distinction that has been lost on the IMF and World Bank. New Solutions Are Needed Past experience has proved that the world business community needs a new mechanism to solve large-scale economic and business problems. This mechanism must be more flexible, and have a shorter lead time between political decision making and implementation. In addition, it must be oriented toward private capital and entrepreneurs , and not just toward governments. Global institutions of...