The experiences of the IMF and World Bank lately reveal a truth: These organizations can only partially help to sustain the world economy from economic shocks (global financial shocks). Furthermore, the entire world seems to be increasingly dependent on the USA for continuity in the provision of economic stability and policy direction.
How does that affect the world economy and how do we, particularly from ethical and Islamic perspectives, understand it?
Limited ability to address global shocks
The International Monetary Fund (IMF) and the World Bank were created to provide a mechanism for the stability of the global economy; to assist developing countries; and to reduce global poverty. However, issues such as the following have exposed structural limitations in how the IMF and World Bank were created to stabilize the global economy:
Global inflation shocks
Energy crises and geopolitical issues
The rising levels of debt of the developing countries
The currency instability of many emerging markets
As a result of providing limited assistance in addressing these issues or shocks to the world economy, countries rely on the interim assistance of the IMF and World Bank indefinitely. All too often, countries end up receiving a new loan, which creates long-term financial dependency on the IMF and/or World Bank from a growing number of countries.
đź’¸ Dependent on the United States - Continued Global Relationship
A significant concern raised during the most recent discussions is that countries continue to rely on financial policy decisions made by the United States.
As the global reserve currency, the U.S. dollar continues to be the most widely-used currency for international transactions; therefore:
The majority of all international trade is conducted using U.S. dollars.
Decisions made by the U.S. to change interest rates have far-reaching effects on economies across the globe.
Many of the largest international organizations and institutions tend to implement economic and financial policies that are consistent with those established by the U.S.
As a result of the above-described dependencies, the International Monetary Fund (IMF) and World Bank are, in part, under the influence of the United States’ economic and monetary policies.
🏦 Structural Debt-Based Financial System
Many of the issues regarding countries’ dependency on the United States are related to the way in which the global financial system is currently structured — namely, it is primarily debt-based and interest-driven.
For example, when countries borrow funds, they typically must accept a loan with prescribed conditions, some of which are as follows:
Riba (interest-based) repayment terms
Structural adjustment conditions
Fiscal consolidation requirements
While conditions imposed by lenders are intended to create stability, they frequently result in:
Reduction of public expenditure; economic contraction in developing nations; and long-term reliance on debt.
Ethical Basis of Islamic Finance
The exploitation of people through the charging of interest, or riba, results in an uneven distribution of wealth and is not permitted by the Islamic financial system.
Islamic Economics has certain principles, which include:
• Sharing risk rather than taking on a debt load
• Providing financing that is backed by an asset rather than providing an interest-based loan
• Fairly distributing wealth and trading with justice
Global institutions such as the International Monetary Fund (IMF) and the World Bank may still be considered “haram” by Muslims to discuss; however, their systems of economics are, in general, philosophically different from Islamic economics and therefore are the basis upon which the respective philosophies differ.
Understanding the differences between these two different systems will allow for honest evaluation of global economies without any emotional bias.
The role of the IMF and World Bank is critical to the stability of the global economy; however, their recent discussions demonstrate that there remains a much larger issue than just global economics; that global economic systems continue to be heavily centralised and depend upon the use of debt.
To emerging economies, there is much to consider in light of the continuing dependence on global lenders; for example:
• How can we reduce our reliance on global lenders?
• Are there alternative financial systems that provide more stability to the countries creating their economic foundation?
đź“Ś Final thoughts
The International Monetary Fund (IMF) and World Bank, along with their many objectives, should not be seen as strictly “good” or “bad” but rather as “systems.” The International Monetary Fund and World Bank are part of a comprehensive system where both their positive effects and negative effects can exist simultaneously.
Understanding how these systems interact and operate within larger systems is important to our ability to analyze global economic systems, debt, and financial independence in an ever-evolving world.