Bilateral and multilateral trade agreements have mushroomed in the recent decades. There is empirical evidence that they boost international trade and contribution to the globalization or, at least, the regionalization of economies. At the same time, trade agreements, including their most prominent subcategory of free trade agreements (FTAs), have been subject to criticism both to their positive impact on economic available and, more broadly from the point of view of societal values. The concerns have been especially pronounced in the case of developing countries where the favorable outcome of free trade on their economies can be called into question. (Baier, & Bergstrand, 2007).
Both the World Bank and the IMF occupy chief roles in advocating for interconnected and globalized economies and bringing down barriers to free trade worldwide. It is important to note, however, that the process of liberalization has not been linear but rather transformed into a multi-speed model of “a spaghetti bowl” of various free trade areas, customs unions, and more complex supranational organizations such as the European Union (EU). Free trade agreements almost exclusively succeed in highly integrated regional blocks with the effect of compartmentalizing global trade into asymmetrical regional blocks. Consequently, regional trade agreements (RTAs) lead to situations were excluded countries lose in their trade flows with countries included in the respective trade agreement. As a result, RTAs also divert trade and reinforce already prevalent regional economic divisions. Moreover, the diverting effect of RTAs can be especially damaging for developing countries, as their economies are especially dependent on securing market access in developed countries. (Carrere, 2006)
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One could suggest that the World Bank and the IMF seek to remedy the situation through their work to include developing countries in the global economy. But the religious focus on liberalization of trade, to the exclusion of numerous other development priorities, is, in fact, damaging to the developing economies. The integrationist mindset bears the danger of pouring all administrative, financial and political resources of developing countries into efforts of maximizing their participation in the world economy. Unsurprisingly, this diverts the attention and the capability to carry out domestic reforms that do not necessarily contribute to a more open economy but are, nonetheless, key to socioeconomic development. When the World Bank and the IMF push the governments to stabilize their budgets, deregulate their legal framework or loosen their fiscal regime, the economy indeed becomes more attractive to foreign investment and cooperation in trade. However, such policy focus can have detrimental effect on purely domestic development priorities: education, healthcare, social cohesion and human rights protection. These concerns are evidence-based and come forward very clearly in the countless examples of African and Latin American countries, which have taken down barriers to trade and investment but did not enjoy a development boost. (Rodrick, 2001)
The World Bank and the IMF, just as any other international organization, have specific policy mandates that they cannot exceed. However, their work with governments of developing countries inevitably has effects on domestic policies – these organizations act as agenda setters in legislatures and government priorities, which largely shapes the internal sociopolitical discourse. Hence, as the mission of the World Bank and the IMF is after all helping countries build market-driven economies, the advocacy of these institutions faces the risk of conflict with social and environment oriented development priorities. (Goldstein, 1998) It often appears that these two institutions treat market forces as inherently democratic. But not anything that is good for the enrichment of global business structures is necessarily good for societies in the long run. The over-reliance on the neoliberal idea of globalization as an economic phenomenon creates conflicts between investment and environmental protection; the creation of jobs and adequate labor standards, economic growth and fair distribution of wealth.
Indeed, a functioning market economy integrated into the global economic landscape has proven to be a valuable attribute of prosperous countries. However, the success of developed nations has also affirmed that prosperity is unimaginable without due regard to the social element of development. It is time for institutions such the World Bank and the IMF to embrace this view and adapt their mandates to real developmental needs.
