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This post continues from the series on International Relations for IAS Prep. Read the essential posts here –
This was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.
In Bretton Woods, New Hampshire in 1944 during the United Nations Monetary and Financial Conference at the Mount Washington Hotel <That’s why IMF and World Bank are known as Bretton Woods twins>
The aim was to help rebuild the shattered post-war economy ( WW2 had just finished in 1945) and to promote international economic cooperation.
Political origin lies in 2 key conditions –
#1. International Monetary Fund(IMF) – To maintain global financial stability through technical assistance, training, and loans to member states to tide over short term balance of payment crisis
#2. World Bank (WB) Group – Consisting of 5 agencies which provides vital financial and technical assistance to developing countries around the world to reduce global poverty
Remember that WTO has nothing to so with Bretton Woods. It officially commenced only in 1995 under the Marrakesh agreement and replace General Agreement on Tariff and trade (GATT)
Trio of – US Treasury Secretary Henry Morgenthau, his chief economic advisor Harry Dexter White, and British economist John Maynard Keynes.
#1. International Monetary Fund (IMF)
Fundamental mission is to ensure the stability of the international monetary system.
Membership: 188 countries
Headquarters: Washington, D.C.
Publication- World Economic outlook, Global Financial Stability Report
This involves the monitoring of economic and financial developments and the provision of policy advice , aimed especially at crisis-prevention.
<Surveillance is the process of appraisal of the exchange rate policies of member countries. In the absence of surveillance, the financial volatility in the world today can become worse>
We all know, how good it’s surveillance is. It failed to predict worse it failed to even recognize the stress in the system which led to financial crisis of 2008. It again failed with the prediction of euro-zone crisis.
The IMF also to countries with balance of payments difficulties, to provide temporary financing and to support policies aimed at correcting the underlying problems, loans to low-income countries are also aimed esp. at poverty reduction <most criticized part, riddled with commonalities we discussed above>
Technical Assistance –
The IMF provides countries with technical assistance and training in its areas of expertise, which it calls capacity development
Obviously IMF would need money to perform all these functions. Money is contributed by member states and each country’s contribution is fixed in terms of it’s quota.
Bretton Woods established an international monetary system of fixed exchange rates pegged to dollar which was roughly pegged to gold known as gold exchange standard i.e. for every unit of currency fixed amount of dollars could be bought and with those dollars fixed amount of gold.
But with high trade growth in world resources did not keep pace with the growth in international trade because there simply wasn’t enough gold. World needed some other asset to supplement shortfall in dollar and gold and IMF brougth in SDR. But in 1971 gold standard and dollar peg collapsed and world moved to flexible exchange rate system. Role of SDR as international reserve asset diminished.
The value of the SDR is based on a basket of key international currencies (weighted avg value). With the addition of Renminbi, 5 currencies, dollar, yen, euro and pound-sterling form the SDR basket. (Renminbi value will be taken into account from Oct 1, 2016 only)
Please remember that SDR is not a currency i.e it is not a claim on the IMF. On the other hand, SDR is a claim on the countries whose currency is included in the SDR basket.(claim as is written on your 500 rs note with Rajan’s signature: I promise to pay the bearer the sum of 500 rupees)
Now, it has primarily become a unit of account i.e. IMF record keeping is done in SDR, Quotas are allocated in SDR.
Role of IMF was criticized for following reasons –
IMF recently passed long standing reform of changing quota share of member countries after US Senate withdrew its virtual veto. A few points
To follow the newscards related to IMF as they are pushed, follow this story, IMF and India
Foreign Exchange for Meeting BOP Deficits:
Such drawings of foreign exchange have enabled the country to tide over the acute foreign exchange crisis and to maintain the imports of essentials goods
Oil Facility from the IMF:
India resorted to drawals from the IMF under the Oil Facility created in June, 1974 to meet larger outlays for the import of petroleum crude.
Assistance under SDRs:
The SDRs provide unconditional liquidity since the participants have access to foreign exchange resources at will.
<We will take World Bank group, a part of bretton woods institutions in next article of this series>
#1. Which one of the following groups of items is included in India’s foreign-exchange reserves? (IAS pre 2013)
#2, Regarding the international monetary fund, which one of the following statements is correct ?
#3.Which of the following organizations brings out the publication known as ‘World Economic Outlook’? (IAS pre 2014)
(a) The International Monetary Fund
(b) The United Nations Development Programme
(c) The World Economic Forum
(d) The World Bank
#4. The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate are distinctly different. Elucidate. (Mains 2013)
Further Readings –