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Revisiting the Basics

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International Org. | Part 7 | Bretton Woods Institutions – World Bank Group


This post continues from the series on International Relations for IAS Prep. Read the essential posts here –

If you haven’t read part one of Bretton Woods institution, click here to read that first


 


 

World Bank is a vital source of financial and technical assistance to developing countries around the world. This is not only a bank in the ordinary sense but a unique partnership to reduce poverty and support development.


When? 1944

Headquarter: Washington, D.C.

Publications- global economic prospects, Ease of doing business index

There are 2 goals for the world to achieve by 2030 –

  • End extreme poverty by decreasing the percentage of people living on less than $1.90 a day to no more than 3%
  • Promote shared prosperity by fostering the income growth of the bottom 40% for every country

World Bank Group is not just World bank but comprises of 5 institutions managed by their member countries

These 5 institutions are as follows –

  1. International Bank for Reconstruction and Development (IBRD)- Commonly known as the world bank. It is the single largest provider of development loans
  2. International Development Association (IDA) – assists the poorest countries
  3. International Finance Corporation (IFC) – supports private enterprise in developing countries.
  4. Multilateral Investment Guarantee Agency (MIGA) – offers investors insurance against non-commercial risk and help developing country governments attract foreign investment <non commercial risks such as political instability, govt deciding to nationalise a private business etc.>
  5. International Centre for the Settlement of Investment Disputes (ICSID) – encourages the flow of foreign investment to developing countries through arbitration and conciliation facilities

Except for ICSID, India is member of other four groups<We don’t like external interference such as arbitration in our decision making process, hence not the member of ICSID>

<India is one of the founder members of IBRD, IDA and IFC>

So, we will discuss this 3 institutions in detail, as are important for India –

International Bank for Reconstruction and Development (IBRD) (world bank)

IBRD provides loans and other assistance primarily to middle income and poor but credit worthy countries at interest rates slightly lower than that offered by other financial institutions but with long term maturity<countries which have the capacity to repay the loan amount with interest>

Members: 188

Origins: IBRD as the name suggest was created in 1944 to help Europe reconstruct/ rebuild after World War II. To be a member of IBRD, a country has t join IMF first.

Main function:

  • Long-term capital assistance to its member-countries for their reconstruction and development
  • It works closely with the rest of the World Bank Group to help developing countries reduce poverty, promote economic growth, and build prosperity.

Other functions of IBRD Bank –

  • Supports long-term human and social development that private creditors do not finance
  • Preserves borrowers’ financial strength by providing support in times of crisis, when poor people are most adversely affected
  • Promotes policy and institutional reforms (such as safety net or anti-corruption reforms)
  • Creates a favorable investment climate to catalyze the provision of private capital
  • Facilitates access to financial markets often at more favorable terms than members can achieve on their own
  • Resources of the Bank consist of the capital and borrowings.

Before granting or guaranteeing a loan, the Bank considers the following matters –

  • merit of the proposal
  • The borrower has reasonable prospect for repayment i.e. credit worthiness
  • The loan is meant for productive purposes and to finance foreign exchange requirements of specific projects of reconstruction and development.

How is IBRD financed?

  • Simple as other banks are financed; float bonds in world financial markets. In fact, in these markets, IBRD is known simply as the World Bank
  • shareholder are member states with governments paying in about $14 billion in capital in proportion to their IMF quota
  • IBRD has maintained a triple-A rating since 1959. Its high credit rating allows it to borrow at low cost and offer middle-income developing countries access to capital on favorable terms in larger volumes, with longer maturities <What is a credit rating? How is it determined? What is the effect of a good or bad credit rating on the prospects of countries and corporations? Answer in the comments.>
  • IBRD earns income every year from the return on its equity and from the small margin it makes on lending
  • This pays for IBRD’s operating expenses, goes into reserves to strengthen the balance sheet, and provides an annual transfer of funds to IDA, the fund for the poorest countries

India and the IBRD

  • India is the founder-banker of the Bank
  • Bank has not been merely a lending institution to India but has also served as a worthy counsel whom India has approached for advice in difficulties
  • India has been the single largest borrower of the Bank
  • Main sectors for which IBRD assistance of US$ 3049 million has been provided are roads & highways, energy, urban infrastructure (including water & sanitation), rural credit, disaster management and the financial services sector
  • The Bank has also been instrumental in the establishment of the India Development Forum, a consortium of donor nations to India.
  • The massive financial assistance pledged by the consortium members has been the largest aid commitment and is a landmark in the history of development aid from developed countries to developing countries.

International Development Association (IDA)

IDA is the part of the World Bank that helps the world’s poorest countries

IDAfront


When? 1960

Aim: To reduce poverty by providing loans (called “credits”) and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions.

Main Functions of IDA:

  • IDA provides loans which are practically interest-free and for longer periods. Therefore, it is often referred to as the ‘soft loan window’ of the Bank.
  • Only the poorest of the poor member countries (with per capita income below $1215 in 2016) are eligible for assistance.
  • IDA complements the World Bank’s original lending arm, International Bank for Reconstruction and Development (IBRD)

IDA1


Structure of lending and credits by IDA

  • IDA lends money on concessional terms. This means that IDA credits have a zero or very low interest charge and repayments are stretched over 25 to 38 years, including a 5- to 10-year grace period
  • IDA also provides grants to countries at risk of debt distress <grants are donations i.e. not to be rapid>
  • In addition to concessional loans and grants, IDA provides significant levels of debt relief through the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI)
  • IDA is a multi-issue institution, supporting a range of development activities, such as primary education, basic health services, clean water and sanitation, agriculture, business climate improvements, infrastructure, and institutional reforms
  • These interventions pave the way toward equality, economic growth, job creation, higher incomes, and better living conditions

Borrowers of IDA

  • 77 countries (plus India) are currently eligible to receive IDA resources
  • Eligibility for IDA support depends first and foremost on a country’s relative poverty, defined as gross national income (GNI) per capita below $1,215 in fiscal year 2016
  • IDA also supports a number of countries, including several small island economies, which are above the operational cutoff but lack the creditworthiness needed to borrow from IBRD
  • Some countries, such as Vietnam and Pakistan, are IDA-eligible based on per capita income levels, but are also creditworthy for some IBRD borrowing. They are referred to as “blend” countries <receive loans from bot IDA and IBRD; India is also one such country>

Roadmap ahead for IDA

  • Today’s fiscal environment presents challenges for all those involved in development from borrowing countries to donors<funds are simply not available after financial crisis>
  • The new Sustainable Development Goals (SDGs) present a critical opportunity to end extreme poverty. That would need strong commitment and financing to meet the goals
  • A number of countries are expected to exceed IDA’s per capita income threshold in the next decade, it is also clear that these countries will continue to be home to millions of poor people who will still need extensive support, particularly during the transition period from concessional to harder lending terms
  • As the main instrument for implementing the global goals in the poorest countries, IDA will need to shift toward increasingly innovative approaches to deliver trans-formative results

India has exceeded IDA’s per capita income threshold of 1260$ and is thus technically not eligible to tap IDA window but India campaigned to extend the tenure of India’s concessional loans by several more years (till 2022), given the country’s high poverty levels and WB decided to continue it’s IDA concessional lending in view of 300m people living below poverty line.

International Finance Corporation (IFC)

Largest global development institution focused exclusively on the private sector in developing countries

When? 1956

Members: 184

Objectives of the IFC

  • To further economic development by encouraging growth of private enterprise in member-countries
  • Invests in private enterprise in member-countries in association with private investors and without Government guarantee, in cases where sufficient private capital is not available on reasonable terms
  • Seeks to bring together investment opportunities, private capital of both foreign and domestic origin, and experienced management
  • Stimulates conditions conducive to the flow of private capital – domestic and foreign – into productive investments in member-countries
  • IFC investment normally does not exceed 40% of the total investment of the enterprise
  • In case of its investment by equity participation, it does not exceed 25% of the share capital

IFC and India

  • IFC makes strategic investments and advisory interventions to promote inclusive growth, help address climate change impacts, and encourage global and regional integration
  • In India, IFC is sharpening its focus on increasing access to energy, finance and healthcare; providing sustainable infrastructure; and boosting regional linkages

Focus Areas –

  • Building infrastructure
  • Facilitating renewable energy generation
  • Promoting cleaner production, energy and water efficiency
  • Supporting agriculture for improved food security
  • Creating growth opportunities for small businesses
  • Helping reform investment climate

Let’s take a look at India-IFC ties

  • Since 1956, IFC has invested in 346 companies in India, providing over $10.3 billion in financing for its own account and $2.9 billion in mobilization from external resources
  • IFC’s committed portfolio in India is nearly $4.7 billion<India has IFC’s largest portfolio exposure>
  • In FY14, IFC committed nearly $1.2 billion across 34 projects in India
  • IFC also has a strong advisory program in India with a total portfolio value of $62 million across 74 projects.
  • In FY14, three quarters of IFC’s advisory program had a footprint in India’s priority states

IFC also issue India’s first masala bonds to tap in foreign funding in local currency. similar IFC also issued first green masala bonds to raise investments to deal with climate change. Want to know what is masala bond, click here to read more

Concerns around World Bank lending and reform of World Bank

  • As we learnt in the earlier part on Bretton Woods institution that main concern is around conditionalities and impact of world bank funded infrastructure projects on local population<displacement, loss of jobs etc.>
  • The Bank’s undemocratic governance structure – which is dominated by industrialised countries – and its privileging of the private sector
  • the Bank’s private sector lending arm (IFC) has been criticised for its business model<increasing use of financial intermediaries such as private equity funds and funding of companies associated with tax havens>
  • World bank recently announced that it would not fund coal technologies for climate change reasons, it would make task of investing in clean coal technologies difficult for countries such as India

Reforms

  • World bank’s governing structure need to be made more democratic
  • Developing countries should be given a chance to shape the agenda
  • There should be more transparency on the issues that come to the table
  • More resources(increase the capital base) need to be put in so that it continue lending to poorer countries

Let’s revise World Bank in brief

Name Main Function Comment
IBRD (WB) Infrastructure loan to poor middle income but credit worthy countries at just below market rates India founder member, largest recipient of loan
IDA Soft loan at virtually zero rate for poverty eradication to poorest countries India founder largest recipient, has crossed the per capita threshold for funding but will continue to receive IDA funds
IFC Private sector arm of WB group, supports private enterprises in developing countries India founder, IFC launched India’s offshore masala bond
MIGA Provide guarantee to investors against non-commercial political risk India not founding member
ICSID Resolve disputes through arbitration and conciliation India not a member

UPSC ke Sawal

#1. Which one of the following groups of items is included in India’s foreign-exchange reserves? (IAS pre 2013)

  1. Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
  2. Foreign-currency assets, gold holdings of the RBI and SDRs
  3. Foreign-currency assets, loans from the World Bank and SDRs
  4. Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

#2. ‘BioCarbon Fund Initiative for Sustain- able Forest Landscapes’ is managed by the (IAS pre 2015)

(a) Asian Development Bank
(b) International Monetary Fund
(c) United Nations Environment Programme
(d) World Bank

#3. The price of any currency in international market is decided by the (ias pre 2012)

  1. World Bank
  2. demand for goods/services provided by the country concerned
  3. stability of the government of the concerned country
  4. economic potential of the country in question

Which of the statements given above are correct?

  • (a) 1, 2, 3 and 4
  • (b) 2 and 3 only
  • (c) 3 and 4 only
  • (d) 1 and 4 only

#1. 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. (IAS mains 2013)

#2. Does India Need the World Bank?

Questions, suggestions and comments


  1. Profile photo of Debodyuti Dutta Debodyuti Dutta

    what is the reason that “loans from foreign countries” is a part of Foreign reserve but not the loan from world bank? what about loan from IMF?

  2. Profile photo of Pushpendra Rana Pushpendra Rana

    How IBRD and IDA differ in terms of granting loans ?? ANy specific criteria adopted by them ??

    1. Profile photo of Er S Er S

      has a question been asked on similar lines? this seems like too much depth.

      1. Profile photo of Pranav Pranav

        IBRD gives loans on sovereign security while IDA gives without security and that too at almost no interest

  3. Profile photo of Swapnil Sonwalkar Swapnil Sonwalkar

    please add other international organisations
    1-united nation
    2 opec
    3-east asia summit
    4-AIIB
    5-WHO
    Also treaty like
    1 TTIP
    2 TPP
    3 RCEP
    4 SAFTA
    5 SAPTA
    6 NPT
    7 CTBT
    8 NAFTA
    9 G4,G7,G20,G33,G90

  4. Profile photo of Krishna Kunal Krishna Kunal

    where are parts 1-4 ? it’s so difficult to find

    1. Profile photo of Rohit Pande Rohit Pande

      Search on the website or just click the first of the hyperlinks and scroll down from there…

  5. Profile photo of g@ur@v g@ur@v

    B,D,B

  6. Profile photo of Pranav Pranav

    Answers
    #1 = 2
    #2 = d
    #3 = b

    Also, I am not sure but if the answer to the #3 is correct, could someone please explain as to how government stability could affect exchange rate. Demand and supply for sure does.

    1. Profile photo of Dr V Dr V

      We have previously discussed currency is like any other commodity and it’s value is determined by forces of demand and supply.

      Clearly world bank can’t determine currency rates # option 1 wrong . Option 2 is definitely correct.as
      Option 2 directly affects exchange rate # high demand for goods and services # export # demand for country currency # currency appreciation
      So right answer option is 2 &3
      3&4 affect exchange rate indirectly as more stable govt and high potential for growth would encourage more investment # more demand for local currency # exchange rate appreciation.
      Option 3&4 is the situation in india after the formation of NDA govt but as u can see, forex markets have been volatile for these factors affect forex market indirectly through investment and speculation .

      1. Profile photo of Pranav Pranav

        So shoudn’t an option like “2,3 and 4” be the most apt since the better economic prospects again would cause inflow of investments # more foreign flow of money, all this money needs to be converted to the home countries currency (basically increasing its demand and hence increasing its value). Also, worse economic prospects (like in the case of China) is causing outflows and eventually devaluation of renmibi

        1. Profile photo of Dr V Dr V

          Yes, you are right. But there was no such option in the upsc paper. If there was an option as 2,3,4, that would have been the best option.

  7. Profile photo of Praveen “VSR” Kumar Praveen “VSR” Kumar

    b,d,b

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