International Economic Institution’s: The Breton Woods Twins- World Bank and IMF

International Economic Institution’s

World Bank and Associated Institutions

The World Bank Group (WBG) is a family of five international organisations that make leveraged loans to developing countries. It is the largest and most famous development bank in the world and is an observer at the United Nation Development Group.

The World Bank

The International Bank for Reconstruction and Development (IBRD), better known as the World Bank, was established under the Bretton Woods System along with the International Monetary Fund.

The role of IMF was to provide the international liquidity in the International Economy which was hampered due to World War 2. The aim of IMF was to correct Balance of Payment difficulties.

In the similar vein, the aim of the World Bank was to provide long term development assistance to and loans in reasonable terms to the nations.

The World Bank or IBRD is a multilateral level inter-governmental Institution. All the member countries have their shares in the capital stock of the World Bank.

Key Functions of the World Bank as per Article 1 of the Agreement

Organisation Structure of the World Bank

The World Bank works on a cooperative structure and currently has 189-member countries. These member countries are represented by a ‘Board of Governor’ are the ultimate policy makers of the World Bank. The Boards of Governors consist of one Governor and one Alternate Governor appointed by each member country. The office is usually held by the country’s minister of finance, governor of its central bank, or a senior official of similar rank.

The governors delegate specific duties to Executive directors, who works at the Bank premises. The five largest shareholders appoint an executive director, while other member countries are represented by elected executive directors.

  • World Bank Group Current President is Jim Yong Kim who chairs the meetings of the Boards of Directors and is responsible for overall management of the Bank. The President is selected by the Board of Executive Directors for a five-year, renewable term.
  • The Executive Directors make up the Board of Directors of the World Bank. They normally meet at least twice a week to oversee the Bank’s business, including approval of loans and guarantees, new policies, the administrative budget, country assistance strategies and borrowing and financial decisions.

Is World Bank Biased Towards Developed Countries?

  • It has been a complaint of many developing countries that the bank provides developmental loans at discretionary high-interest rates. For example, some of the loans which India has received in recent years bear an interest of 53.4 per cent including the commission at 1 per cent which is credited to the Bank’s special reserves.
  • The financial aids given by the Bank accounts for a minuscule part of financial requirement essential for various development projects in developing countries.
  • The bank usually asks for the collateral from the under developed countries which are difficult to provide by such countries due to their low level of income and development. The logical question is ‘if the poor and underdeveloped countries have an asset to provide as collateral, why would they approach institutions like the World Bank for loans at a concessional rate?
  • The working, structure and operations of the World Bank are dominated by the Western countries led by the USA, who are also one of the highest stakeholders at the Bank. The bank has often been criticized for not being multilateral in the true sense and works more like a unilateral institution of the Western countries with the main aim of providing profits to them.
  • With the World Bank, there are concerns about the types of development projects funded. Many infrastructure projects financed by the World Bank Group have social and environmental implications for the populations in the affected areas, and the criticism has centred on the ethical issues of funding such projects. For example, World Bank-funded construction of hydroelectric dams in various countries has resulted in the displacement of indigenous peoples of the area.
  • The approach adopted by the bank is not suitable for all the countries. The bank follows ‘One Size Fits All’ strategy while providing development assistance and policies. Such strategies cannot work effectively in a real-life World since problems and situations vary country wise, and a common solution to all of them is not possible and utopian in nature. For example, The problem of Stunting (low height of Children as per their age) for an Indian child can’t be compared with that of an African child. The African child will be much longer in height as compared to its Indian counterpart in same age group. Thus, they both need different types of calories intake as per their geography.

International Development Assistance

  • The International Development Association (IDA) is the part of the World Bank group that helps the world’s poorest countries. Overseen by 173 shareholder nations, IDA aims to reduce poverty by providing loans (called “credits”) and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions.
  • IDA complements the World Bank’s original lending arm—the International Bank for Reconstruction and Development (IBRD). IBRD was established to function as a self-sustaining business and provides loans and advice to middle-income and credit-worthy poor countries. IBRD and IDA share the same staff and headquarters and evaluate projects with the same rigorous standards.
  • IDA is one of the largest sources of assistance for the world’s 75 poorest countries, 39 of which are in Africa, and is the single largest source of donor funds for basic social services in these countries.
  • 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 40 years, including a 5- to 10-year grace period. IDA also provides grants to countries at risk of debt distress.
  • In addition to concessional loans and grants, IDA provides significant levels of debt relief through the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative.
  • 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. For the period July 1, 2014–June 30, 2017 (IDA17), IDA operations are placing a special emphasis on four thematic areas: climate change, fragile and conflict affected countries, gender equality, and inclusive growth.
  • IDA17 financing is expected to provide, among other things, electricity for an estimated 15-20 million people, life-saving vaccines for 200 million children, microfinance loans for more than 1 million women, and basic health services for 65 million people. Some 32 million people will benefit from access to clean water and another 5.6 million from better sanitation facilities.
  • Many of the issues developing countries face do not respect borders. By helping address these problems, IDA supports security, environmental and health concerns, and works to prevent these threats from becoming global issues.

International Finance Corporation

  • The IFC was established in 1956 to support the growth of the private sector in the developing world. IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector in developing countries.
  • The IFC’s stated mission is “to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people’s lives.”
  • While the World Bank (IBRD and IDA) provides credit and non-lending assistance to governments, the IFC provides loans and equity financing, advice, and technical services to the private sector. The IFC also plays a catalytic role, by mobilizing additional capital through loan syndication and by lessening the political risk for investors, enabling their participation in a given project. The IFC has worked with more than 3319 companies in 140 countries since its inception in 1956.
  • It is a public entity, although its clientele consists of transnational, national, and local private sector companies, operating in a competitive and fast-moving business environment.

Multilateral Investment Guarantee Agency

  • MIGA is a member of the World Bank Group. Its mission is to promote FDI into developing countries to help support economic growth, reduce poverty and improves people’s lives.
  • At the centre of MIGA’s new FY18-20 strategy are three elements:
  1. A re-affirmed focus on the poorest through support for projects in IDA countries
  2. A continuing emphasis on Fragile and Conflict-affected States, where MIGA has opportunity to have impact where private PRI insurers are unwilling to go, and
  3. An expanded commitment to climate change mitigation and adaptation, targeting 28% of new issuance related to climate change mitigation or adaptation in 2020.

To deliver on these targets, MIGA’s FY18-20 strategy has four pillars:

  1. Grow core business: MIGA will enable new investments across sectors and regions through building on past efforts to improve operations and delivery in current segments.
  2. Innovate applications: MIGA will continue to create new ways of using its suite of products to create impact, especially through the use of new vehicles, including the IDA 18 Private Sector Window.
  3. Create projects for impact: MIGA will develop, structure and launch new projects by playing a proactive role early in the pipeline through working with governments, state-owned enterprises, and investors.
  4. Create markets: MIGA will drive comprehensive country solutions and spur private sector investment and development by working as part of the WBG’s Cascade Approach.
  • MIGA is owned and governed by its member states, but has its own executive leadership and staff which carry out its daily operations. Its shareholders are member governments which provide paid-in-capital and have the right to vote on its matters. It insures long-term debt and equity investments as well as other assets and contracts with long-term periods. The agency is assessed by the World Bank’s Independent Evaluation Group each year.

International Monetary Fund

The IMF is an organization of 189-member countries, working to foster global monetary cooperation, secure financial stability, facilitates international trade, promote high employment and sustainable economic growth along with poverty reduction.

The IMF was conceived at a United Nation Conference in Bretton Woods, New Hemisphere, United States in July 1944 along with the World Bank. The initial 44-member countries at the conference sought to build a framework for economic cooperation and to avoid a repetition of competitive devaluation of currency which has contributed to ‘Great Depression of the 1930s’.

The IMF’s primary responsibility is to ensure the stability of international monetary system remains safe, to safeguard the system of the exchange rate and international payments so that countries could transact with each other freely.

The IMF’s mandate was updated in the year 2012, to include all macroeconomic and financial sector issues that can affect global financial stability.

IMF at Glance

Total Member 189 Countries
Headquarter Washington DC, USA
Executive Board 24 Directors each representing a single or group of countries
Total Resources US $668 Billion
Currency Special Drawings Rights (SDR consists of 5 Key World currencies: US Dollar, Euro, Japanese Yen, UK Pound and Chinese Renminbi.
Biggest Borrowers Portugal, Greece, Ukraine and Pakistan (as on 31/08/2016)

Role of IMF in promoting Global Economic Stability

The IMF advises member countries on economic and financial matters that promote stability, reduce vulnerability to crises, and encourages sustained growth and high living standards. It also monitors global economic trends and developments that affect the health of the international monetary and financial system.

Economic stability implies avoiding economic and financial crises, volatility in economic activity, high inflation and excessive volatility in foreign exchange and financial markets. Economic instability can increase uncertainty, discourage investment, obstruct economic growth and living standards. The biggest challenge for policy makers is to minimize instability in their own country and abroad without reducing the economy’s ability to improve living standards through rising productivity, employment and sustainable growth.

How Does IMF help in achieving stability?

The IMF help countries achieve stability through Surveillance, Assistance and Lending.

  • Surveillance: Every country joining IMF accepts the obligation to subject its economic and financial policies to the scrutiny of the international community. The IMF oversees the international monetary system and monitors the economic and financial developments of its 189-member countries. The surveillance takes place at the global and individual country level. The IMF assesses the domestic policies and risk associated with domestic and balance of payment stability and advises for the same.
  • The IMF produces periodic report known as “World Economic Outlook” and the “Global Financial Stability Report” regarding the same. The report’s analyses global and regional macroeconomic and financial developments.
  • Technical Assistance: The IMF helps countries strengthen their capacity to design and implement sound economic policies. It provides advice and training in areas of core expertise—including fiscal, monetary, and exchange rate policies; the regulation and supervision of financial systems; statistics; and legal frameworks.
  • Lending: Even the best economic policies cannot completely eradicate instability or avert crises. If a member country faces a balance of payment crisis, the IMF can provide financial assistance to support policy programs that will correct underlying macro economic problems, limit disruption to both the domestic and the global economy, and help restore confidence, stability, and growth. The IMF also offers precautionary credit lines for countries with sound economic fundamentals for crisis prevention.

IMF’s Special Drawing Rights

The SDR is an international reserve asset created by IMF in 1969 to supplement its member countries official reserves. The value of SDR is based on a basket of five major currencies- the US Dollar, the Euro, the Japanese Yen, the UK Pound and the Chinese Renminbi.

The Creation of SDR: A country participating in foreign exchange market needs official foreign exchange reserves. The domestic governments hold these foreign exchange reserves in the form of Gold and widely accepted foreign currencies like the US dollar or the Euro. The domestic countries use their foreign exchange reserves during the crisis period or when they need to provide support to their respective currencies and exchange rate. The countries do so by buying their currency in the foreign exchange rate markets by paying through dollar or gold. But the supply of two key international reserve assets- the US dollar and the gold is inadequate for supporting the needs and expansion of the financial flows. Therefore, the international community decided to create a new international reserve asset called ‘SDR’ under the leadership of the IMF.

IMF Quota System

Quotas are central to IMF’s financial resource. Each member country of the IMF is assigned a quota of resources based broadly on its relative position in the World Economy. A member country’s quota determines its maximum financial commitment to the IMF, its voting rights and its access to IMF lending’s.

When a country joins the IMF, it is assigned an initial quota based on its size of the economy. The current quota formula is a weighted average of:

  • Country’s GDP (50 percent weight)
  • Openness of the economy (30 percent weight)
  • Economic variability (15 percent)
  • Intranational/Foreign reserves (5 percent)
  1. Quotas are determined in SDR terms. The largest member of the IMF is the United States, with a current quota of SDR 82.99 Billion and the smallest member is Tuvalu, with a quota of SDR 2.5 Million. India’s current quota is SDR 13.1 Billion.
  2. The quota plays a key role in determining a country’s financial and organisational relationship with the IMF. A member’s quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. The quota determines the member voting power inside the IMF decision making. A number of finances a member can access from the IMF is also based on its share of quota.
  3. The 14th General Quota review which met on January 2016 decided to increase the quota of each of the IMF 189 members to a combined SDR of 477 Billion from about SDR 238.5 Billion. With the move, the IMF has implemented its long pending quota reforms (under pressure from the emerging economies) which will give more voting rights to emerging economies such as India and China in the functioning of the IMF.
  4. With these reforms, India’s quota in the IMF would rise to 2.7 percent, from the existing 2.44 percent. The voting share of Indian in IMF would also increase to 2.6 percent from 2.34 percent. The reforms reflected the increasing role of dynamic emerging and developing countries in the World economy. For the first-time key emerging countries of the BRIC bloc (Brazil, India, China and Russia) will be among the 10 largest members of the IMF. China has become the third largest country in the IMF.
  5. Other top 10 countries include the US, Japan, Germany, France, UK and Italy. Also for the first time, the IMF board will consist entirely of elected executive directors, ending the past tradition of having appointed executive directors.
  6. The reforms shifted more than 6 percent of quota shares from over represented to under-represented countries. the reforms also shifted more than 6 percent quota shares to emerging and developing countries.

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

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