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6' Global institutions: IMF and IBRD

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Title: 6' Global institutions: IMF and IBRD


1
6. Global institutions IMF and IBRD
  • IMF and The World Bank different mandates
  • IMF
  • Proposes and evolution
  • Activities
  • Governance
  • Financing the IMF
  • The World Bank
  • Composition
  • Operations
  • Governance
  • Financing
  • Conditionality
  • Other parallel institutions the BIS, G10, G5/G7,
    the EBRD.
  • Essay 13 Global Institutions IMF and the
    World Bank Group

2
Institutions IMF and IBRD
  • Readings
  • www.IMF.org, and  http//www.worldbank.org/ ,
  • Kahler, 1995, pp. 48-65
  • Stiglitz, Joseph E. (2003), Globalisation and its
    discontents, Norton, Chapter 8 and 9

3
1. IMF and The World Bank different mandates
  • The IMF and the World Bank have different
    mandates
  • Bretton Woods Conference established The World
    Bank and the IMF.
  • The World Bank purpose was to help war-ravaged
    countries rebuild. The earliest recipients of its
    loans were the European countries and Japan.
  • By the early 1960s, these countries no longer
    needed World Bank assistance, and its lending was
    redirected to the newly independent and emerging
    nations of Africa, Asia, Latin America, and the
    Middle East
  • In the 1990s, assistance also went to transition
    countries of Central and Eastern Europe.

4
1. IMF and The World Bank different mandates
  • The IMF and the World Bank have different
    mandates (Continuation)
  • IMF's focus is chiefly on macroeconomic issues
    and the financial sector (it does not finance
    projects),
  • The World Bank is concerned mainly with
    longer-term development and poverty reduction.
  • Its loans finance infrastructure projects, the
    reform of particular sectors of the economy, and
    broader structural reforms.
  • Countries must join the IMF to be eligible for
    World Bank membership.

5
2.i. IMF proposes
  • The IMF's primary purpose is,
  • to ensure the stability of the international
    monetary systemthe system of exchange rates and
    international payments that enables countries
    (and their citizens) to buy goods and services
    from each other.
  • IMFs What is the IMF, 2006, p.1

6
2.i. IMF rules
  • Principal features and rules, distinguish
    external and domestic policies as in GATT .
  • Mainly it constrain certain mutually harmful
    external policies, in particular
  • Preventing competitive devaluation stable ERs,
  • Preventing restrictions on current account
    convertibility.
  • The idea of central policy coordination bargains
    was NOT part of the Bretton Woods system.
  • Beginning of 1970s the IMF crumbled. IMF role in
    subsequent episodes have been marginal.

7
2.i. IMF ER stability
  • Between 1945 and 1971, countries agreed to keep
    their exchange rates pegged to the US, at rates
    that could be adjusted only to correct a
    "fundamental disequilibrium" in the balance of
    payments and only with the IMF's agreement. This
    so called par value systemalso known as the
    Bretton Woods systemprevailed until 1971, when
    the U.S. government suspended the convertibility
    of the U.S. dollar (and dollar reserves held by
    other governments) into gold.
  • Since then, members are free to choose their own
    ER regimes.

8
2.i. IMF evolution
  • IMF had to adapt to global capital markets and
    to,
  • Increased membership from initial 29 members to
    the 184 members today, including LDCs (some
    former colonies of European powers) and
    transition economies (former communist countries
    in Eastern Europe).
  • Many crisis (i) 1971, end of par value system to
    present floating, (ii) 1970s, oil price shocks,
    (iii) 1980s, Latin America debt crisis, (iv)
    1990s, crises in the emerging financial markets
    in Mexico and Asia, and (v) 2001, Argentina debt
    default.
  • Prevailing poverty in the world.

9
2.i. IMF evolution to conditionality
  • After 1971, as the IMF role on international
    policy coordination waned, the IMF and the WB
  • have served as a means of integrating poorer
    and newer members of the capitalist economy
    rather than dealing with the coordination of
    economic policies among industrialized
    countries. Kahler, p 49

10
2.i. IMF evolution to conditionality
  • After the 1970s, the IMF was able to mobilize
    financial support for currencies in trouble and
    adjustment programs.
  • Instrument of conditionality IMFs financial
    assistance against specified domestic policy
    changes. This involved negotiations and
    monitoring of the stand-by arrangements. It deals
    mainly with CA items, not items of capital
    account.
  • By the 1990s the central role of the IMF was to
    link financial support of the two institutions to
    international oversight of LDCs domestic policy
    regimes and the transition economies (K, p.49).

11
2.ii. IMF activities
  • The IMF has essentially 3 activities, in order to
    maintain stability and prevent crisis,
  • Surveillance monitoring national, global, and
    regional economic and financial developments and
    advising member countries on their economic
    policies
  • Lending members hard currencies to support policy
    programs designed to correct balance of payments
    problems and
  • Offering technical assistance in its areas of
    expertise, as well as training for government and
    central bank officials.

12
2.ii. IMF surveillance
  • Two forms (a) general surveillance of the world
    economy published in the World Economic Outlook
    and the International Capital Markets Report, (b)
    surveillance of individual countries (Article
    IV).
  • This is composed by
  • Article IV consultations (IMF's Articles of
    Agreement) regular comprehensive consultations
    with individual member countries, with interim
    discussions as needed.
  • IMF staff missions also often reach out beyond
    their official interlocutors for discussions with
    parliamentarians and representatives of business,
    labour unions, and civil society.
  • A team visits the country and reports its
    findings to IMF management and to IMF's member
    countries, for discussion. A summary of the
    Board's views is transmitted to the country's
    government.

13
2.ii. IMF's surveillanceMain - macroeconomic and
financial sector policies
  • In its oversight of member countries, the IMF
    focuses on the following
  • macroeconomic policies relating to the
    government's budget, the management of money and
    credit, and the exchange rate
  • macroeconomic performancegovernment and consumer
    spending, business investment, exports and
    imports, output (GDP), employment, and inflation

14
2.ii. The IMF's surveillance Main
businessmacroeconomic and financial sector
policies
  • Continuation
  • balance of paymentsthat is, the balance of a
    country's transactions with the rest of the
    world
  • financial sector policies, including the
    regulation and supervision of banks and other
    financial institutions and
  • structural policies that affect macroeconomic
    performance, such as those governing labour
    markets, the energy sector, and trade.

15
2.ii. IMF Lending to countries in difficulty
  • Any member country may turn to the IMF when it
    looses creditworthiness in capital markets (or
    loans become too expensive).
  • Technically, countries do not receive loans from
    the IMFthey "purchase" foreign exchange from the
    IMF's reserve assets, paying with their own
    currency. The loan is considered repaid when the
    borrower "repurchases" its currency from the IMF
    in exchange for reserve assets.

16
2.ii. IMF Lending facilities
  • Stand-By Arrangements are designed to deal mainly
    with short-term balance of payments problems. The
    IMF's largest loans fall into this category. In
    1997, the IMF introduced the
  • Supplemental Reserve Facility, under which it can
    quickly provide large loans with very short
    maturities to countries going through a capital
    account crisis.

17
2.ii. IMF Lending facilities
  • The IMF introduced the Extended Fund Facility to
    help countries address balance of payments
    difficulties related partly to structural
    problems that may take longer to correct than
    macroeconomic imbalances.
  • Programs may then include measure to improve the
    way markets and the supply side of the economy
    function, such as tax and financial sector
    reforms, privatisation of public enterprises, and
    steps to make labour markets more flexible.

18
2.ii. IMF Lending facilities
  • Under its Poverty Reduction and Growth Facility,
    the IMF provides concessional loansloans with
    low interest rate for 10 yearsto its poorest
    member countries. The majority of the IMF's loans
    now fall into this category.
  • In 2005, it approved the establishment of the
    Exogenous Shocks Facility, under which it can
    give LDCs (that are not receiving funds under the
    Poverty Reduction and Growth Facility, and) that
    are suffering a balance of payments problem
    because of a shock beyond their control, quick
    access to funds on a concessional basis.

19
2.ii. IMF Lending facilities
  • The IMF also provides
  • Emergency Assistance natural disasters, or
    military conflicts causing B/P problems,
  • Trade Integration Mechanism B/P problems due to
    trade liberalization

20
2.ii. IMF Lending instruments
  • Two types of windows
  • Most countries (except for the poorest) -
    regular, non-concessional lending windows pay
    market-related interest rates and service
    charges, plus a refundable commitment fee.
  • Low-income countries borrowing under the Poverty
    Reduction and Growth Facility pay a concessional
    fixed interest rate of 0.5 percent a year.
  • The foreign exchange provided by the IMF is
    subject to limits determined partly by a member's
    quota in the IMF and is deposited with the
    country's central bank to supplement its
    international reserves.

21
2.ii. Technical assistance and training
  • Objective to help improve the design and
    implementation of members' economic policies,
    including by strengthening skills in institutions
    such as finance ministries and central banks.
  • It is provided for,
  • central banking, monetary and exchange rate
    policy, tax policy and administration, and
    official statistics.
  • More than 75 percent of the IMF's technical
    assistance goes to low-income and
    lower-middle-income countries, particularly in
    sub-Saharan Africa and Asia.

22
2.ii. IMF help for the very poor
  • Most of the IMF's loans to low-income countries
    are made on concessional terms, under the Poverty
    Reduction and Growth Facility.
  • 2005 - Policy Support Instrument - the success of
    a country's program is assessed by the IMF
    against the goals set forth in the country's
    poverty reduction strategy,
  • Debt relief efforts in 1996, the IMF and the WB
    unveiled the Heavily Indebted Poor Countries
    (HIPC) Initiative to faster debt relief. In
    2005, the G-8 launched the Multilateral Debt
    Relief Initiative (MDRI), which called for the
    cancellation of the debts owed to several
    organizations.
  • Poverty Reduction Strategy Paper (PRSP) process -
    in 1999 the IMF and the World Bank introduced it.

23
2.ii. IMF help for the very poor
  • Poverty Reduction Strategy Paper (PRSP) process -
    in 1999 the IMF and the World Bank introduced it.
  • Aid for Trade - In 2005, the IMF and the World
    Bank introduced the concept it includes
    analysis, policy advice, and financial support.
    The IMF provides advice to countries on such
    issues as the modernization of customs
    administration, tariff reform, and the
    improvement of tax collection to compensate for
    the loss of tariff revenues that may follow trade
    liberalization.
  • The IMF also participates in the
  • Integrated Framework for Trade-Related Technical
    Assistance, a multi-agency, multi-donor program
    that helps the least developed countries by
    identifying impediments to their participation in
    the global economy and coordinating technical
    assistance from different sources.

24
2.iii. IMF governance
  • The IMF is governed by, and is accountable to,
    its member countries through its Board of
    Governors.
  • There is one Governor from each member country,
    typically the finance minister or central bank
    governor.
  • The Governors usually meet once a year, in
    September or October, at the Annual Meetings of
    the IMF and the World Bank.
  • International Monetary and Financial Committee -
    IMFC committee of Governors assessing key policy
    issues related to the international monetary
    system.
  • Development Committee - joint committee of the
    Boards of Governors of the IMF and the World Bank
    to advise and report to the Governors on
    development policy and other matters of concern
    to developing countries.
  • There are also the Executive Board see below.

25
2.iii. IMF governance executive board
  • Composition 24 Executive Directors on the Board,
  • 8 are appointed by single countriesthe IMF's 5
    largest quota-holders (the United States, Japan,
    Germany, France, and the United Kingdom) and
    China, Russia, and Saudi Arabia.
  • 16 Executive Directors are elected for two-year
    terms by groups of countries known as
    "constituencies.

26
2.iii. IMF governance executive board
  • Voting - weighted voting system - the larger a
    country's quota in the IMFdetermined broadly by
    its economic sizethe more votes the country has,
    in addition to its "basic votes," of which each
    member has an equal number.
  • Decisions are based on formal voting most
    decisions are based on consensus. Shadow voting
    is probably widespread so that the 8 countries
    have more power than the others.
  • In the early 2000s, in response to changes in the
    weight and role of countries in the world
    economy, the IMF began to re-examine the
    distribution of quotas and voting power to ensure
    that all members are fairly represented.

27
2.iv. Financing the IMF
  • Mostly financing come from quotas that countries
    deposit when they join the IMF. Quotas depend on
    size of each member's economy. For example, the
    U.S. the world's largest economy, has the largest
    quota in the IMF.
  • Countries deposit 25 of their quota
    subscriptions in Special Drawing Rights or major
    currencies, such as U.S. dollars or Japanese yen.
    The IMF can call on the remainder, payable in the
    member's own currency, to be made available for
    lending as needed.
  • Quotas determine voting power, the amount of
    financing members can borrow from the IMF and
    share in SDR allocation.

28
2.iv. SDRs - Special Drawing Rights
  • The SDR is the IMF's unit of account introduced
    in 1969.
  • It is a supplementary international reserve asset
    that member countries can add to their foreign
    currency and gold reserves and use for payments
    requiring foreign exchange.
  • It is a basket of four major currencies the
    euro, Japanese yen, pound sterling, and U.S.
    dollar.
  • It may be used between members, and with other
    institutional organizations and with the IMF.
  • A number of other international and regional
    organizations and international conventions use
    it as a unit of account, or as the basis for a
    unit of account.

29
2.iv. Financing the IMF
  • Quotas finance most IMF loans.
  • Exceptions,
  • Loans under the Poverty Reduction and Growth
    Facility, which are paid out of trust funds set
    up by the IMF and some rich members.
  • The IMF may borrow from a number of its
    financially strongest member countries to
    supplement the resources available from its
    quotas.
  • It also earns income from the interest charged
    and fees levied on its loans as in any other
    financial institution.

30
3.i. The World Bank
  • Made up of two development institutions which are
    owned by the 185 member countries
  • International Bank for Reconstruction and
    Development (IBRD) (Hard window)
  • International Development Association (IDA) to
    alleviate poverty. (Soft window)
  • The IBRD focuses on middle income and
    creditworthy poor countries, while IDA focuses on
    the poorest countries in the world.
  • They provide low-interest loans, interest-free
    credit and grants to developing countries for
    education, health, infrastructure, communications
    and other purposes.

31
3.i. The World Bank Group the 5 institutions
  • It is formed by the 2 development institutions of
    The World Bank plus 3 affiliates,
  • The International Finance Corporation (IFC) - the
    private sector arm of the Group. (Created in
    1956)
  • Multilateral Investment Guarantee Agency (MIGA) -
    's mission is to promote foreign direct
    investment (FDI) into developing countries to
    help support economic growth, reduce poverty, and
    improve people's lives. (Created in 1988)
  • International Centre for Settlement of Investment
    Disputes (ICSID) aim at facilitating the
    settlement of investment disputes between
    governments and foreign investors to promote
    increased flows of international investment.
    (Created in 1966)

32
3.ii. The World Bank Group operations
  • Loans
  • Through the IBRD and IDA, there are two basic
    types of loans and credits investment loans and
    development policy loans. Investment loans are
    made to countries for goods, works and services
    in support of economic and social development
    projects in a broad range of economic and social
    sectors. Development policy loans (formerly known
    as adjustment loans) provide quick-disbursing
    financing to support countries policy and
    institutional reforms. These are based on
    projects negotiated between the country and the
    WB and involve some kind of conditionality.
  • Source web.worldbank.org

33
3.ii. The World Bank Group operations
  • Grants
  • Grants are designed to facilitate development
    projects by encouraging innovation, co-operation
    between organizations and local stakeholders
    participation in projects. In recent years, IDA
    grants have been used to
  • Relieve the debt burden of heavily indebted poor
    countries
  • Improve sanitation and water supplies
  • Support vaccination and immunization programs to
    reduce the incidence of communicable diseases
    like malaria
  • Combat the HIV/AIDS pandemic
  • Support civil society organizations
  • Create initiatives to cut the emission of
    greenhouse gasses
  • Source web.worldbank.org

34
3.ii. The World Bank Group operations
  • Analytic and Advisory Services
  • Capacity Building
  • Another core bank function is to increase the
    capabilities of our own staff, our partners and
    the people in developing countriesto help them
    acquire the knowledge and skills they need to
    provide technical assistance, improve government
    performance and delivery of services, promote
    economic growth and sustain poverty reduction
    programs.
  • Source web.worldbank.org

35
3.iii. The World Bank Group governance
  • Boards of Executive Directors are responsible for
    conducting the day-to-day business of the World
    Bank.
  • The Boards are composed of 24 Directors, who are 
    appointed or elected by member countries or by
    groups of countries, and the President, who
    serves as its Chairman.
  • Regular meetings are usually held once or twice a
    week. Other meetings are held at various other
    times whenever required.

36
3.iv. The World Bank financing
  • Primarily financed by selling AAA-rated bonds in
    the world's financial markets.
  • (While IBRD earns a small margin on lending, the
    greater proportion of its income comes from
    lending out its own capital.)
  • Capital consists of reserves built up over the
    years and money paid in from the bank's 184
    member country shareholders. IBRDs income also
    pays for World Bank operating expenses and has
    contributed to IDA and debt relief.
  • IDA, the world's largest source of interest-free
    loans and grant assistance to the poorest
    countries, is replenished every three years by 40
    donor countries. Additional funds are regenerated
    through repayments of loan principal on
    35-to-40-year, no-interest loans, which are then
    available for re-lending. IDA accounts for nearly
    40 of our lending.

37
4. Conditionality
  • Reference
  • The World Bank, 2005, Conditionality Revisited,
    Overview, p.3-18.
  • IMFs financial assistance is conditional to
    specified domestic policy changes.
  • This involved negotiations and monitoring of the
    stand-by arrangements.
  • Criticisms to conditionality became widespread
    after the debt crisis of the early 1980s.

38
4. Conditionality
  • The initial approach was driven by a belief that
  • Policy reforms could be made with aid money, and
  • Freeing countries from restrictive barriers to
    growth meant to implement economic liberalization
    policies.
  • However, country specificity and country
    ownership have been increasingly recognized as
    key ingredients for successful policy-based
    programs.
  • There is a broad consensus that domestic
    ownership of a reform agenda is vital to its
    success the legitimate way forward is for donors
    to be actively involved in the policy dialogue
    within the country.

39
5. Other institutions the BIS and the G10
  • After the collapse of the BWs system (1970s)
    there were 2 parallel organizations that gain an
    increasing role on international monetary system
    the Bank of International Settlements (BIS) and
    the Group of 10.
  • The BIS, is a central bank club. It had an
    important role in monetary integration in Europe.
  • G-10, collaboration of great powers in a system
    of discretionary bargaining.

40
5. The BIS and the G10
  • BIS 55 member countries (including the ECB)
  • G-10 - composed of Benelux, Canada, France,
    Germany, Italy, Japan, Sweden, Switzerland, the
    U.K. and the USA.
  • The G-10 was replaced by the G-6 in 1975, later
    G-7. Note that Benelux, Sweden and Switzerland do
    not belong to G-7.

41
5. The BIS
  • BIS is the oldest, surviving international
    financial institution and it is still the
    principal centre for international central bank
    cooperation.
  • It was founded in 1930, to deal with
  • Reparation payments imposed on Germany, after
    WWI,
  • As a trustee for the international loans issued
    to finance reparations,
  • Promote central bank cooperation in general.

42
5. The BIS
  • Main activities meeting place for central banks
    to foster monetary policy cooperation and
    provider of banking services for central banks
  • Traditional" banking functions - for the central
    bank community (eg gold and foreign exchange
    transactions), and to trustee and agency
    functions.
  • Agent for the European Payments Union (EPU,
    1950-58), helping the European currencies restore
    convertibility after the Second World War.
  • It has acted as the agent for various European
    exchange rate arrangements, including the
    European Monetary System (EMS, 1979-94) which
    preceded the move to a single currency.

43
5. The BIS
  • The BIS has also provided or organised emergency
    financing to support the international monetary
    system when needed.
  • 1931-33 financial crisis - it organised support
    credits for both the Austrian and German central
    banks.
  • 1960s - it arranged special support credits for
    the French franc (1968), and two so-called Group
    Arrangements (1966 and 1968) to support sterling.
  • More recently, the BIS has provided finance in
    the context of IMF-led stabilisation programmes
    (eg for Mexico in 1982 and Brazil in 1998).

44
5. The BIS
  • Global financial stability
  • Growth and globalisation of financial markets
    during the final decades of the 20th century
    shaped the nature of central bank cooperation.
    BIS has assisted the pursuit of global monetary
    and financial stability in two main ways
  • By providing emergency financial assistance to
    central banks in case of need and
  • By supporting experts from national central banks
    and supervisory agencies in proposing measures
    and developing standards aimed at strengthening
    the international financial architecture, and in
    particular international banking supervision.

45
5. Other institutions EBRD
  • There are several development banks at regional
    level, in most continents. Some hace
    concessional loans available.
  • Examples Inter-American Development Banks or the
    European Bank for Reconstruction and Development.
  • The EBRD was established in 1991 for helping
    transition of former communist countries in
    Europe and Central Asia for market economies.

46
5. Other institutions
  • Two settings for discretionary bargaining emerged
    in the 1970s and 1980s,
  • Initially the annual economic meetings of G-5
    were essentially politicians-oriented, the
    economic part was dealt by finance ministers.
  • In the 80s, a link was established between the
    G-5/ G-7 summits and the surveillance system of
    the IMF. This occurred already in the Plaza
    Accord (1985) and afterwards.
  • The IMF became an informal secretariat to the
    G-8 providing surveillance indicators but
    excluded from foreign exchange market issues.

47
5. Other institutions
  • Two settings for discretionary bargaining emerged
    in the 1970s and 1980s,
  • Initially the annual economic meetings of G-5
    were essentially politicians-oriented, the
    economic part was dealt by finance ministers.
  • In the 80s, a link was established between the
    G-5/ G-7 summits and the surveillance system of
    the IMF. This occurred already in the Plaza
    Accord (1985) and afterwards.
  • The IMF became an informal secretariat to the
    G-8 providing surveillance indicators but
    excluded from foreign exchange market issues.
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