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InternationalFinancial
InstitutionsConstance L. Danner
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MariaMaria 0505
MaryamMaryam 2222
HinaHina 2626
NadaNada 3636
ZohraZohra 4848
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Financial System
Money
Financial Instruments
Financial Markets
Financial Institutions
Central Banks
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Financial Institutions
A financial institution is an institution that
provides financial services for its clients or
members.
Act as financial intermediaries.
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International Financial
Institutions
International Financial Institutions
(IFIs) Refers to financial institutions
that have been established (or
chartered) by more than one country
and hence are subject to internationallaw
~Definition~
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Types Of IFIs
Bretton Woods institutions
Regional development banks
Bilateral development banks Other regional financial institutions
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Examples Of IFIs
International Monetary Fund
World Bank Group
Asian Development Bank African Development Bank
Inter-American Development Bank
Islamic Development Bank
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History Of IFIs
After the Great Depression inthe 1930s there was a need foran organization to create asystem for exchange ratestability
The World Bank and theInternational Monetary Fundwere created in the aftermathof World War II
Countries economies affected
by WWII need for reconstruction in well-
developed nations need for development in the
lesser developed nations
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Bretton Woods (Contd)
The meeting wasborn out of thedetermination byUS PresidentFranklin DRoosevelt and UKPrime MinisterWinston Churchill
to ensure post-warprosperity through
Churchill & Roosevelt at their first meeting~Bretton Woods~
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Bretton-Woods
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1944 Bretton Woods
President
Roosevelt told theconference: "The
economic health ofevery country is aproper matter of
concern to all itsneighbours, near
and distant
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IFIs: that Well discuss
International Monetary Fund
World Bank
Asian Development Bank
Islamic Development Bank
* ADB & IsDB will be explained briefly
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International Monetary
Fund(The IMF)
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International MonetaryFund
TheThe International Monetary FundInternational Monetary Fund ((IMFIMF))is an international organization thatis an international organization that
oversees the global financial system byoversees the global financial system by
following the macroeconomic policies of itsfollowing the macroeconomic policies of itsmember countries, in particular those withmember countries, in particular those with
an impact on exchange rates and thean impact on exchange rates and the
balance of payments. It is an organizationbalance of payments. It is an organizationformed to stabilize international exchangeformed to stabilize international exchange
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International Monetary Fund(contd)
Established in (1944)
Formally organized on (Dec 27th 1945)
Member states (185)
Headquarters (Washington USA)
Currency (SDR) *SDR = just a unit of accountnot a real currency
*Background Image = IMF Headquarters
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IMF: Managing Director
Dominique Strauss-Kahn
Nationality: French
10th Managing Director ofthe International MonetaryFund
Assumed this position onNov 1st ,2007.
http://images.google.com/imgres?imgurl=http://www.33ff.com/flags/XL_flags_embossed/France_flag.gif&imgrefurl=http://www.33ff.com/flags/worldflags/France_flag.html&usg=__8CSFikXO9G0oB_q9t3-0xNI_rms=&h=240&w=360&sz=7&hl=en&start=9&um=1&tbnid=EHbTJCgAZzuNaM:&tbnh=81&tbnw=121&prev=/images%3Fq%3DFrance%2Bflag%26hl%3Den%26rlz%3D1T4RNWN_enPK307PK307%26um%3D18/14/2019 16581293 International Financial Institutions
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IMF: Purposes
Articles of Agreement of the IMF
i) promote international monetary cooperation
ii) expansion and balanced growth ofinternational trade
iii) promote exchange rate stability
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iv) help establish multilateral system of
payments and eliminate foreignexchange restrictions
v) make resources of the Fund available to
members
vi) Shorten the duration and lessen thedegree of disequilibrium in international
balances of payments
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Where does the IMF get itsmoney?
The quotasubscriptions
Gold holdings
Borrowingarrangements (eg.GABs)
Interest charges andFees
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What IMF Does?
The work of the IMF is of three
main types:
Surveillance
Lending
Technical Assistance
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EconomicSurveillance
The IMF oversees the international
monetary system and monitors thefinancial and economic policies of itsmembers. It keeps track of economicdevelopments on a national, regional, and
global basis
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Technical Assistance
To assist mainly low- andmiddle-income countriesin effectively managingtheir economies, the IMF
provides practicalguidance and training onhow to upgradeinstitutions, and designappropriatemacroeconomic, financial,and structural policies.
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Lending
The IMF providesloans to countries thathave trouble meeting
their internationalpayments and cannototherwise find
sufficient financing onaffordable terms
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Special Drawing Rights (SDRs)
The SDR is an international reserve asset,
created by the IMF in 1969 to supplement
the existing official reserves of membercountries.
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Unit of account
Need of SDR
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The SDR is neither a currency, nor a claim
on the IMF. Rather, it is a potential claim on
the freely usable currencies of IMFmembers.
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SDR valuation criterion
the value of the exports of goods and
services
the amount of reserves denominated in therespective currencies which were held by
other members of the IMF
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SDR valuation
SDR was initially equivalent to 0.888671
grams of fine gold
today consisting of the euro, Japanese yen,pound sterling, and U.S. dollar.
Values revised after five years
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How to calculate SDR
Friday, May 22, 2009
CurrencyWeigh
tsCurrency amountunder Rule O-1
Exchangerate
U.S. dollarequivalent
Euro44%
0.4100 1.35910 0.557231Japaneseyen
34%18.4000 97.89000 0.187966
Poundsterling
11%0.0903 1.51090 0.136434
U.S. dollar 11% 0.6320 1.00000 0.632000
1.513631
U.S.$1.00 = SDR 0.660663
SDR1 = US$ 1.51363
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How to Calculate *Interest Rate* (Interest thats charged on SDR)
For the week of May 18, 2009 to May 24, 2009
Currency
Currency
amount
under Rule O-1
(A)
Exchange rate
against the
SDR 1
(B)
Interest rate 2
(C)
Product
(A) x (B) x (C)
Euro 0.4100 0.893571 0.7330 0.2685
Japanese Yen 18.4000 0.00670294 0.1950 0.0241
U.K. Pound
Sterling0.0903 1.0012 0.5500 0.0497
U.S. Dollar 0.6320 0.665602 0.1800 0.0757
Total 0.4180
SDR Interest Rate 0.42
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Potential pitfalls as a reserve
currency
The SDR does not containChinese Yuan,
Indian Rupee, Australian Dollar or Canadian Dollar,
(which are important benchmark or secondaryglobal reserve currencies.)
The current SDR is a relatively small basketof currencies.
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QUOTAS
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QuotasDefinition
Each member country of the IMF is
assigned a quota, based broadly on itsrelative size in the world economy andcharacteristics .
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Size of the quotas determine votingpower
IMF decides on the quota for eachmember
richer countries have larger quota
IMF Members' Quotas and Voting
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IMF Members' Quotas and VotingPower
Member
QUOTA Governor VOTES
Millionsof SDRs
Percent ofTotal
Number Percent of Total
United States 37,149.3 17.09 Timothy F. Geithner 371,743 16.77
United
Kingdom
10,738.5 4.94 Alistair Darling 107,635 4.86
Japan 13,312.8 6.13 Kaoru Yosano 133,378 6.02
Germany 13,008.2 5.99 Axel A. Weber 130,332 5.88
France 10,738.5 4.94 Christine Lagarde 107,635 4.86
Italy 7,055.5 3.25 Giulio Tremonti 70,805 3.19
China 8,090.1 3.72 ZHOU Xiaochuan 81,151 3.66
India 4,158.2 1.91 P. Chidambaram 41,832 1.89
PakistanPakistan 1,033.71,033.7 0.480.48 Salim RazaSalim Raza 10,58710,587 0.480.48
*Source IMF site May 2009
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The Multifaceted Role of Quotas
(1) The amount of financial resources
(2) The member's voting power ininstitutional decision making (along withbasic votes);
(3) The level of access of the member toIMF financing;
(4) The members' share of general SDRallocations.
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More on quotas
Quotas are reviewed every 5 years by theIMF
Formula calculation
Quotas also determine how much eachmember can borrow from the IMF when inneed of aid
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When is a country in need ?
A country that had not taken in enoughforeign currency to pay the other countriesfor what they have bought
spends more money than it takes in
So IMF will lend foreign exchange to thatmember
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How much money a member canborrow from the IMF
25% of the countrys quota may be used
If this is not sufficient, then members canborrow up to 3 times the amount of its
quota present plans for reform to Executive
Directors
If these plans are sufficient for theExecutive Directors, the IMF grants themember a loan
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IMF&
Pakistan
Wh d P ki t
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Why does Pakistanneed IMF?
As Pakistan is a developing country andhas a struggling economy we often have toturn to IMF for help.
Pakistan gets loans from IMF for the followingmain purposes:
Balance of payment deficits.
Stabilization of currency. Rebuilding international reserves
Managing liquidity problems.
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IMF Attit d t d
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IMFs Attitude towardsPakistan
IMF attitude towardsdeveloping nationshas always been
humiliating so same isthe case withPakistan
The conditionsimposed for lendinghave a crushing effecton the economy
Th L t t L
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Pakistan has accepted 11 tough conditions fromthe International Monetary Fund (IMF) toovercome its pending balance of payment crisissome of them are as follow:
Pakistan government has agreed to graduallyimpose the central excise duty (CED) onservices and agriculture sectors at the rate ofeight to 18 percent in place of the general sales
tax (GST) The Pakistani currency was devalued after slight
changes in the discount rate and exchange ratedecreased officially by 6-7%
The Latest LoanNovember 24th 2008
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The WORLD BANK
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The World Bank is an internationalfinancial institution that provides financial
and technical assistance to developingcountries for development programs (e.g.
bridges, roads, schools, etc.) with thestated goal of reducing poverty.
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: Facts &Figures
History: Similar to IMF(result of Bretton Woods Conference,1944)
Formation: 27 December 1945
Purpose/ Focus : Poverty elimination by
debt creation Membership: 185 countries
President: Robert B. Zoellick
Main Organ: Board of Directors Parent Organization: World Bank Group First loan: $ 250m to France (for post-war reconstruction)
W ld B k
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World Bank:Headquarters
*Location: Washington, D.C.
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World Bank: President
Robert Bruce Zoellick
Nationality: American
Current (11th)
President of World
Bank
Since: July 1st, 2007
Nominated by: George
W. Bush
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World Bank: a Bank?
The World Bank is not a bank in thecommon sense of the word.
A single person cannot open anaccount or ask for a loan.
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World Bank Group
International Bank for Reconstruction andDevelopment (IBRD)
International Development Association
(IDA) International Finance Corporation (IFC)
Multilateral Investment Guarantee Agency
(MIGA) International Centre for Settlement of
Investment Disputes (ICSID)
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The World Bank Group
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World Bank
The World Bank differs from the WorldBank Group, in that the World Bankcomprises only two institutions:
International Bank for Reconstruction andDevelopment (IBRD)
International Development Association
(IDA)
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IBRD: Function
To assist in process of reconstruction, development andrestoration of countries destroyed by war.
To promote long term balanced growth all around theworld.
To encourage international investments for developmentof the member countries.
To encourage private foreign investments by means ofgurantees.
To help member countries in maintenances ofequilibrium of BOP.
To play a role so that smooth transition may take placefrom war time to peace time economies.
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IBRD
Mode of funding
Loans
Membership
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IDA
OrignIn 1959, the US made the resolution for the articles ofagreement for IDA and in September 1960 the IDA wasestablished.
Objectives and functions To promote economic development
increase productivity
raise standard of living It was established to provide confessional (no interest or
"soft") loans to the world's poorest governments.
Loans
World Bank Background and
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World Bank Background and
Objectives
Natural disasters
Needs affecting developing economies
Post conflict rehabilitation
Needs affecting a transitioning economy
WB Areas of operation
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WB: Areas of operationThe World Bank is active in the
following areas: Agricultural and Rural
Development Conflict and Development Development Operations and
Activities Economic Policy Education
Energy Environment Financial Sector Gender Governance Health, Nutrition and Population
Industry Information and Communication
Technologies Information, Computing and
Telecommunications International Economics and
Trade
International Economics andTrade
International Economics andTrade
Labor and social protection Law and Justice Macroeconomic and Economic
Growth Mining
Poverty Reduction Poverty Private Sector Public Sector Governance Rural Development Social Development
Social Protection Trade Transport Urban Development Water Resources Water Supply and Sanitation
Globalization and the role of
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Globalization and the role of
World Bank
The World Bank serves to eradicate theevils of globalization.
The first step of the World Bank towards
the accomplishment of the task is debtrelief.
The World Bank has also drawn plans tohelp the middle income countries in thedevelopment of their infrastructure anddevelop their trade
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Millennium Development Goals
Goal 1: Eradicate extreme poverty and hunger Goal 2: Achieve universal primary education Goal 3: Promote gender equality and empower
women
Goal 4: Reduce child mortality Goal 5: Improve maternal health Goal 6: Combat HIV/AIDS, malaria, and other
diseases
Goal 7: Ensure environmental sustainability Goal 8: Develop a global partnership for
development
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Diff b t IMF d WB
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Difference between IMF and WBInternational Monetary Fund World Bank
1 Purposesoversees the international monetary
system
seeks to promote the economicdevelopment of the world's poorer countries
2 Functions
promotes exchange stability and orderly
exchange relations among its member
countries
assists developing countries through long-
term financing of development projects and
programs
3 Recipients of Funding
assists all members--both industrial and
developing countries--that find themselves
in temporary balance of payments
difficulties by providing short- to
medium-term credits
provides to the poorest developing
countries whose per capita GNP is less than
$865 a year special financial assistance
through the International Development
Association (IDA)
4 Operations
supplements the currency reserves of its
members through the allocation of SDRs
(special drawing rights); to date SDR 21.4
billion has been issued to member
countries in proportion to their quotas
encourages private enterprises in
developing countries through its affiliate,
the International Finance Corporation (IFC)
Difference between IMF and WB
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Difference between IMF and WB
[contd]International Monetary Fund World Bank
5 Source of Funding
draws its financial resources principally
from the quota subscriptions of its
member countries
acquires most of its financial resources by
borrowing on the international bond market
6 Capital
has at its disposal fully paid-in quotas nowtotaling SDR 145 billion (about $215
billion)
has an authorized capital of $184 billion, ofwhich members pay in about 10 percent
7 Size and Structure
has a staff of 2,300 drawn from 182
member countries
has no affiliates or subsidiaries
has a staff of 7,000 drawn from 180
member countries (World Bank Group is
about three times as large as the IMF)
Has a more complex structureWB itself comprises of 2 major
organizations
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Asian Development Bank
(The ADB)
The Asian Development Bank
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The Asian Development Bank(ADB)
is a regional development bank established in1966 to promote economic and socialdevelopment in Asian and Pacific countriesthrough loans and technical assistance.
It is a multilateral development financialinstitution owned by 67 members (48 from theregion and 19 from other parts of the globe)
ADB's vision is a region free of poverty.
Its mission is to help its developing membercountries reduce poverty and improve the qualityof life of their citizens.
ADB:
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ADB:Headquarters
*Location:Location:
Manila, PhilippinesManila, Philippines
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Islamic Development Bank
(The IsDB)
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IsDB: Fact & Figures
Founded in: 18 December 1973(officially began its activities on 20 October, 1975 [15 Shawwal 1395H])
Headquarter: Jeddah, Saudi Arabia
Members: 56 Countries Financial year: lunar Hijri Year
Unit of Account: Islamic Dinar
Official Language: Arabic (English &French are also used)
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IsDB: Funtions
to provide equity participation and grantloans for productive projects andenterprises.
It also gives financial assistance tomember states in other forms for theireconomic and social development and to
foster foreign trade among membercountries.
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IsDB: Purpose
To foster the economicdevelopment and social progress of
Member States and Muslim
Communities individually as well ascollectively in accordance with the
principles of the Shariah
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IsDB: Main Shareholders
Saudi Arabia Sudan
Kuwait
Libya
Turkey
UAE Iran
Egypt
Indonesia
Pakistan
*IsDB: Bulding in Dhaka
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IsDB: Capital
The authorised capital of the Bank is six billionIslamic Dinars,
divided into 600,000 shares
The value of the Islamic Dinar is equivalent toone Special Drawing Right of the IMF (SDR).
The subscribed capital of the Bank is 4 billionIslamic Dinars. One Islamic Dinar =1.3 US
Dollar. `
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Criticis
mon
IMFand
WorldB
ank
Criticism of
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the IMF &
World Bankoften takesthe form of
protesting
* A demonstrator waves a red and black flag during an intersectionoccupation outside the World Bank. (october Rebellion 19-20 Oct,
2007)`
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* video
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1.Conditionalities (so called SAPs)
On giving loans to countries, the IMF makesthe loan conditional on the implementation ofcertain economic policies.
These policies tend to involve:
Reducing government borrowing - Higher taxesand lower spending
Higher interest rates to stabilize the currency. Allowfailing firms to go bankrupt.
Structural adjustment. Privatization, deregulation,reducing corruption and bureaucracy.
The problem is that these policies ofstructural adjustment and macro economicintervention make the situation worse.(Argentina -2001 Example)
[contd] Conditionalities (so called
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[cont d] Conditionalities (so calledSAPs)
Slows down socialstability
Leads to an increase
in poverty
Strict programs,"increasing taxes to
balance budget deficit
What if the debtor countries
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dont fulfill IMFs conditions?
The alternative isfor debtor
countries to suffer
the same kind of
economic
sanctions as Iran,
Cuba and pre-invasion Iraq.
2 I t P bli H lth
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2.Impact on Public Health
strict conditionson theinternational loansby the IMFresulted inthousands ofdeaths as publichealth care had tobe weakened.
In the 21 countrieswhich the IMF had
given loans,tuberculosisdeaths rose by16.6 %
WB: AIDS
controversy
In 2008, A study by Cambridge and Yale concluded:
3 D l ti
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3.Devaluations
IMF is also criticized for allowing
inflationary devaluations How ??
3.Devaluations
4.Crititsm from free-market
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4.Crititsm from free marketadvocates
Believers in free markets argue that: it is better to let capital markets operate
without attempts at intervention.
And attempts to influence exchange rates onlymake things worse
5.IMF/World Bank support of
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5.IMF/World Bank support ofmilitary dictatorships
Arguments in favor of the IMF Economic stability is a precursor todemocracy
However, The role of the Bretton Woods institutions hasbeen controversial since the late Cold War period, as theIMF policy makers supported military dictatorships
friendly to American and European corporations. there are various examples in
which democratized countries fellafter receiving IMF loans.
E.g World Banks support to aBrazilian Dictator
In Pakistan, the IMF used themilitary government to impose the
General Sales Tax (GST)
6. IMF & WB : secretive
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institutions with no accountability
The IMF is funded withtaxpayer money, yet itoperates behind a veil ofsecrecy.
Members of affectedcommunities do notparticipate in designingloan packages.
The IMF works with aselect group of centralbankers and financeministers to make polices.
7.Democracy is being torn apart by
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7.Democracy is being torn apart bya financial oligarchy (Might is right)
Undemocratic SystemWhile the WB represents 185 countries, it isrun by a small number of economicallypowerful countries
a. Past Managing DirectorsHistorically
the IMF's managing director = European
president of the World Bank = from United States
b. Americanization IMF & World Bank: an instrument for the promotion of US orWestern interests in certain regions of the world
The United States has an exclusive veto power in major IMFdecisions
WBs president :always an American
8 Vi l ti f I l i P i i l
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8.Violation of Islamic Principles
In Islam distribution ofincome is the vital element
Interest is un-Islamic
IMF has disregarded allthese Islamic Norms byonly nurturing the rich.
*The world divided intorich & poor
9.Other Criticisms
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9.Other Criticisms
IMF Hurts the
environment[eg. Ivroy Coastscoca production]
Human rights andLabor rights-violated
Some of the most Ironic Facts:
IMF itself is exempt from all taxes, along
with its sister institutions, eg. the WorldBank)
HQs of IMF & WB both in WashingtonDC.
IMFs Dominique Strauss Kahn is no
stranger to controversies either
C iti i b F P l
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Criticism: by some Famous People
They [WB] focused on growth-based development andthus invest in energy sectors, setting up ports andinfrastructure.instead of this they must focus on poor.~PROF MUHAMMAD YUNUS~[Nobel laureate, Bangladeshi banker andeconomist, founder of Grameen Bank]
the IMF is not serving a useful role in low-incomecountries, and that low-income national governmentsneed more policy space and less IMF interventions.~JACK JONES ZULU~[Southern African Regional Poverty Network]
American diplomats wanted to lock foreign countriesinto further dependency on paper dollars.~MICHAEL HUDSON~ [a Wall street analyst, economist and Historian]
Why do countries sign agreements
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y g gwith the IFIs if the consequences
are ultimately negative? Most countries that
accept the loans do sobecause they have no
other way of avoidingtotal financial collapse.
there often areinternational pressures
on such countries toget Aids from the IMFand World Bank
IMF and the 3rd World
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IMF and the 3rd World
The 3rd Worldtreated step-
motherly
*(A Clip fromJohn Piglerss
documentary
New rulers ofthe World)
* IMF: Lender of last resort !!
Response to Criticism by IMF
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Response to Criticism by IMF
Crisis always leads to some Difficulties.
IMF has had Some Successes.
Confidence
Countries are not obliged to take anIMF loan
IMF Easy target.
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