International Monetary Fund and World Bank

(History, Role and Future)

BySylvia Hany Habib

Contents 1.IMF, World Bank and the Force of History

a. Ten Events and That Have Shaped the Institutionb. Ten Ideas That Have Shaped the Institution

2.The International Monetary Fund a. Governance, Organization and Purposes b. How Does the IMF Achieve Its Goals? c. Why Is the IMF Controversial?

3.The World Bank a. Structureb. Governance c. The IBRDd. International Development Association (IDA) e. International Finance Corporation f. Multilateral Investment Guarantee Agency (MIGA)g. International Center for Settlement of Investment Disputes (ICSID) h. Why Is the World Bank Controversial?

4. Debt Relief for Heavily Indebted Poor Countries (HIPC) 5.IMF and World Bank Annual Meeting in Tokyo 2012 Highlights 6. Egypt and IMF Reach Tentative Loan Deal

Briefed View 1/2

• During the Great Depression of the 1930s, countries attempted to shore up their failing economies by sharply raising barriers to foreign trade.

• The IMF was conceived in 1944, when 45 countries meeting in the town of Bretton Woods, in the United States, agreed on a framework for international economic cooperation, after 2nd world wear

• The IMF came into formal existence in 1945, when its first 29 countries signed its Articles of Agreement.

http://www.imf.org/external/about/histcoop.htm Accessed 3 November 2012

Briefed View 2/2 • The countries that joined the IMF agreed to keep their

exchange rates which called par value system—also known as the Bretton Woods system—prevailed until 197

• By the early 1960s, the U.S. dollar's fixed value against gold, under the Bretton Woods system of fixed exchange rates, was seen as overvalued, Vietnam War gradually worsened the overvaluation of the dollar

• The system dissolved between 1968 and 1973. 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold

http://www.imf.org/external/about/histcoop.htm Accessed 3 November 2012

Ten Events and That Have Shaped IMF and World Bank

1-The Paris Peace

Conference

2-The Great Depression

3- World War II

4-The Rise of Multiple

Economic Centers

5- The Cold War

6- African Independence

7-The Vietnam War

1-The Paris Peace Conference

• They created the League of Nations, but its economic functions were poorly defined and never did get into an effective role. They created the International Labour Organization, but its role was specialized and limited.

• The conference’s neglect of economics did not result from a failure to understand the importance of international trade for prosperity and thus for maintaining the peace.

• It was very much on the minds of those who were drawing up the designs for the new institution

2-The Great Depression• The Depression amplified the negative

consequences of Versailles, as an implosion of international trade interacted with domestic policy errors to deflate both output and prices around the world

• The article which sets the objective of using IMF lending to provide member countries “with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity”

3- World War II• The other major influence of the war on the IMF

was that it left the United States in virtual control of the world economy. As a consequence, the financial structure of the IMF would be based on the U.S. dollar, rather than on an international currency of its own making.

• Its lending power would be limited in size and scope, and the Fund would lack most of the powers of a central bank. Its headquarters would be neither in London nor even in New York.

4-The Rise of Multiple Economic Centers

• As the balance of economic and financial power became more widely dispersed, more and more currencies became fully convertible for current account and even capita transactions.

• The IMF responded in 1969 by amending its Articles and creating Special Drawing Rights (SDRs) as a supplement to existing reserve assets, second amendment, adopted in 1978, that exchange rates among key currencies were likely to float.

5- The Cold War

• The obvious effect of the Cold War on the IMF was this limitation on membership. In the terminology of the period, it included the first world and much of the third, but the second was missing from the table.

• The IMF became largely a capitalist club that helped stabilize market-oriented economies

6- African Independence

• The emergence of Africa as a continent of independent nations had a major effect on the size and diversity of the IMF.

• The IMF now lends to low-income countries primarily through ,the Poverty Reduction and Growth Facility, and it coordinates that assistance with the World Bank.

• To qualify for those loans, countries must develop their own strategies for generating economic growth and reducing poverty

7-The Vietnam War

• The larger effect, however, was on the U.S. economy and its external payments position.

• In combination with a sizeable increase in domestic spending, With the dollar no longer convertible into gold.

8-Globalization of Financial Markets

• The importance of capital flows began to increase in the 1950s as Europe countries gradually reestablished convertibility, IMF financing became quantitatively marginalized for many potential borrowers, and weaken the “credit union” character of the IMF as a membership institution

9-The International Debt Crisis

• The debt crisis had a transforming impact on the IMF, catapulting it into the role of international crisis manager.

• Previous international crises—Suez in 1956, the breakdown of the official gold market in 1968, the oil shocks of the 1970s had intensified the demand for IMF lending without fundamentally changing the way the IMF worked

10-Collapse of Communism

• The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF at last to become a (nearly) universal institution.

• In three years, membership increased from 152 countries to 172, the most rapid increase since the influx of African members in the 1960s, This development had little impact on the philosophical underpinnings of the Fund’s work.

Ten Ideas That Have Shaped IMF and World Bank

The Case for Floating Exchange

Rates

Monetarism

The Open-Economy

Macro Model

The Monetary Approach to the

Balance of Payments

Keynesian Macroeconomics

Inflation Targeting

The Washington Consensus

The International Monetary Fund

Governance

The IMF is controlled by its 187 member-countries, and managed by a 24-person Executive Board.

voting power is weighted based on the size of the economy and therefore the quota allocation of each country.

Decisions are usually taken by consensus, but the United States, as the IMF's major shareholder, has the most influence in the institution's policy-making.

Organization

The IMF's current managing director is Ms. Christine Lagarde of France, who took office on June 28, 2011. Each members of the executive board runs a particular department of the IMF.

The IMF has a total of 2,300-2,600 employees, mostly based in its Washington, D.C. headquarters

Purposes

The Bretton Woods Conference set out six goals for the IMF which is valid till today

1) Facilitate the cooperation of countries on monetary policy2) Assist the liberalization of international trade by helping countries increase their real incomes while lowering unemployment.3) Help stabilize exchange rates between countries. 4) Maintain a multilateral system of payments that eliminates foreign exchange restrictions. 5) Provide a safeguard to members of the IMF against balance of payments crises6) Try to reduce the effects of volatility in countries' balance of payments accounts, the IMF helps assure that global trade and financial relationships can continue at a steady rate without the risks of global depressions like that of the 1930s.

How Does the IMF Achieve Its Goals? • Surveillance Each year, the IMF sends economists to each of its member

countries to analyze the country's economic situation. The purpose of such consultation is to provide an outside check on national decisions that might have an affect on the international economic system

• Financial Assistance Member countries with balance of payments problems can receive

credits and loans to pay off their obligations and readjust their economic policies so that they will not face another crisis or near-crisis,

• Technical Assistance The IMF dispatches its own experts and private consultants on

training missions to educate government officials and also runs the IMF Institute in Washington, D.C. to provide courses for officials

Why Is the IMF Controversial?• Since they were headquartered in Washington, D.C. the IFIs' strategy was

called the "Washington Consensus." As summarized by the World Bank, with ten basic points, Critics attack four interrelated aspects of the implementation of the Washington Consensus.

• First, critics say that the conditions placed on loans are too intrusive and compromise the economic and political sovereignty of the receiving countries.

• Second, critics say that the IMF imposed the policies of the Washington Consensus on countries without understanding the distinct characteristics of the countries that made those policies difficult to carry out, unnecessary, or even counterproductive

• Third, critics say that the policies were imposed all at once, rather than in an appropriate sequence

• Fourth, critics say that the IMF was not open to criticism or public oversight when working on these policies, leading to arrogance and a lack of connection to the reality on the ground in the affected countries

The World Bank

Organization

• The World Bank is the name that has come to be used for the International Bank for Reconstruction and Development (IBRD) founded at Bretton Woods.

• The IBRD and the IDA focus mainly on public sector monetary policy and provide low-interest loans, interest-free credit, and grants to developing countries

Governance

• The governance of the World Bank is almost identical to that of the IMF. The governors direct the IBRD based on weighted voting rights that are determined by each country's agreed annual contributions to the World Bank. As in the IMF, the United States is the largest contributor and has the most weighted voting power, though as a practical matter, decisions are made by consensus.

The International Bank for Reconstruction and Development (IBRD) 1/4

• The mission statement of the IBRD states that it "aims to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development, through loans, guarantees, and non-lending-including analytical and advisory-services."

The International Bank for Reconstruction and Development (IBRD) 2/4

• The goals are as follows: Eradicate extreme poverty and hunger, Achieve universal primary education, Promote gender equality and empower women, Reduce child mortality. Improve maternal health, Combat HIV/AIDS, malaria, and other diseases, Ensure environmental sustainability, and Develop a global partnership for development.

The International Bank for Reconstruction and Development (IBRD) 3/4

• World Bank loans are conditioned on the World Bank's approval of the investment plans and schedule for the project and repayment of the loans. The World Bank funds its loans by raising money on the international bond market, issuing bonds in its name to large institutional international investors, such as banks and pension funds.

The International Bank for Reconstruction and Development (IBRD) 4/4

• As a non-profit institution, however, the World Bank does not take any profit on the results of its fundraising. Instead, it uses its profits to subsidize its lending back to the countries whose projects its finances. Only about half of the World Bank's funding comes from grants by members, and the rest comes from the World Bank's own operations.

A need for new specialized organizations

• As the World Bank expanded beyond its initial scope and purpose of rebuilding Europe after the Second World War, the World Bank grew through the creation of four additional organizations

World BankIBRD

ICSID1966

MIGA1988

IDA1960

IFC1956

Investment through syndications,

underwritings and co-financing.

Long-term credits at concessional rates to the poorest country

Provides guarantees

against risks

Provides arbitration services

International Development Association (IDA)

• The IDA was organized by the World Bank in 1960 to provide additional financial assistance to the poorest developing countries,

• These credits are zero-interest loans that have longer payment periods of 35 to 40 years and a grace period of ten years.

• These types of loans are offered to the poorest countries to help them pursue their development goals, sometimes despite disease and conflict

• Examples of IDA projects: In Tanzania, since 1995, the IDA has allocated US $3.2 Billion, which has caused an annual increase of an average of five and six percent in the GDP, and the GDP per capita has doubled. All of this has greatly improved the standard of living

International Finance Corporation (IFC)• The IFC was established in 1956 and is now the largest public

source of financial investment for private sector projects in developing countries

• IFC provides private sector investment, helps companies acquire additional financing in international markets, and provides technical advice and assistance

• In Azerbaijan, Georgia, and Turkey, the IFC is helping finance the construction of an oil pipeline to move up to million barrels of oil per day from Baku, in Central Asia, to Ceyhan, on Turkey's Mediterranean coast

Multilateral Investment Guarantee Agency (MIGA)• MIGA was created in 1988 to provide risk-balancing insurance

services to foreign direct investment projects in developing countries. • MIGA's activities, potentiate reduction of risks through insurance,

developing countries are encouraged to adopt policies that promote investment.

• This combination of reform at the domestic level and insurance coverage for investors is another important tool in the drive to reduce poverty by the World Bank Group

• In Ecuador, MIGA is supporting investors in the construction of a new airport to serve the capital of Quito to improve and expand economic development and trade

International Center for Settlement of Investment Disputes (ICSID) • The World Bank established ICSID in

1966 to encourage both investors and governments to undertake and receive foreign direct investment by providing a neutral dispute resolution system.

• The ICSID provides arbitration services

• ICSID is chaired by the president of the World Bank, and the two organizations are well integrated, with their annual meetings being held in concert, and with ICSID's operating expenses coming from the World Bank Group's budget.

Why Is the World Bank Controversial?• Promoting the Washington Consensus through its close participation

with the IMF in lending only to programs that were heavily conditioned.

• World Bank causes high debt among developing countries• The World Bank is often accused of ignoring the environmental and

social impact of projects it supports.

• The World Bank also funded a dam-building project in India that resulted in the forced resettlement of people the Narmada River Valley between 1978 and 1993.

The International Monetary Fund and the World Bank at a Glance

International Monetary Fund World Bank

• oversees the international monetary system

• seeks to promote the economic development of the world's poorer countries

• promotes exchange stability and orderly exchange relations among its member countries

• assists developing countries through long-term financing of development projects and programs

• 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)

http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm accessed 10-2012

The International Monetary Fund and the World Bank at a Glance con’t

International Monetary Fund World Bank

• 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)

• 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

• has at its disposal fully paid-in quotas now totaling SDR 145 billion (about $215 billion)

• has an authorized capital of $184 billion, of which members pay in about 10 percent

• has a staff of 2,300 drawn from 182 member countries

• has a staff of 7,000 drawn from 180 member countries

http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm accessed 10-2012

Debt Relief for Heavily Indebted Poor Countries (HIPC)

• In 1996, the World Bank and IMF created the Debt Relief for Heavily Indebted Poor Countries (HIPC) Initiative, recognizing the need for debt relief from multilateral institutions.

• The G-8 meeting in 2005 brought 100 percent cancellations of debt owed to the African Development Fund, the World Bank, and the IMF by 18 countries who were eligible for the HIPC initiative.

• Most recently The (IMF) and the (IDA) have decided to support US$ 2.1 billion in debt relief for Guinea, representing a 66 % reduction of its future external debt service over a period of 40 years,

IMF and World Bank Annual Meeting in Tokyo 2012 Highlights • The I.M.F. warned that economic stagnation in richer countries hurt

poorer ones,• Bilateral borrowing agreements• To implement the increase in IMF resources 10 bilateral borrowing

agreements • Governance of the IMF• No decision was reached on the review of the quota formula. However, the

member states reiterated their determination to complete the review by January 2013.

• Strengthening financing opportunities for developing countries• The member states unanimously welcomed the decision of the IMF’s

Executive Board to use the SDR 1.75bn• Deauville Partnership • Took place on the sidelines of the IMF’s annual meeting. The participants

decided to establish a “Transition Fund” worth US$250m to support the Middle East and North African countries.

Egypt and IMF Reach Tentative Loan Deal

• Egypt's request for the 22-month loan is expected to be submitted to the IMF Executive Board for approval in a few weeks.

• Egypt's economy has been battered by a sharp drop in tourism and foreign investment.

• The country was long viewed as an emerging market star with rapid economic expansion, fuelled by decades of stability and the Middle East's largest population.

http://online.wsj.com/article/SB10001424127887324352004578130723791212616.html accessed 24-11-2012

Egypt and IMF Reach Tentative Loan Deal

• The program will give Egypt access to a total of $14.5 billion in loans and deposits on favorable terms from a range of bilateral and multilateral donors, including the IMF.

• The erosion of foreign-exchange reserves has prompted speculation that the central bank would be forced to devalue the Egyptian pound, which has been remarkably stable at close to 6 per dollar since the revolution.

http://online.wsj.com/article/SB10001424127887324352004578130723791212616.html accessed 24-11-2012

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