The World Bank was established as the International Bank for Reconstruction and Development (IBRD). The latter, somewhat cumbersome, title provides a more accurate description of the bank’s role. The IMF has more of the functions and responsibilities one would expect from a world central bank.
The World Bank was set up to address long-term development issues and to reduce global poverty. It provides funding for basic infrastructure projects to developing countries. It is also mandated to facilitate reforms to reduce global poverty. This is clearly well intentioned but the evidence shows that it has had limited success. Its effor ts in sub-Sahara Africa have had few positive results, for example.
The gap in terms of wealth between developed and many developing economies has widened. The blame for this should not be laid at the feet of the World Bank, however. Its resources are a small fraction of private investment flows and subsidies on agricultural products and other commodities by developed countries have taken their toll on incomes in developing countries.
Posts Tagged ‘banking’
The World Bank
Friday, September 4th, 2009The International Monetary Fund (IMF)
Saturday, August 29th, 2009The simplest way to view the IMF is that it is the world’s lender of last resort. The principal stated objectives of the IMF are as follows:
To promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment In practice the IMF’s most high profile activity is to provide funding to countries experiencing balance of payment problems while imposing conditions on the governments of these countries to implement economic reforms in return for being given such loans:
Financing. The IMF is financed by contributions from its member countries. Each member’s contribution is based on its relative economic size and condition. These contributions are referred to as quotas and are denominated in a special currency unit, the Special Drawing Right (SDR), based on a weighted basket of four major currencies (at the time of writing this basket was made up of the US dollar, the euro, the Japanese yen and UK sterling).
Quotas are reviewed periodically and may be adjusted to reflect changes in either an individual member’s economic condition or changes in the IMF’s financing requirements. The latter depends largely on the state of the global economy.
The IMF pays interest on members’ positive balances based on short-term money market rates of the currency basket.
In addition to providing the IMF with its funding, quotas are used to define each member’s maximum contribution, and, in principle at least, to determine their ability to borrow from the fund in times of financial distress.
Management. The head of the IMF is, by tacit agreement, always a European. Quotas are used to determine each member’s voting rights. As the world’s largest economy the US has a significant influence on the IMF’s management and policies and the heaviest voting weighting.
In practice the IMF is run by an executive board. This 24-strong board is made up of permanent representatives from the USA, Japan, Germany, France, the UK, China, Russia and Saudi Arabia plus 16 other representatives from other countries elected for two-year terms. Few decisions are, however, made based on formal votes.
Borrowing rights. Member countries can borrow the equivalent of their quota in any given year and up to three times their quotas in total. In exceptional circumstances these lending limits may be lifted.
When trouble star ts politics become an overriding consideration, both domestic and international. Domestic politics affect the ability of governments to make reforms while international politics has an impor tant influence on the IMF’s willingness to provide funds.
Conditionality. Conditionality is the most controversial aspect of the IMF’s operations. Before making a loan to a distressed country the IMF will seek to impose conditions for economic, and sometimes political, reform to ensure that the financing is genuinely short term and that the borrower will be able to repay the loan.
These conditions can be wide ranging and usually require the borrower to meet defined monetary and budgetary targets, the removal of subsidies on selected products, the opening up of markets, reduction in import tariffs and removal of foreign ownership restrictions. These conditions frequently lead to hardship and with the IMF also being widely seen as a tool of US foreign policy tend to lead to popular political opposition in affected developing markets.
It is easy to make the IMF the bogeyman and it does not have a perfect record in terms of corrective action proscribed. These attacks miss the point. In an open global economy the world needs an organization such as the IMF. Trade and capital flow imbalances in individual economies will occur from time to time. These may be the result of poor government or central bank policies. They may also be a consequence of supply side or demand side shocks, such as a sharp increase in energy prices or a fall in commodity prices.
It is also fair to add that many governments have taken advantage of the intervention of the IMF to impose unpopular policies that it can blame on the IMF but had actually wanted to pursue in any case. IMF conditions that a government reduces its fiscal deficit do not normally define in detail exactly how this is to be achieved. A government may choose to cut public employees’ salaries, for example, but maintain its chosen level of military spending.