Role Of Multilateral AgenciesPresentation Transcript
International Financial Institutions Constance L. Danner
Financial Institutions “A financial institution is an institution that provides financial services for its clients or members.” Act as financial intermediaries.
International Financial Institutions ~Definition~ “International Financial Institutions (IFIs) Refers to financial institutions that have been established (or chartered) by more than one country and hence are subject to international law”
Examples Of IFIs International Monetary Fund World Bank Group Asian Development Bank African Development Bank Inter-American Development Bank Islamic Development Bank
History Of IFIs After the Great Depression in the 1930s there was a need for an organization to create a system for exchange rate stability The World Bank and the International Monetary Fund were created in the aftermath of World War II Countries’ economies affected by WWII need for reconstruction in well-developed nations need for development in the lesser developed nations
IFIs: that We’ll discuss International Monetary Fund World Bank
International Monetary Fund (The IMF)
International Monetary Fund The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It is an organization formed to stabilize international exchange
International Monetary Fund (cont’d) Established in (1944) Formally organized on (Dec 27th 1945) Member states (186) Headquarters (Washington D.C. USA) Currency (SDR) *SDR = just a unit of account…not a real currency
IMF: Managing Director Dominique Strauss-Kahn Nationality: French 10th Managing Director of the International Monetary Fund Assumed this position on Nov 1st ,2007.
i) Promote international monetary
ii) Expansion and balanced growth of
iii) Promote exchange rate stability
IMF: Purposes (Contd.)
iv) Help establish multilateral system of
payments and eliminate foreign
v) Make resources of the Fund available
vi) Shorten the duration and lessen the
degree of disequilibrium in international
balances of payments
Where does the IMF get its money? The quota subscriptions (25% of quota subscription) Borrowing arrangements Interest charges and Fees
What IMF Does? The work of the IMF is of three main types:
Economic Surveillance The IMF oversees the international monetary system and monitors the financial and economic policies of its members. It keeps track of economic developments on a national, regional, and global basis
Technical Assistance To assist mainly low- and middle-income countries in effectively managing their economies, the IMF provides practical guidance and training on how to upgrade institutions, and design appropriate macroeconomic, financial, and structural policies.
Lending The IMF provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms
Quotas “Definition” Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy and characteristics .
Size of the quotas determine voting power
IMF decides on the quota for each member
Richer countries have larger quota
Quotas are reviewed every 5 years
IMF Members' Quotas and Voting Power *Source IMF site May 2009
The Multifaceted Role of Quotas
The amount of financial resources
The member's voting power in institutional decision making (along with basic votes);
The level of access of the member to IMF financing;
The members' share of general SDR allocations.
How much money a member can borrow from the IMF
25% of the country’s quota may be used
3 times the amount of its quota, if this is not sufficient
Plans to Executive Directors
India and IMF India joined on 27th December, 1945 as an original member Till 2003, India a borrower In May, 2003, India became the creditor with contribution of $ 498 mn to IMF’s financial plan.
India and IMF 1991 Economic Crisis Rising Inflation and BoP unbalance – Very little amount left in reserve. Capable of importing only for 3 weeks IMF put a condition to open up the economy Liberalization of Indian Economy Economic reforms won over Executive Directors and got a loan of 2.2 bn $
2 The WORLD BANK
The World Bank is an international financial institution that provides financial and technical assistance to developing countries for development programs (e.g. bridges, roads, schools, etc.) with the stated goal of reducing poverty.
: 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)
: President Robert Bruce Zoellick Nationality: American Current (11th) President of World Bank Since: July 1st, 2007 Nominated by: George W. Bush
Difference between World Bank and a commercial bank ? World Bank is owned by 186 countries. The financial support and advice is provided to the member countries to fight poverty. Unlike commercial banks, it often lends at little or no interest to developing countries. Offers longer periods to repay loans than commercial banks allow. World bank borrows the money it lends. It has good credit as it has large and well managed financial reserves.
The World Bank Group
International Bank for Reconstruction and Development (IBRD)
International Development Association (IDA)
International Finance Corporation (IFC)
Multilateral Investment Guarantee Agency (MIGA)
International Centre for Settlement of Investment Disputes (ICSID)
The World Bank differs from the World Bank Group. The World Bank comprises of only two institutions:
International Bank for Reconstruction and Development (IBRD)
International Development Association (IDA)
IBRD Origin The foundation of IBRD was laid in the Bretton Wood conference. It was founded in 1944. Purpose It was founded to finance reconstruction projects in war-ravaged countries despite their poor creditworthiness.
IBRD: Functions To assist in process of reconstruction, development and restoration of countries destroyed by war. To promote long term balanced growth all around the world. To encourage international investments for development of the member countries. To encourage private foreign investments by means of guarantees. To help member countries in maintenances of equilibrium of BOP. To play a role so that smooth transition may take place from war time to peace time economies.
IDA Origin In 1959, the US made the resolution for the articles of agreement for IDA and in September 1960 the IDA was established. 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.
Background and Objectives Natural disasters Needs affecting developing economies Post conflict rehabilitation Needs affecting a transitioning economy
Areas of operation Agricultural and Rural Development Conflict and Development Economic Policy Education Energy Environment Financial Sector Gender Governance Health, Nutrition and Population Industry Information and Communication Technologies International Economics and Trade Labor and social protection Law and Justice Macroeconomic and Economic Growth Mining Poverty Reduction Private Sector Public Sector Governance Rural Development Social Development Trade Transport Urban Development Water Resources Water Supply and Sanitation
Globalization and Role of
The World Bank serves to eradicate the evils of globalization.
The first step of the World Bank towards the accomplishment of the task is debt relief.
The World Bank has also drawn plans to help the middle income countries in the development of their infrastructure and develop their trade
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
and India … India is one of the ‘founding fathers’ of the World Bank. India receives roughly half of its World Bank loans interest free. Also it remains the Bank’s largest single borrower. The Bank also works closely with the Indian government, civil society and communities in designing its support for the country.
and India … WB has been the largest financers of India’s National Aids Control Program (NACP). Helped to develop India’s national power grid. Provides support to establish e-governance in India. Supports the Government of India’s nation-wide Education for All program - SarvaShikshaAbhiyan (SSA)
Difference between IMF and WB
Difference between IMF and WB [cont’d]
Criticism on IMF and World Bank
Criticism of the IMF & World Bank often takes the form of protesting
* A demonstrator waves a red and black flag during an intersection occupation outside the World Bank. (october Rebellion 19-20 Oct, 2007)`
1.Conditionalities (so called SAPs) On giving loans to countries, the IMF makes the loan conditional on the implementation of certain economic policies. These policies tend to involve: Reducing government borrowing - Higher taxes and lower spending Higher interest rates to stabilize the currency. Allow failing firms to go bankrupt. Structural adjustment. Privatization, deregulation, reducing corruption and bureaucracy. The problem is that these policies of structural adjustment and macro economic intervention make the situation worse. (Argentina -2001 Example)
Conditionalities (so called SAPs) Slows down social stability Leads to an increase in poverty “Strict programs," increasing taxes to balance budget deficit
2.Impact on Public Health In 2008, A study by Cambridge and Yale concluded: strict conditions on the international loans by the IMF resulted in thousands of deaths as public health care had to be weakened. In the 21 countries which the IMF had given loans, tuberculosis deaths rose by 16.6 %
3.Devaluations 3.Devaluations IMF is also criticized for allowing inflationary devaluations How ??
4.Crititsm from free-market advocates Believers in free markets argue that: it is better to let capital markets operate without attempts at intervention. And attempts to influence exchange rates only make things worse
5.IMF/World Bank support of military dictatorships Arguments in favor of the IMF “Economic stability is a precursor to democracy” However, The role of the Bretton Woods institutions has been controversial since the late Cold War period, as the IMF policy makers supported military dictatorships friendly to American and European corporations.
there are various examples in which democratized countries fell after receiving IMF loans.
E.g World Bank’s support to a Brazilian Dictator
In Pakistan, the IMF used the military government to impose the General Sales Tax (GST)
6. IMF & WB : secretive institutions with no accountability The IMF is funded with taxpayer money, yet it operates behind a veil of secrecy. Members of affected communities do not participate in designing loan packages. The IMF works with a select group of central bankers and finance ministers to make polices.
7.Democracy is being torn apart by a financial oligarchy (Might is right)
While the WB represents 185 countries, it is run by a small number of economically powerful countries a. Past Managing Directors Historically 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 or Western interests in certain regions of the world The United States has an exclusive veto power in major IMF decisions WB’s president :always an American HQ’s of IMF and WB both in Washington
8.Other Criticisms IMF Hurts the environment [eg. Ivroy Coast’s coca production] Human rights and Labor rights-violated Some of the most Ironic Facts:
IMF itself is exempt from all taxes, along with its sister institutions, eg. the World Bank)
HQs of IMF & WB both in Washington DC.
IMF’s Dominique Strauss Kahn is no stranger to controversies either
Criticism: by some Famous People “They [WB] focused on growth-based development and thus invest in energy sectors, setting up ports and infrastructure.instead of this they must focus on poor.” ~PROF MUHAMMAD YUNUS~[Nobel laureate, Bangladeshi banker and economist, founder of Grameen Bank]
“the IMF is not serving a useful role in low-income countries, and that low-income national governments need more policy space and less IMF interventions.”
~JACK JONES ZULU~[Southern African Regional Poverty Network]
“American diplomats wanted to lock foreign countries into further dependency on paper dollars.”
~MICHAEL HUDSON~[a Wall street analyst, economist and Historian]
Why do countries sign agreements with the IFI’s if the consequences are ultimately negative? Most countries that accept the loans do so because they have no other way of avoiding total financial collapse. there often are international pressures on such countries to get “Aids” from the IMF and World Bank