Lecture on the International Monetary Fund and World Bank for a graduate course in International Political Economy that I taught in 2004.

1. Bretton Woods:
The IMF and World Bank

3. Bretton Woods
• Even before the end of World War II, the Allied
Powers recognized that there would be a need
to reconstruct the international economy.
• A new international financial architecture
was necessary to replace the defunct Gold
Standard.
• Significant amounts of funding were
necessary to rebuild war-torn economies.

4. On Financial Systems
1. Automaticity
2. Supranationality
3. Hegemony
4. Negotiation
The design of the international financial system
will depend on the organizing principle its
designers adopt:

5. Exchange Rate Regimes
REGIMES CHARACTERISTICS EXAMPLE
Currency
Board
Exchange
Rate Peg
Adjustable Peg
Crawling Peg
Managed Float
(Dirty Float)
Free Float
Strongest link to other currencies; money
supply adjusts automatically with
international reserves.
Central Bank intervenes to maintain peg;
some policy discretion is possible depending
on the permitted degree of fluctuation.
Countries maintain a peg for as long as
possible, but change the peg in the face of
substantial disequilibria at that rate.
Central Bank intervenes to maintain the
peg, which is adjusted according to specified
rules/criteria (such as “hard” fluctuation
Occasional government intervention in
currency markets to influence currency’s
market value.
Normally no foreign exchange market
intervention.
Argentina
Hong Kong
China
CFA Zone in
Africa
Bretton Woods
Brazil
Mexico
Many
Developing
Countries
United States
United Kingdom

6. Exchange Rate Regimes
REGIMES CHARACTERISTICS EXAMPLE
Currency
Board
Strongest link to other currencies; money
supply adjusts automatically with
international reserves.
Argentina
Hong Kong
China
Exchange
Rate Peg
Central Bank intervenes to maintain peg;
some policy discretion is possible depending
on the permitted degree of fluctuation.
CFA Zone in
Africa
Adjustable Peg
Countries maintain a peg for as long as
possible, but change the peg in the face of
substantial disequilibria at that rate.
Bretton Woods
Crawling Peg
Central Bank intervenes to maintain the
peg, which is adjusted according to specified
rules/criteria (such as “hard” fluctuation
Brazil
Mexico
Managed Float
(Dirty Float)
Occasional government intervention in
currency markets to influence currency’s
market value.
Many
Developing
Countries
Free Float
Normally no foreign exchange market
intervention.
United States
United Kingdom
F I X E D
INTERMEDIATE
F L O A T I N G

7. The IMF
• The International Monetary Fund (IMF) was
created to be the institution to manage the
post-war financial system.
• Overall, its task was to ensure the liquidity of
the international system.
• Surveillance
• Financial Assistance
• Technical Assistance
• In short, it was the Central Bank of Central
Banks.

8. The System
• The IMF was created to oversee a financial
system of fixed but adjustable exchange rates.
• Fixed: Countries had to peg their currency
to gold, or a currency convertible to gold,
and keep it within 1% of that par value.
• Adjustable:The Fund determined if these par
values had to be adjusted in the event of
“fundamental disequilibrium”.

9. The IMF:A Fund
• The IMF sets quotas that determine the
amount of funding it requires of members and
allows members to borrow.
• “Membership Fee”: Countries must provide
the Fund with financial resources equal to
their quota.
• Voting Power:The quota allocates decision-
making power among members.
• Access Limit: Quotas set borrowing ceilings.
• The quota is generally determined by a
country’s relative size in the world economy.

10. The World Bank Group
• The World Bank Group can be described as a
cooperative of sovereign states dedicated to
international reconstruction and development.
• Today, its mission is “to fight poverty and
improve living standards”.
• Generally, the prerequisite for Bank
membership is Fund membership.

11. Group, Bank, Broker
• The World Bank consists of five (5) agencies:
1. International Bank for Reconstruction and Development
2. International Development Association
3. International Finance Corporation
4. Multilateral Investments Guarantee Agency
5. International Center for the Settlement of Investments
Disputes
• Bank lending has traditionally been oriented
towards project loans.
• The Bank sources these funds from
international capital markets, not from paid-in
capital.

12. L E N D I N G
F U N D I N G
O R I E N T A T I O N
O B J E C T I V E
IMF WB
International Financial Stability
Individual Country Reconstruction
and Development
Macro Micro
Paid-in Capital / Member
Contributions
International Capital Markets
Loans for Balance-of-Payments
Disequilibria
Project Loans

13. The Golden Era
• The Bretton Woods System was able to lend
financial stability and contribute to
international growth from its inception in 1944
to its breakdown in 1973.
• Yet during this period, the Bretton Woods
Institutions began to evolve, innovate and
expand in their respective spheres of
responsibility.

14. DEFAULT
LOAN CONDITIONALITY
MACROECONOMY
DEVELOPING COUNTRIES
IMF WB
Clientele
Policy
Concern
Approach
Arrears
Convergence
• Less dependence on the Fund
by industrialized countries.
• Competition from alternative
lending institutions.
• Worsening world economic
conditions.
• Concerns over developing
country creditworthiness.
• Shift from a systemic towards
a country-specific orientation.
• Movement away from
project-specific loans, realizing
that these were sterile unless
broader policy issues were
addressed.
• Development of instruments
that addressed developing
country needs:
- EFF - SAF/ESAF
- Trust Fund - SDRs
• Development of structural
adjustment loans that
addressed BoP issues.
• Since both institutions catered to the same countries, they
equally bore the risk that their clients would be unable to repay
their loans.

15. Modus Operandi
IMF WB
Missions
• Capable of negotiating on
behalf of the Fund.
• Staffed by economists and the
like.
• Undergoes relatively quicker
procedures.
• Unable to commit during
negotiations.
• More diverse in composition.
• Takes much longer to
negotiate.
Counterparts • Finance/Treasury Ministers
• Broader representation
among government personas.
Orientations
• Short-term bias towards
stabilization policies.
• Sees an existing trade-off
between stabilization and
development.
• More concerned with
development, thus adopting a
longer-term perspective.
• Sees no trade-off between
stability and development.
Conditionalities
• Fewer monitorable indicators
of macroeconomic stability that
guarantee access to subsequent
tranches of funds.
• More numerous general and
performance indicators of
macroeconomic stability.
Compliance can become a
matter of negotiation.

16. ModusVivendi
• The two institutions have been able to achieve
modest cooperation.
• Coordinated staff reports and meetings.
• Policy Framework Papers.
• Agreement against cross-conditionality.
• In practice, there remains some degree of
friction between them.
• The Bank has always pushed for delineating
the responsibilities of each.
• The Fund is perceived as the more
domineering of the two.

17. Concluding Remarks
• The IMF and WB are examples of institutions
that have constantly tried to reinvent
themselves (especially the Fund).
• Certainly their performance is at best spotty.
• That they have their critics does not
necessarily mean that they have done a bad
job (but it doesn’t mean they’ve done a great
one either).
• Overall, it seems that there is a need for
interventions at the systemic level of the sort
that the Fund and Bank represent.