Role of International economic Role of International economic institutions in global businessinstitutions in global business(with (with reference to reference to IMFIMF and and World BankWorld Bank))

Presented by: Group 9

Flow of presentationFlow of presentation Some international economic institutions IMF History Responsibilities of IMF What IMF does? Economic surveillance Lending by IMF Accountability and Transparency Gold and Borrowings Quotas and SDRs Tackling current challenges India’s relations with IMF The World Bank Criticism of IMF and the World Bank

International Economic Institutions International Economic Institutions since World War IIsince World War II

1. The International Monetary Fund (IMF)

2. The World Bank

3. Global Agreement on Tariffs and Trade (GATT)

4. World Trade Organization (WTO)

5. Organization for Economic Cooperation and Development (OECD)

6. United Nations (UN) Department of Economic and Social Affairs (DESA)

About IMFAbout IMFInternational Monetary Fund (IMF) is

an administrative unit that is international in nature and whose objective is to regulate and administer the financial system of the world.

The IMF does this by observing the payments balance and exchange rates of the world. It offers technical and financial help to the member nations.

Its head office is in Washington D.C, USA

Its MD is Mr. Dominique Strauss Kahn.

History –Cooperation and History –Cooperation and reconstruction(1944-1971)reconstruction(1944-1971)Why was IMF created? The Great Depression of 1930s

Institution of IMF- IMF was instituted in Dec.1945 after

The Bretton Woods Agreement by its 29 member countries. It began operations on March 1, 1947. France became its first borrower.

Until 1971,the IMF practised The Par Value System which was suspended thereafter.

The end of Bretton Woods The end of Bretton Woods System(1972-81)System(1972-81)In 1971,the US decided to suspend the

dollar’s convertibility into gold temporarily which led to the overall dismissal of the Bretton Woods System.

The transition from fixed exchange rates to floating rates was smooth and facilitated adjustments to external shocks such as the oil price shocks of the 1970s.

To help oil importers deal with inflation the IMF set up the first of two oil facilities and what we know as the Trust Fund.

Debt and painful reforms (1982–89)Debt and painful reforms (1982–89)

The oil shocks forced oil importing countries to borrow from western commercial banks who lent billions of recycled petrodollars to them.

In 1979,interest rates in developing countries skyrocketed and this led to an international debt crisis.

At the same time, recession in developing countries pushed them to expand their fiscal policies by further borrowings.

The IMF initiatives calmed the panic by engaging commercial banks but a long road of painful reforms lay ahead.

In March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December 1987.

The end of communism (1989-The end of communism (1989-2004)2004)Post 1991, the IMF membership

increased from 152 to 172 countries making it a universal institution.

The IMF's staff expanded by nearly 30 percent in six years. The Executive Board expanded to accommodate Directors from Russia and Switzerland.

The IMF provided policy advice, technical assistance, and financial support to new member countries helping them make the transition from centrally planned to market driven economies.

Continued Globalisation(2005-Continued Globalisation(2005-present)present)Global capital flows have risen to 15%of GDP

compared to 2-6% in 1980-95.Originally IMF had lent only to countries

facing current account crisis but in recent years capital account crisis have become rampant.

The magnitude of the loans is larger now and response has to be more urgent. Continued globalization has brought new challenges like current financial crisis and Oil price shocks.

The IMF proposed spending cuts of $100 million until 2011 and 380 staff dismissals.

IMF executive board has agreed to sell a part of the gold reserves.

Responsibilities of IMFResponsibilities of IMF Promoting international monetary

cooperation.

Facilitating the expansion and balanced growth of international trade.

Promoting exchange stability.

Assisting in the establishment of a multilateral system of payments and

Making its resources available (under adequate safeguards) to members experiencing balance of payments difficulties.

What IMF does??What IMF does??Economic Surveillance:- a) Country b) Region c) Global

Technical Assistance Highlights of this section

Beneficiaries of Technical Assistance Types of Technical Assistance Working Closely with Donors

Lending by IMFLending by IMF3 main purposes of lending i) help make adjustments to external shocks ii) act as a catalyst for other lenders iii) prevention of crisis

Conditions of lending:- a) Loans are disbursed in installments b) Loans are pledged against economic

targets c) The IMF loans provide only a small portion

to finance BOPs

Lending contd.Lending contd.Main lending Facilities:- a) Stand-By Arrangement- Most popular with

middle income countries b) Short Term Liquidity Facility- for

temporary liquidity problems in emerging markets

c) Emergency Assistance- for coping with natural disasters or military conflicts

d) Extended Fund Facility- for long term structural reforms

e) Trade Integration Mechanism- for countries facing multilateral trade liberalization

Lending ContdLending ContdLending to low income countries:- a) Poverty Reduction and Growth Facility-

largest no. of loans made in recent years. Interest rate is 0.5% and period is 5-10 yrs

b) Exogenous Shocks Facility- helps deal with economic shocks such as food and fuel price hikes or natural disasters

Debt Relief:- a) Heavily Indebted Poor Countries b) Multilateral Debt Relief Initiative- 100%

debt was written off for many African nations

Accountability and Accountability and TransparencyTransparencyThe IMF’s internal watchdog is called

Independent Evaluation Office.The IMF also has its own Ethics OfficeAn Integrity Hotline-a 24hour

whistleblowing system was launched in 2008.

The IMF is engaged with intergovernmental groups like G7 and G24.

IMF’s executive board has adopted a transparency policy to encourage publication of member countries’ policies and data.

Gold and BorrowingsGold and BorrowingsThe IMF holds 103.4 million ounces(3217

metric tonnes) of gold worth $83 billion.Gold played an important role in the Bretton

Woods era(1944-71).Until 1970s member countries paid 25% of

their subscription in gold.Today IMF is considering selling some of its

gold following a large decline in outstanding credit.

Gold and Borrowings Gold and Borrowings contd..contd..The proceeds from selling gold will be

retained for investment in HIPC and PRGF.

IMF can borrow from 11 industrialized countries.

In times of crisis its first resort is NAB and then GAB. It can borrow up to SDR34 billion under these arrangements.

Quotas and SDRsQuotas and SDRsQuotas broadly reflect the size of each

member's economy- output, trade.USA, world’s largest economy has the

largest quota.Quotas, together with the equal number of

basic votes each member has, determine countries' voting power.

They also help determine how much countries can borrow from the IMF and their share in allocations of special drawing rights or SDRs (the reserve currency created by the IMF in 1969).

Quotas and SDRs contd..Quotas and SDRs contd..Countries pay 25% of their quota

subscriptions in SDRs or major currencies, such as U.S. dollars, Euros, pounds sterling, or Japanese yen. They pay the remaining 75 percent in their own currencies.

Under a quota and voice reform the quotas of dynamic economies, many of which are emerging market countries, should be increased.

As of end-August 2008, IMF's total quotas stood at SDR 217.4 billion (about $341 billion).

Quotas and SDRs contd..Quotas and SDRs contd..Today, the SDR has only limited use as a

reserve asset, and its main function is to serve as the unit of account of the IMF.

It is a potential claim on the freely usable currencies of IMF members.

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar.

Today it is calculated as the sum of specific amounts of 4 currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

Quotas and SDRs contd..Quotas and SDRs contd..SDR interest rate provides basis for

calculating interest charged on loans and paid on SDR holdings.

An SDR allocation provides each member with a costless asset on which interest is neither earned nor paid.

If a member's SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall.

Tackling current Tackling current challengeschallengesThe IMF was first in drawing attention to

growing risks in the U.S. mortgage market in its Global Financial Stability Report. It has tracked the deterioration in the global economy.

The IMF is helping low-income countries by encouraging aid effectiveness, promoting social spending, providing policy frameworks for good performers, and expanding regional technical assistance to limit the impact of high fuel and food prices.

Tackling current challenges Tackling current challenges contd..contd..Sovereign wealth funds—getting

consensus.IMF is helping to reduce global payments

imbalances.IMF is working on exchange rate stability.IMF is analyzing economic impact of

global warmingIMF is tracking global trends- population

aging, march of the cities, financial globalization, gender and development.

Data Dissemination Data Dissemination systemssystems In 1995, the International Monetary Fund

began work on data dissemination standards with the view of guiding IMF member countries to disseminate their economic and financial data to the public. The International Monetary and Financial Committee (IMFC) endorsed the guidelines for the dissemination standards and they were split into two tiers: The General Data Dissemination System (GDDS) and the Special Data Dissemination Standard (SDDS).

DDS contd..

IMF members using SDDS IMF members not using any of the DDSystems IMF members using GDDS No interaction with IMF

India's relations with the India's relations with the International Monetary FundInternational Monetary FundThe IMF provides financial assistance to India,

which helps in boosting the country’s economy.

In 2005, the IMF said that the budget of India is very positive for it points that the economy of the country will grow at the rate of 6.7%.

The IMF said that the reasons behind the economic growth of India are that the RBI has been able to control inflation and has also handled its monetary policies very skillfully.

The IMF has suggested that India can become a financial super power by bringing in more reforms in its economic policies that will increase its growth rate to 8%.

The current relationship between The current relationship between IMF and IndiaIMF and IndiaThe relationship between the IMF

and India has grown strong over the years. In fact, the country has turned into a creditor to the IMF and has stopped taking loans from it.

The loans provided by IMF to India:The loans provided by IMF to India:

SDR 3,260,405,000 in 1992 SDR 3,584,905,000 in 1993 SDR 2,763,180,833 in 1994 SDR 1,966,633,125 in 1995 SDR 1,085,250,003 in 1996 SDR 589,791,667 in 1997 SDR 284,916,664 in 1998 SDR 38,500 in 1999

The World BankThe World BankEstablished in 1944The World Bank is the world's largest source

of development assistance. It provides nearly $16 billion in loans

annually to its client countries for social development, institution-building, environmental protection, private business development, stable macroeconomic environment, and poverty reduction.

The Washington, D.C.-based Bank is owned by its 185 member countries, and has 67 country offices around the world.

The World Bank contdThe World Bank contdHeaded by Robert.B.Zoellick who is

the president.World Bank comprises two institutions: -International Bank For Reconstruction

and Development (IBRD) -International Development

Association (IDA)Issued its first loan of US$250 million

to France for post-war reconstruction.The bank obtains its funding through

the IBRD’s sale of AAA-rated bonds in world financial markets.

World Bank contd..World Bank contd..Issues two types of loans: Investment loans- support for

economic and social development projects

Development policy loans- support policy and institutional reforms

Grants- given by IDA.Other services include analytical,

advisory and educational services. Current focus is on Millennium

Development Goals (MDGs).

World Bank cont.World Bank cont.Poverty Reduction strategies include

collaboration with poor people’s organizations such as Slum Dwellers International and obtaining aid through IDA.

World Bank is temporarily managing Clean Technology Fund which focuses on developing renewable energy sources.

World Bank Institute looks after training of staff and civil servants from member countries.

Global Development Learning Network (GDLN) is a network of 120 learning centers across 80 countries facilitating dialogue on development issues between people.

Criticism of IMF and World Criticism of IMF and World BankBankConditionalities including

Structural Adjustment Programs.

The IMF advocates Keynesian approach of demand-side economics, currency devaluation which is inflationary.

Their austerity programmes are self contradictory.

International Monetary Fund Gold Reserve is allegedly undervalued.

ContdContdThe Argentinean economic crisis of 2001 due

to privatization of vital national resources and maldesigned fiscal federalism.

Easier currency movement by Kenyan central bank proposed by SAPs of IMF led to the Goldenberg scandal worth billions of Kenyan shillings.

Since 1980 over 100 countries have experienced a banking collapse which has reduced GDP by 4% or more.

In 21 countries of eastern Europe which were loaned by IMF, TB deaths rose by 16.6%.

contdcontdThe World Bank is accused of undermining

democratic efforts by loaning huge amounts to dictatorships.

US effectively has a veto on some constitutional decisions with over 16% shares in the bank and a 2008 WB report which found that biofuels had driven food prices up by 75% was never published.

The director of World bank has always been an American and the MD of IMF a European.

The Jamaican dollar in 1978 was worth a little more than the US dollar but by 1995 it had eroded to less than 2 cents US. Jamaica borrowed from IMF in 1978.

ReferencesReferencesWikipedia encyclopediaIMF official websiteWorld Bank official websiteMapsofindia.comBusiness line website

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