the international monetary fund (imf) & the world bank group

slide. 1IMF & World Bank | Abdul Basit Adeel | Political Science/Chair of International Relations

International Monetary Fund & The World Bank Group

ABDUL BASIT ADEEL


Contents:

• Introduction Establishment IMF vs. World Bank – Fundamental difference

• IMF Basic structure, goals, mechanism etc.

• World Bank Basic structure, goals, mechanism etc.

• Case Study Argentina

• Conclusion• Discussion


INTRODUCTION


Establishment:

• Established after WW II to rehabilitate global economy

• Bretton Wood Conference - 1944• New instructional infrastructure for intl. economics• Intern-state treaties • New institutions

IMF World Bank


IMF vs. World Bank:

• Common origin and similar structural features

• Different purposes, functioning and outcome


IMF vs. World Bank:

• International Monetary Fund• Help states in dealing with balance of payment problems• Short term loans of foreign currencies

Generally followed dictation/change in policies to enable monetary stability

• World Bank• Long term loans for poverty/development related projects


IMF/WB and Member States:

• Member states have two level relationship that develops

• Whey they sign treaties Particular rights like participation in plenary bodies Obligations: financial contribution, compliance with terms

• When they borrow money Shaped by standard legal terms but more significance is of the

negotiation terms between that states and IMF/WB

Virtually no authority of IMF/WB over non-borrowing members


IMF – Basics:

• Members:• 186 member – 29 founding members as of 1945

• Main goal: • To maintain stability of global monetary system

By offering technical assistance By lending money to maintain balance of payments

• Key structure:• A pool of $325 billons to borrow from


IMF - Functioning:

• At the time of establishment, two functions were defined:

1. Central coordinating mechanism for exchange rates Before this was relative to each other or gold Became obsolete after a shift of intl. economy to market

driven exchange rates since 1970s+ Relevant article was amended to work

2. Create a fund based on forex reserves of member states Given as loans to states facing balance of payments deficits Still functioning


IMF – Membership Obligations:

• Collaborate with the fund for stable exchange rates• Avoid manipulating exchange rates

• To accept periodic surveillance of domestic monetary position and provide correct information about it• States can refuse it if it is overwhelming – Argentina 2006

• To accept the conditions attached with the loan agreement


IMF – Organizational Structure:

1. Board of Governors:• Decides on highest level policy questions• Finance ministers or Central bankers of 186 states• Power is delegated to the Executive Board

2. Directors of Executive Board:• Reviews load request and deals with operational matters• 24 members

5 biggest contributor states – 19 states to represent others+ Bigger economies / contributor’s vote have more weightage

• 85% majority is required to ratify decisions


IMF – How it works:

Repayment

Loan earns profit as well as brings economic stability

SurveillanceIf country implementing the agreed policies then installments continue

Negotiations & AgreementCountry has to agree to conditions to improve her monetary stability

Balance of Payment ProblemLoan is given out on defined installments and conditions


IMF – Enforcement:

• No legal authority of IMF over states policies

• No legal power to punish the deviant states• In the case of ineligibility:

New installments may be stopped• In the case non-compliance:

States may not be able to use fund’s resources States may not be able to vote and asked to withdraw IMF may put political pressure – Argentina’s default, 2006

However, this has never be practiced


IMF – In case of failed Enforcement:

Sates use non-compliance/default as a tool of leverage• Such behavior depends on the effective political power• Almost half of IMF loan cases don’t meet the conditions

• What IMF does when a state defaults:• Tries to pressurize the states via institutions & other states• Threatens to denounce reputation and credit rating• Tells that future loans will be based on current behaviors

States are given waivers in criteria (sometimes repayment) Sometime conditions are renegotiated


World Bank – Basics:

• Members:• 186 member – 1945

• Main goal: • Assistance in development & reconstruction

Aimed at European and Asian reconstruction after WWII After 1960s, development as a strategy against poverty

• Key structure:• A pool of contributions worth $275b to borrow from • $59b in loans and credits + self issued bonds to raise money


World Bank – Membership Obligations:

• Bank is a corporate partnership with shareholders• Shares are proportionate to the investment made

• Members on joining purchase shares to for a lending fund• Cannot be traded or used as collateral for sovereign borrowing• 20% upfront paid in gold or USD, rest in various currencies• Shares can fluctuate when currencies fluctuate• USA, Japan, Germany, France, UK have highest shares

• Borrowers agree to the loan terms• May include policy changes


World Bank – Organizational Structure:

• Similar to that of IMF• Board of Governors• Board of Executive Directors

8 largest share holders – 16 region based representatives • President

• Several Institutions under World Bank Group• The original Intl. Bank for Development & Reconstruction• International Finance Corporation (IFC)

To finance private (non-governmental)development projects• International Development Agency (IDA)

Raises money from rich states to lend to poorest sates


World Bank – How it works:

• Banks borrowing costs are much lower than states• Has a good capital raising and payment history


World Bank – Enforcement:

• No legal authority like IMF over states policies

• No legal power to punish the deviant states• Almost 50% projects continue for public good

• In the case of ineligibility & non-compliance: States may not be able to take further loans (it depends)

• A huge amount of money (30%) goes to corruption• $100b out of $400b since 1946 has been stolen

Violation of terms – Criminal Debt


• Never defaulted on a World Bank loan• Gave the lenders a satisfaction

• Borrowed money from IMF and World Bank• For infrastructure and economic development projects

• In 2001, they defaulted to foreign creditors

• Though they continued to pay back loans to IMF and World Bank, it still made both institutions cautious

Case Study – Argentina:


• Since 1990s, Argentina has fixed exchange rate w.r.t. $• Change in dollar brings change in local currency

• After increase in dollar, Argentinian currency increased• Exports reduced and imports increased being cheap

Caused trade and payments balance to collapse• Foreign debts increased and country was not able to pay• Financial Panic started

Investors pulled their money, people ran to banks Dollar reserves wiped out Government had to put regulate money withdrawal



• New government came and halted foreign debt payments• They negotiated new terms with IMF

Only option with IMF as credit rating and reputation had already declined

IMF tarried to avoid an awkward situation that lender can be controlled by the borrower in case of default

• Argentina regained stability• Cost was massive devalued currency, 25% unemployment

and 50% population under poverty line

• Paid last repayment on January 2006



CONCLUSION


• Pros• Both institution help fight economic destabilization• Have strong intellectual base and well defined goals• Make a global social system of immediate rescue• Help in development and fighting poverty

• Cons:• Loose legal framework – easily leveraged • Undermine sovereignty of the borrowers• Represent the inequality among states – financial & political• Possibility of corruption, financial pressure on public

Conclusion:

the international monetary fund (imf) & the world bank group

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