6' Global institutions: IMF and IBRD

1
6. Global institutions IMF and IBRD

• IMF and The World Bank different mandates
• IMF
• Proposes and evolution
• Activities
• Governance
• Financing the IMF
• The World Bank
• Composition
• Operations
• Governance
• Financing
• Conditionality
• Other parallel institutions the BIS, G10, G5/G7,
  the EBRD.
• Essay 13 Global Institutions IMF and the
  World Bank Group

2
Institutions IMF and IBRD

• Readings
• www.IMF.org, and  http//www.worldbank.org/ ,
• Kahler, 1995, pp. 48-65
• Stiglitz, Joseph E. (2003), Globalisation and its
  discontents, Norton, Chapter 8 and 9

3
1. IMF and The World Bank different mandates

• The IMF and the World Bank have different
  mandates
• Bretton Woods Conference established The World
  Bank and the IMF.
• The World Bank purpose was to help war-ravaged
  countries rebuild. The earliest recipients of its
  loans were the European countries and Japan.
• By the early 1960s, these countries no longer
  needed World Bank assistance, and its lending was
  redirected to the newly independent and emerging
  nations of Africa, Asia, Latin America, and the
  Middle East
• In the 1990s, assistance also went to transition
  countries of Central and Eastern Europe.

4
1. IMF and The World Bank different mandates

• The IMF and the World Bank have different
  mandates (Continuation)
• IMF's focus is chiefly on macroeconomic issues
  and the financial sector (it does not finance
  projects),
• The World Bank is concerned mainly with
  longer-term development and poverty reduction.
• Its loans finance infrastructure projects, the
  reform of particular sectors of the economy, and
  broader structural reforms.
• Countries must join the IMF to be eligible for
  World Bank membership.

5
2.i. IMF proposes

• The IMF's primary purpose is,
• to ensure the stability of the international
  monetary systemthe system of exchange rates and
  international payments that enables countries
  (and their citizens) to buy goods and services
  from each other.
• IMFs What is the IMF, 2006, p.1

6
2.i. IMF rules

• Principal features and rules, distinguish
  external and domestic policies as in GATT .
• Mainly it constrain certain mutually harmful
  external policies, in particular
• Preventing competitive devaluation stable ERs,
• Preventing restrictions on current account
  convertibility.
• The idea of central policy coordination bargains
  was NOT part of the Bretton Woods system.
• Beginning of 1970s the IMF crumbled. IMF role in
  subsequent episodes have been marginal.

7
2.i. IMF ER stability

• Between 1945 and 1971, countries agreed to keep
  their exchange rates pegged to the US, at rates
  that could be adjusted only to correct a
  "fundamental disequilibrium" in the balance of
  payments and only with the IMF's agreement. This
  so called par value systemalso known as the
  Bretton Woods systemprevailed until 1971, when
  the U.S. government suspended the convertibility
  of the U.S. dollar (and dollar reserves held by
  other governments) into gold.
• Since then, members are free to choose their own
  ER regimes.

8
2.i. IMF evolution

• IMF had to adapt to global capital markets and
  to,
• Increased membership from initial 29 members to
  the 184 members today, including LDCs (some
  former colonies of European powers) and
  transition economies (former communist countries
  in Eastern Europe).
• Many crisis (i) 1971, end of par value system to
  present floating, (ii) 1970s, oil price shocks,
  (iii) 1980s, Latin America debt crisis, (iv)
  1990s, crises in the emerging financial markets
  in Mexico and Asia, and (v) 2001, Argentina debt
  default.
• Prevailing poverty in the world.

9
2.i. IMF evolution to conditionality

• After 1971, as the IMF role on international
  policy coordination waned, the IMF and the WB
• have served as a means of integrating poorer
  and newer members of the capitalist economy
  rather than dealing with the coordination of
  economic policies among industrialized
  countries. Kahler, p 49

10
2.i. IMF evolution to conditionality

• After the 1970s, the IMF was able to mobilize
  financial support for currencies in trouble and
  adjustment programs.
• Instrument of conditionality IMFs financial
  assistance against specified domestic policy
  changes. This involved negotiations and
  monitoring of the stand-by arrangements. It deals
  mainly with CA items, not items of capital
  account.
• By the 1990s the central role of the IMF was to
  link financial support of the two institutions to
  international oversight of LDCs domestic policy
  regimes and the transition economies (K, p.49).

11
2.ii. IMF activities

• The IMF has essentially 3 activities, in order to
  maintain stability and prevent crisis,
• Surveillance monitoring national, global, and
  regional economic and financial developments and
  advising member countries on their economic
  policies
• Lending members hard currencies to support policy
  programs designed to correct balance of payments
  problems and
• Offering technical assistance in its areas of
  expertise, as well as training for government and
  central bank officials.

12
2.ii. IMF surveillance

• Two forms (a) general surveillance of the world
  economy published in the World Economic Outlook
  and the International Capital Markets Report, (b)
  surveillance of individual countries (Article
  IV).
• This is composed by
• Article IV consultations (IMF's Articles of
  Agreement) regular comprehensive consultations
  with individual member countries, with interim
  discussions as needed.
• IMF staff missions also often reach out beyond
  their official interlocutors for discussions with
  parliamentarians and representatives of business,
  labour unions, and civil society.
• A team visits the country and reports its
  findings to IMF management and to IMF's member
  countries, for discussion. A summary of the
  Board's views is transmitted to the country's
  government.

13
2.ii. IMF's surveillanceMain - macroeconomic and
financial sector policies

• In its oversight of member countries, the IMF
  focuses on the following
• macroeconomic policies relating to the
  government's budget, the management of money and
  credit, and the exchange rate
• macroeconomic performancegovernment and consumer
  spending, business investment, exports and
  imports, output (GDP), employment, and inflation

14
2.ii. The IMF's surveillance Main
businessmacroeconomic and financial sector
policies

• Continuation
• balance of paymentsthat is, the balance of a
  country's transactions with the rest of the
  world
• financial sector policies, including the
  regulation and supervision of banks and other
  financial institutions and
• structural policies that affect macroeconomic
  performance, such as those governing labour
  markets, the energy sector, and trade.

15
2.ii. IMF Lending to countries in difficulty

• Any member country may turn to the IMF when it
  looses creditworthiness in capital markets (or
  loans become too expensive).
• Technically, countries do not receive loans from
  the IMFthey "purchase" foreign exchange from the
  IMF's reserve assets, paying with their own
  currency. The loan is considered repaid when the
  borrower "repurchases" its currency from the IMF
  in exchange for reserve assets.

16
2.ii. IMF Lending facilities

• Stand-By Arrangements are designed to deal mainly
  with short-term balance of payments problems. The
  IMF's largest loans fall into this category. In
  1997, the IMF introduced the
• Supplemental Reserve Facility, under which it can
  quickly provide large loans with very short
  maturities to countries going through a capital
  account crisis.

17
2.ii. IMF Lending facilities

• The IMF introduced the Extended Fund Facility to
  help countries address balance of payments
  difficulties related partly to structural
  problems that may take longer to correct than
  macroeconomic imbalances.
• Programs may then include measure to improve the
  way markets and the supply side of the economy
  function, such as tax and financial sector
  reforms, privatisation of public enterprises, and
  steps to make labour markets more flexible.

18
2.ii. IMF Lending facilities

• Under its Poverty Reduction and Growth Facility,
  the IMF provides concessional loansloans with
  low interest rate for 10 yearsto its poorest
  member countries. The majority of the IMF's loans
  now fall into this category.
• In 2005, it approved the establishment of the
  Exogenous Shocks Facility, under which it can
  give LDCs (that are not receiving funds under the
  Poverty Reduction and Growth Facility, and) that
  are suffering a balance of payments problem
  because of a shock beyond their control, quick
  access to funds on a concessional basis.

19
2.ii. IMF Lending facilities

• The IMF also provides
• Emergency Assistance natural disasters, or
  military conflicts causing B/P problems,
• Trade Integration Mechanism B/P problems due to
  trade liberalization

20
2.ii. IMF Lending instruments

• Two types of windows
• Most countries (except for the poorest) -
  regular, non-concessional lending windows pay
  market-related interest rates and service
  charges, plus a refundable commitment fee.
• Low-income countries borrowing under the Poverty
  Reduction and Growth Facility pay a concessional
  fixed interest rate of 0.5 percent a year.
• The foreign exchange provided by the IMF is
  subject to limits determined partly by a member's
  quota in the IMF and is deposited with the
  country's central bank to supplement its
  international reserves.

21
2.ii. Technical assistance and training

• Objective to help improve the design and
  implementation of members' economic policies,
  including by strengthening skills in institutions
  such as finance ministries and central banks.
• It is provided for,
• central banking, monetary and exchange rate
  policy, tax policy and administration, and
  official statistics.
• More than 75 percent of the IMF's technical
  assistance goes to low-income and
  lower-middle-income countries, particularly in
  sub-Saharan Africa and Asia.

22
2.ii. IMF help for the very poor

• Most of the IMF's loans to low-income countries
  are made on concessional terms, under the Poverty
  Reduction and Growth Facility.
• 2005 - Policy Support Instrument - the success of
  a country's program is assessed by the IMF
  against the goals set forth in the country's
  poverty reduction strategy,
• Debt relief efforts in 1996, the IMF and the WB
  unveiled the Heavily Indebted Poor Countries
  (HIPC) Initiative to faster debt relief. In
  2005, the G-8 launched the Multilateral Debt
  Relief Initiative (MDRI), which called for the
  cancellation of the debts owed to several
  organizations.
• Poverty Reduction Strategy Paper (PRSP) process -
  in 1999 the IMF and the World Bank introduced it.

23
2.ii. IMF help for the very poor

• Poverty Reduction Strategy Paper (PRSP) process -
  in 1999 the IMF and the World Bank introduced it.
• Aid for Trade - In 2005, the IMF and the World
  Bank introduced the concept it includes
  analysis, policy advice, and financial support.
  The IMF provides advice to countries on such
  issues as the modernization of customs
  administration, tariff reform, and the
  improvement of tax collection to compensate for
  the loss of tariff revenues that may follow trade
  liberalization.
• The IMF also participates in the
• Integrated Framework for Trade-Related Technical
  Assistance, a multi-agency, multi-donor program
  that helps the least developed countries by
  identifying impediments to their participation in
  the global economy and coordinating technical
  assistance from different sources.

24
2.iii. IMF governance

• The IMF is governed by, and is accountable to,
  its member countries through its Board of
  Governors.
• There is one Governor from each member country,
  typically the finance minister or central bank
  governor.
• The Governors usually meet once a year, in
  September or October, at the Annual Meetings of
  the IMF and the World Bank.
• International Monetary and Financial Committee -
  IMFC committee of Governors assessing key policy
  issues related to the international monetary
  system.
• Development Committee - joint committee of the
  Boards of Governors of the IMF and the World Bank
  to advise and report to the Governors on
  development policy and other matters of concern
  to developing countries.
• There are also the Executive Board see below.

25
2.iii. IMF governance executive board

• Composition 24 Executive Directors on the Board,
• 8 are appointed by single countriesthe IMF's 5
  largest quota-holders (the United States, Japan,
  Germany, France, and the United Kingdom) and
  China, Russia, and Saudi Arabia.
• 16 Executive Directors are elected for two-year
  terms by groups of countries known as
  "constituencies.

26
2.iii. IMF governance executive board

• Voting - weighted voting system - the larger a
  country's quota in the IMFdetermined broadly by
  its economic sizethe more votes the country has,
  in addition to its "basic votes," of which each
  member has an equal number.
• Decisions are based on formal voting most
  decisions are based on consensus. Shadow voting
  is probably widespread so that the 8 countries
  have more power than the others.
• In the early 2000s, in response to changes in the
  weight and role of countries in the world
  economy, the IMF began to re-examine the
  distribution of quotas and voting power to ensure
  that all members are fairly represented.

27
2.iv. Financing the IMF

• Mostly financing come from quotas that countries
  deposit when they join the IMF. Quotas depend on
  size of each member's economy. For example, the
  U.S. the world's largest economy, has the largest
  quota in the IMF.
• Countries deposit 25 of their quota
  subscriptions in Special Drawing Rights or major
  currencies, such as U.S. dollars or Japanese yen.
  The IMF can call on the remainder, payable in the
  member's own currency, to be made available for
  lending as needed.
• Quotas determine voting power, the amount of
  financing members can borrow from the IMF and
  share in SDR allocation.

28
2.iv. SDRs - Special Drawing Rights

• The SDR is the IMF's unit of account introduced
  in 1969.
• It is a supplementary international reserve asset
  that member countries can add to their foreign
  currency and gold reserves and use for payments
  requiring foreign exchange.
• It is a basket of four major currencies the
  euro, Japanese yen, pound sterling, and U.S.
  dollar.
• It may be used between members, and with other
  institutional organizations and with the IMF.
• A number of other international and regional
  organizations and international conventions use
  it as a unit of account, or as the basis for a
  unit of account.

29
2.iv. Financing the IMF

• Quotas finance most IMF loans.
• Exceptions,
• Loans under the Poverty Reduction and Growth
  Facility, which are paid out of trust funds set
  up by the IMF and some rich members.
• The IMF may borrow from a number of its
  financially strongest member countries to
  supplement the resources available from its
  quotas.
• It also earns income from the interest charged
  and fees levied on its loans as in any other
  financial institution.

30
3.i. The World Bank

• Made up of two development institutions which are
  owned by the 185 member countries
• International Bank for Reconstruction and
  Development (IBRD) (Hard window)
• International Development Association (IDA) to
  alleviate poverty. (Soft window)
• The IBRD focuses on middle income and
  creditworthy poor countries, while IDA focuses on
  the poorest countries in the world.
• They provide low-interest loans, interest-free
  credit and grants to developing countries for
  education, health, infrastructure, communications
  and other purposes.

31
3.i. The World Bank Group the 5 institutions

• It is formed by the 2 development institutions of
  The World Bank plus 3 affiliates,
• The International Finance Corporation (IFC) - the
  private sector arm of the Group. (Created in
  1956)
• Multilateral Investment Guarantee Agency (MIGA) -
  's mission is to promote foreign direct
  investment (FDI) into developing countries to
  help support economic growth, reduce poverty, and
  improve people's lives. (Created in 1988)
• International Centre for Settlement of Investment
  Disputes (ICSID) aim at facilitating the
  settlement of investment disputes between
  governments and foreign investors to promote
  increased flows of international investment.
  (Created in 1966)

32
3.ii. The World Bank Group operations

• Loans
• Through the IBRD and IDA, there are two basic
  types of loans and credits investment loans and
  development policy loans. Investment loans are
  made to countries for goods, works and services
  in support of economic and social development
  projects in a broad range of economic and social
  sectors. Development policy loans (formerly known
  as adjustment loans) provide quick-disbursing
  financing to support countries policy and
  institutional reforms. These are based on
  projects negotiated between the country and the
  WB and involve some kind of conditionality.
• Source web.worldbank.org

33
3.ii. The World Bank Group operations

• Grants
• Grants are designed to facilitate development
  projects by encouraging innovation, co-operation
  between organizations and local stakeholders
  participation in projects. In recent years, IDA
  grants have been used to
• Relieve the debt burden of heavily indebted poor
  countries
• Improve sanitation and water supplies
• Support vaccination and immunization programs to
  reduce the incidence of communicable diseases
  like malaria
• Combat the HIV/AIDS pandemic
• Support civil society organizations
• Create initiatives to cut the emission of
  greenhouse gasses
• Source web.worldbank.org

34
3.ii. The World Bank Group operations

• Analytic and Advisory Services
• Capacity Building
• Another core bank function is to increase the
  capabilities of our own staff, our partners and
  the people in developing countriesto help them
  acquire the knowledge and skills they need to
  provide technical assistance, improve government
  performance and delivery of services, promote
  economic growth and sustain poverty reduction
  programs.
• Source web.worldbank.org

35
3.iii. The World Bank Group governance

• Boards of Executive Directors are responsible for
  conducting the day-to-day business of the World
  Bank.
• The Boards are composed of 24 Directors, who are 
  appointed or elected by member countries or by
  groups of countries, and the President, who
  serves as its Chairman.
• Regular meetings are usually held once or twice a
  week. Other meetings are held at various other
  times whenever required.

36
3.iv. The World Bank financing

• Primarily financed by selling AAA-rated bonds in
  the world's financial markets.
• (While IBRD earns a small margin on lending, the
  greater proportion of its income comes from
  lending out its own capital.)
• Capital consists of reserves built up over the
  years and money paid in from the bank's 184
  member country shareholders. IBRDs income also
  pays for World Bank operating expenses and has
  contributed to IDA and debt relief.
• IDA, the world's largest source of interest-free
  loans and grant assistance to the poorest
  countries, is replenished every three years by 40
  donor countries. Additional funds are regenerated
  through repayments of loan principal on
  35-to-40-year, no-interest loans, which are then
  available for re-lending. IDA accounts for nearly
  40 of our lending.

37
4. Conditionality

• Reference
• The World Bank, 2005, Conditionality Revisited,
  Overview, p.3-18.
• IMFs financial assistance is conditional to
  specified domestic policy changes.
• This involved negotiations and monitoring of the
  stand-by arrangements.
• Criticisms to conditionality became widespread
  after the debt crisis of the early 1980s.

38
4. Conditionality

• The initial approach was driven by a belief that
• Policy reforms could be made with aid money, and
• Freeing countries from restrictive barriers to
  growth meant to implement economic liberalization
  policies.
• However, country specificity and country
  ownership have been increasingly recognized as
  key ingredients for successful policy-based
  programs.
• There is a broad consensus that domestic
  ownership of a reform agenda is vital to its
  success the legitimate way forward is for donors
  to be actively involved in the policy dialogue
  within the country.

39
5. Other institutions the BIS and the G10

• After the collapse of the BWs system (1970s)
  there were 2 parallel organizations that gain an
  increasing role on international monetary system
  the Bank of International Settlements (BIS) and
  the Group of 10.
• The BIS, is a central bank club. It had an
  important role in monetary integration in Europe.
• G-10, collaboration of great powers in a system
  of discretionary bargaining.

40
5. The BIS and the G10

• BIS 55 member countries (including the ECB)
• G-10 - composed of Benelux, Canada, France,
  Germany, Italy, Japan, Sweden, Switzerland, the
  U.K. and the USA.
• The G-10 was replaced by the G-6 in 1975, later
  G-7. Note that Benelux, Sweden and Switzerland do
  not belong to G-7.

41
5. The BIS

• BIS is the oldest, surviving international
  financial institution and it is still the
  principal centre for international central bank
  cooperation.
• It was founded in 1930, to deal with
• Reparation payments imposed on Germany, after
  WWI,
• As a trustee for the international loans issued
  to finance reparations,
• Promote central bank cooperation in general.

42
5. The BIS

• Main activities meeting place for central banks
  to foster monetary policy cooperation and
  provider of banking services for central banks
• Traditional" banking functions - for the central
  bank community (eg gold and foreign exchange
  transactions), and to trustee and agency
  functions.
• Agent for the European Payments Union (EPU,
  1950-58), helping the European currencies restore
  convertibility after the Second World War.
• It has acted as the agent for various European
  exchange rate arrangements, including the
  European Monetary System (EMS, 1979-94) which
  preceded the move to a single currency.

43
5. The BIS

• The BIS has also provided or organised emergency
  financing to support the international monetary
  system when needed.
• 1931-33 financial crisis - it organised support
  credits for both the Austrian and German central
  banks.
• 1960s - it arranged special support credits for
  the French franc (1968), and two so-called Group
  Arrangements (1966 and 1968) to support sterling.
  
• More recently, the BIS has provided finance in
  the context of IMF-led stabilisation programmes
  (eg for Mexico in 1982 and Brazil in 1998).

44
5. The BIS

• Global financial stability
• Growth and globalisation of financial markets
  during the final decades of the 20th century
  shaped the nature of central bank cooperation.
  BIS has assisted the pursuit of global monetary
  and financial stability in two main ways
• By providing emergency financial assistance to
  central banks in case of need and
• By supporting experts from national central banks
  and supervisory agencies in proposing measures
  and developing standards aimed at strengthening
  the international financial architecture, and in
  particular international banking supervision.

45
5. Other institutions EBRD

• There are several development banks at regional
  level, in most continents. Some hace
  concessional loans available.
• Examples Inter-American Development Banks or the
  European Bank for Reconstruction and Development.
• The EBRD was established in 1991 for helping
  transition of former communist countries in
  Europe and Central Asia for market economies.

46
5. Other institutions

• Two settings for discretionary bargaining emerged
  in the 1970s and 1980s,
• Initially the annual economic meetings of G-5
  were essentially politicians-oriented, the
  economic part was dealt by finance ministers.
• In the 80s, a link was established between the
  G-5/ G-7 summits and the surveillance system of
  the IMF. This occurred already in the Plaza
  Accord (1985) and afterwards.
• The IMF became an informal secretariat to the
  G-8 providing surveillance indicators but
  excluded from foreign exchange market issues.

47
5. Other institutions

• Two settings for discretionary bargaining emerged
  in the 1970s and 1980s,
• Initially the annual economic meetings of G-5
  were essentially politicians-oriented, the
  economic part was dealt by finance ministers.
• In the 80s, a link was established between the
  G-5/ G-7 summits and the surveillance system of
  the IMF. This occurred already in the Plaza
  Accord (1985) and afterwards.
• The IMF became an informal secretariat to the
  G-8 providing surveillance indicators but
  excluded from foreign exchange market issues.