BCom International Economic Institutions Notes Study Material

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BCom International Economic Institutions Notes Study Material

INTRODUCTION

Toward the end of the Second World War, in July 1944, representatives of the United States, Great Britain, France, Russia, and 40 other countries met at Bretton woods, a resort in New Hampshire, to lay the foundation for the post-war international financial order and to reconstruct world economy. (BCom International Economic Institutions Notes Study Material)

Such a new system, they hoped, would prevent another worldwide economic cataclysm like the Great Depression that had destabilized Europe and the United States in the 1930s and had contributed to the rise of Fascism and the war. Other delegations of notables came from China, India, Russia, and France. (BCom International Economic Institutions Notes Study Material)

At the time of Bretton woods, there was serious concern about the stability of global economic markets. The worldwide depression of the 1930s had been deepened by the instability of international currency markets and the contraction of international trade so the stabilization of those markets and promotion of trade were considered crucial to avoid another crisis.

Likewise, the widespread destruction of Europe and uncertainty about its future also threatened to cause an economic and political breakup. The countries allied to fight Nazi Germany and Japan believed that a similar collaborative effort was the only way to stabilize their economies and those of their soon-to-be-defeated enemies and to provide funds to rejuvenate the countries destroyed by the war.

In this tune, some international economic institutions have taken birth i.e. World Bank and IMF. GATT was also an outcome of this conference but in a different form. UNCTAD was established much better to help trade development, especially in less developed countries. The WTO is the latest addition to world economic institutions in 1994.

The basic philosophy is that international trade should be free from tariff and non-tariff barriers so that production capacities in various countries may be built on the basis of comparative cost advantage and then goods move freely without restrictions. The objectives and role of these institutions have been discussed below to understand international economic issues and problems.

WORLD BANK

The International Bank for Reconstruction and Development (IBRD), popularly known as the World Bank has come to act after the Monetary and Financial Conference in Bretton woods, New Hampshire, in July 1944. It was established in 1945 after the Bretton woods conference along with International Monetary Fund (IMF) but began its operations in June 1946.

As the World Bank expanded beyond its initial scope and purpose of rebuilding Europe after the Second World War, the World Bank grew through the creation of four additional organizations. Together, these five financial organizations comprise the World Bank Group, namely the IBRD, the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Center for Settlement of Investment Disputes (ICSID).

The IBRD and the IDA focus mainly on public sector monetary policy and provide low-interest loans, interest-free credit, and grants to developing countries. Additionally, they work to affect the policies of governments by providing macroeconomic policy advice, research, and technical advice. The remaining three institutions that belong to the World Bank Group focus more on private market interactions, providing funding, insurance, and dispute resolution for private sector projects.

Organization and Structure

The organization of the bank consists of the Board of Governors, the Board of Executive Directors and the Advisory Committee, the Loan Committee, and the president and other staff members. All the powers of the bank are vested in the Board of Governors which is the supreme policy-making body of the bank. The board consists of one Governor and one Alternative Governor appointed for five years by each member country. Each Governor has voting power which is related to the financial contribution of the Government that he represents.

The Board of Executive Directors consists of 21 members, 6 of them are appointed by the six largest shareholders, namely the USA, the UK, West Germany, France, Japan, and India. The rest of the 15 members are elected by the remaining countries. Each Executive Director holds voting power in proportion to the shares held by his Government. The Board of Executive Directors meets regularly once a month to carry on the routine work of the bank. (BCom International Economic Institutions Notes Study Material)

The president of the bank is appointed by the Board of Executive Directors. He is the Chief Executive of the Bank and he is responsible for the conduct of the day-to-day business of the bank. The Advisory Committees are appointed by the Board of Directors. It consists of 7 members who are experts in different branches of banking. There is also another body known as the Loan Committee. This committee is consulted by the bank before any loan is extended to a member country.

Governance

The governance of the World Bank is almost identical to that of the IMF. It is directed by a board of governors composed of one representative from each member country, and the governors direct the IBRD based on weighted voting rights that are determined by each country’s agreed annual contributions to the World Bank. As in the IMF, the United States is the largest contributor and has the most weighted voting power, though as a practical matter, decisions are made by consensus. Objectives of World Bank

The World Bank is an international financial institution that provides loans in developing countries for capital programs. It comprises two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank is a component of the World Bank Group and a member of the United Nations Development Group.

The World Bank’s official goal is the reduction of poverty. According to its Articles of Agreement, all its decisions must be guided by a commitment to the promotion of foreign investment and international trade and to the facilitation of capital investment. The main objectives of the World Bank are given below:

1. Eradicate Extreme Poverty and Hunger: From 1990 through 2004, the proportion of people living in extreme poverty fell from almost a third to less than a fifth. Although results vary widely within regions and countries, the trend indicates that the world as a whole can meet the goal of halving the percentage of people living in poverty. Africa’s poverty, however, is expected to rise, and most of the 36 countries where 90% of the world’s undernourished children live are in Africa. Less than a quarter of countries are on track to achieving the goal of halving undernutrition. (BCom International Economic Institutions Notes Study Material)
2. Achieve Universal Primary Education: The percentage of children in school in developing countries increased from 80% in 1991 to 88% in 2005. Still, about 72 million children of primary school age, 57% of them girls, were not being educated as of 2005.
3. Promote Gender Equality: The tide is turning slowly for women in the labor market, yet far more women than men-worldwide more than 60%-are contributing but unpaid family workers. The World Bank Group Gender Action Plan was created to advance women’s economic empowerment and promote shared growth. (BCom International Economic Institutions Notes Study Material)
4. Reduce Child Mortality: There is some improvement in survival rates globally; accelerated improvements are needed most urgently in South Asia and Sub-Saharan Africa. An estimated 10 million-plus children under five died in 2005; most of their deaths were from preventable causes. (BCom International Economic Institutions Notes Study Material)
5. Improve Maternal Health: Almost the entire half a million women who die during pregnancy or childbirth every year live in Sub-Saharan Africa and Asia. There are numerous causes of maternal death that require a variety of health care interventions to be made widely accessible. (BCom International Economic Institutions Notes Study Material)
6. Combat HIV-AIDS, Malaria, and Other Diseases: Annual numbers of new HIV infections and AIDS deaths have fallen, but the number of people living with HIV continues to grow. In the eight worst-hit southern African countries, prevalence is above 15 percent. Treatment has increased globally, but still meets only 30 percent of needs (with wide variations across countries). AIDS remains the leading cause of death in Sub-Saharan Africa (1.6 million deaths in 2007). (BCom International Economic Institutions Notes Study Material)

There are 300 to 500 million cases of malaria each year, leading to more than 1 million deaths. Nearly all the cases and more than 95 percent of the deaths occur in Sub-Saharan Africa. (BCom International Economic Institutions Notes Study Material)

7. Ensure Environmental Sustainability: Deforestation remains a critical problem, particularly in regions of biological diversity, which continues to decline. Greenhouse gas emissions are increasing faster than energy technology advancement.
8. Develop a Global Partnership for Development: Donor countries have renewed their commitment. Donors have to fulfill their pledges to match the current rate of core program development. Emphasis is being placed on the Bank Group’s collaboration with multilateral and local partners. (BCom International Economic Institutions Notes Study Material)

To make sure that World Bank-financed operations do not compromise these goals but instead add to their realization, environmental, social, and legal safeguards were defined. However, these safeguards have not been implemented entirely yet. At the World Bank’s annual meeting in Tokyo in 2012, a review of these safeguards has been initiated which was welcomed by several civil society organizations.

9. Other Important Objectives: (i) To provide long-run capital to member countries for economic reconstruction and development.

(ii) To induce long-run capital investment for assuring Balance of Payments (BOP) equilibrium and balanced development of international trade.

(iii) To provide a guarantee for loans granted to small and large units and other projects of member countries.

(iv) To ensure the implementation of development projects so as to bring about a smooth transference from wartime to a peace economy.

(v) To promote capital investment in member countries in the following ways:

(a) To provide a guarantee on private loans or capital investment.

(b) If private capital is not available even after providing a guarantee, then IBRD provides loans for productive activities under considerate conditions.

World Bank Group

The World Bank functions with the United Nations Economic and Social Council, and a family of five international organizations that make leveraged loans to poor countries:

1. International Bank for Reconstruction and Development (IBRD)
2. International Development Association (IDA)
3. International Finance Corporation (IFC)
4. Multilateral Investment Guarantee Agency (MIGA)
5. International Centre for Settlement of Investment Disputes (ICSID)

Functions of World Bank

World Bank is playing the main role of providing loans for development works to member countries, especially to underdeveloped countries. The World Bank provides long-term loans for various development projects of 5 to 20 years duration. The main functions can be explained with the help of the following points:

1. World Bank provides various technical services to member countries. For this purpose, the Bank has established “The Economic Development Institute” and a Staff College in Washington.
2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital.
3. The quantities of loans, interest rate, and terms and conditions are determined by the Bank itself.
4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the member country.
5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.
6. Bank also provides loans to private investors belonging to member countries on its own guarantee, but for this loan, private investors have to seek prior permission from those countries where this amount will be collected.

Capital Resources of World Bank

The initial authorized capital of the World Bank was $10,000 million, which was divided into 1 lakh shares of $ 1 lakh each. The authorized capital of the Bank has been increased from time to time with the approval of member countries.

On June 30, 1996, the authorized capital of the Bank was $ 188 billion out of which $ 180.6 billion (96% of total authorized capital) was issued to member countries in the form of shares. (BCom International Economic Institutions Notes Study Material)

Member countries repay the share amount to the World Bank in the following ways:

1.2% of allotted shares are repaid in gold, US dollar, or Special Drawing Rights (SDR).

2. Every member country is free to repay 18% of its capital share in its own currency.
3. The remaining 80% share is deposited by the member country only on demand by the World Bank.

INTERNATIONAL MONETARY FUND (IMF)

The articles of agreement of the international monetary fund were also formulated at United Nations Monetary and Finance Conference held at Bretton woods between 1^st to 22^nd July 1944. The IMF commenced operations in Washington on 1st March 1947. The IMF describes itself as: “an organization of 186 countries, working to foster global monetary cooperation, secure financial stability facilitates international trade, promote high employment and sustainable economic growth and reduce poverty.”

Governance

The IMF is controlled by its 187 member countries, each of whom appoints a representative to the IMF’s Board of Governors. The Board of Governors, most of whom are the finance ministers or heads of the Central Bank of the members, meet once per year to discuss and possibly achieve consensus on major issues. In the meantime, day-to-day operations are managed by a 24-person Executive Board.

The world’s major economic and political powers-the United States (the IMF’s largest shareholder), Great Britain, Japan, Germany, France, China, Russia, and Saudi Arabia-each have permanent seats on the executive board, while the 16 other directors are elected for two-year terms by groups of countries divided roughly by geography, e.g., Caribbean, Africa, South-East Asia, etc. The executive board, in turn, is run by the managing director, who is elected for renewable five-year terms.

The IMF also has an International Monetary and Financial Committee of 24 representatives of the member countries that meets twice yearly to provide advice on the international monetary and financial system to the IMF’s staff. In all of its operations, voting power is weighted based on the size of the economy and therefore the quota allocation of each country. Decisions are usually taken by consensus, but the United States, as the IMF’s major shareholder, has the most influence in the institution’s policy-making.

Organization

The IMF’s current managing director is Ms. Christine Lagarde of France, who took office on June 28, 2011. Each member of the executive board runs a particular department of the IMF. There are offices devoted to:

(a) Particular regions of the world, such as Europe, Africa, Middle East, Western Hemisphere, and Asia/Pacific;

(b) Functions, such as finance, technical assistance, fiscal planning, capital markets, research, and statistics; and

(c) Administrative functions of the IMF itself.

The IMF has a total of 2,600 employees, mostly based in its Washington, D.C. headquarters.

Purposes

The Bretton woods Conference set out six goals for the IMF in its Articles of Agreement. Those goals are known as the guiding principles of the IMF today.

(i) To promote international monetary cooperation through a permanent institution that provides the machinery for consultation and collaboration on international monetary problems. (BCom International Economic Institutions Notes Study Material)

(ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. (BCom International Economic Institutions Notes Study Material)

(iii) To promote exchange stability, maintain orderly exchange arrangements among members, and avoid competitive exchange depreciation.

(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions that hamper the growth of world trade.

(v) To give confidence to members by making the general resources of the IMF temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive to national or international prosperity. (BCom International Economic Institutions Notes Study Material)

(vi) In accordance with the above, to shorten the duration and reduce the degree of disequilibria in the international balances of payments of members.

In simpler terms, the goals are to:

(1) Facilitate the cooperation of countries on monetary policy, including providing the necessary resources for both consultation and the establishment of monetary policy in order to minimize the effects of the international financial crisis.

(2) Assist the liberalization of international trade by helping countries increase their real incomes while lowering unemployment.

(3) Help stabilize exchange rates between countries. Especially after the global depression of the 1930s, it was considered vital to establish currencies that could hold their value, serve as mediums of international exchange, and resist any speculative attacks.

(4) Maintain a multilateral system of payments that eliminates foreign exchange restrictions. Countries are thus free to trade with each other without worrying about the effects of interest rates and currency depreciation on their payments.

(5) Provide a safeguard to members of the IMF against the balance of payments crisis, i.e., when governments cannot balance the money they have with the money they owe to other countries. IMF members can have the confidence to adjust the imbalances in their national accounts without resorting to painful measures that would hamper their prosperity, such as devaluing their currency in relation to other countries.

(6) To Try to reduce the effects of volatility in countries’ balance of payments accounts, the IMF helps assure that global trade and financial relationships can continue at a steady rate without the risks of global depressions like that of the 1930s.

INDIA AND THE INTERNATIONAL MONETARY FUND (IMF)

International Monetary Fund (IMF) was established along with the International Bank for Reconstruction and Development at the Conference of 44 nations held at Bretton woods, New Hampshire, USA in July 1944. At present, 187 nations are members of the IMF. India is a founder member of the IMF. (BCom International Economic Institutions Notes Study Material)

India has not taken any financial assistance from the IMF since 1993. Repayments of all the loans taken from the International Monetary Fund have been completed on 31st May 2000. The objectives of IMF are macro-economic growth, alleviation of poverty and economic stability, policy advice & financing for developing countries, a forum for cooperation in the monetary system, promotion of exchange rate stability, and an international payment system. (BCom International Economic Institutions Notes Study Material)

India’s current quota in the IMF is SDR (Special Drawing Rights) 5,821.5 million, making it the 13^th largest quota holding country at IMF and giving it shareholdings of 2.44%. However, based on voting share, India (together with its constituency countries viz. Bangladesh, Bhutan, and Sri Lanka) is ranked 17^th in the list of 24 constituencies at the Executive Board.

Quota Reforms

As part of the Fourteenth General Review of Quotas (2010), India’s total quota has been increased to SDR 13,114.4 million from SDR 5821.5 million. With this increase, India’s share would increase to 2.75 % (from 2.44%), making it the 8th largest quota-holding country in the IMF. Significantly, the reforms will lead to a realignment of quota shares of member countries, with the shifts to dynamic Emerging Market and Dynamic Countries (EMDCs) and from over- to under-represented countries both exceeding 6 percent, while protecting the voting share of the poorest member. (BCom International Economic Institutions Notes Study Material)

Governance and India

Finance Minister is the ex-officio Governor on the Board of Governors of the IMF. RBI Governor is the Alternate Governor at the IMF. India is represented at the IMF by an Executive Director. At the 24-member Executive Board of the IMF. Currently, the members with the five largest quotas appoint an Executive Director each, while the rest of the Executive Directors are elected.

However, the reforms of the Executive Board would facilitate a move towards a more representative, all-elected Executive Board, ending the category of appointed Executive Director. To this end, there has been a consensus to reduce the number of Executive Directors representing advanced European countries by 2 in favor of EMDCs (Emerging Market Developing countries).

The amendments are part of a package of reforms on quotas and governance in the IMF. Along with the recent quota reforms in IMF (i.e. Fourteenth General Review of Quotas), these amendments represent a major overhaul of the Fund’s quotas and governance and help in strengthening the Fund’s legitimacy and effectiveness. (BCom International Economic Institutions Notes Study Material)

Article-IV Consultations

As part of its mandate for international surveillance under the Articles of Agreement, the IMF conducts what is known as Article-IV consultations to review the economic status of member countries. Article-IV Consultations are generally held in two phases, main consultations in October-November and mid-term review in June. The latest round of Article-IV Consultations for India took place from October 25-November 9, 2012. (BCom International Economic Institutions Notes Study Material)

Financial Transactions Plan (FTP)

India agreed to participate in the Financial Transaction Plan of the IMF in late 2002. Fifty-three countries, including India, now participate in FTP. By participating in FTP, India is allowing IMF to en-cash its rupee holdings as part of our quota contribution, for hard currency which is then lent to other member countries who are debtors to the IMF. From 2002 to 31st December 2010 India made seventeen purchase transactions of SDKs 1194.16 million and twenty-two repurchase transactions of SDKs 795.98 million.

India’s Contribution to Lending Resources of IMF

In the London Summit of the Group of Twenty (G-20), a decision was taken to triple the IMF’s lending capacity up to the US $ 500 billion. In pursuance of this decision, India decided to invest its reserves, initially up to US $ 10 billion through the Notes Purchase Agreement (NPA), and subsequently up to the US $ 14 billion through New Arrangement to Borrow (NAB). As of 7th April 2011, India has invested SDR 750 million (approx. 5,340.36 crores) through 9 note purchase agreements with the IMF.

REMARKABLE ACHIEVEMENTS OF THE IMF

(1) It provided excellent machinery for consultation in international monetary affairs. It serves as an excellent forum for discussions, practically on a day-to-day basis, of the economic, fiscal, and financial policies of member countries with particular reference to their balance of payments impact. The Fund has created a feeling among the member countries that their economic problems are not their exclusive concern but of the whole international society. (BCom International Economic Institutions Notes Study Material)

(2) The Fund has contributed in certain ways to the expansion of world trade. By providing credit facilities to member countries, the IMF has reduced the need for their imposing import and exchange controls. It assists the deficit countries to meet their temporary disequilibrium in payments. It also works for facilitating multi-lateral payments and trade, promoting thereby international trade as a whole.

(3) Another fundamental object of the IMF is to promote exchange stability. The measure of exchange stability that the world has witnessed in the IMF era is remarkably superior to what was seen during the inter-war period of the gold standard regime.

Under the IMF arrangements, stable exchange rates do not imply rigid exchange rates. IMF’s object is to combine the merit of stability with flexibility in exchange management. It aims at avoiding competitive exchange depreciations by wanting the members to declare the par values of their currencies fixed in terms of gold or the U.S. dollar. (BCom International Economic Institutions Notes Study Material)

However, it allows for an orderly adjustment of the exchange rates when this is needed for correcting a fundamental disequilibrium in a country’s balance of payments. The recent devaluation of the Indian rupee (in 1966) and that of the pound sterling was justified by the IMF.

(4) Moreover, the Fund has been particularly interested in the newly developing countries of the world and has been liberally assisting them to have a healthy balance of payments and maintain monetary stability at home.

In recent years, however, underdeveloped countries have started looking to the Fund to assist them in their economic development programs also. Furthermore, most of the new members who have acquired independence recently are facing difficult problems in organizing their monetary, fiscal, and exchange systems, so they need a solid basis for their economic growth.

The Fund has been already providing technical assistance to its members in this respect, but now its activity is substantially widened to meet this challenge. In many of these countries, the Fund’s experts have assisted in the formulation of appropriate monetary, fiscal, and exchange policies in the implementation of stabilization programmes. (BCom International Economic Institutions Notes Study Material)

CRITICISM OF IMF

Over time, the IMF has been subject to a range of criticisms, generally focused on the conditions of its loans. The IMF has also been criticized for its lack of accountability and willingness to lend to countries with bad human rights records.

Many criticisms of IMF include:

1. Conditions of Loans: On giving loans to countries, the IMF makes the loan conditional on the implementation of certain economic policies. These policies tend to involve:

(i) Reducing government borrowing-Higher taxes and lower spending,

(ii) Higher interest rates to stabilize the currency.

(iii) Allow failing firms to go bankrupt.

(iv) Structural adjustment. Privatization, deregulation, reducing corruption and bureaucracy.

The problem is that these policies of structural adjustment and macroeconomic intervention make the situation worse.

2. Exchange Rate Reforms: When the IMF intervened in Kenya in the 1990s, it made the Central Bank remove controls over flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with—insisting on blanket reforms. (BCom International Economic Institutions Notes Study Material)
   The economist Joseph Stiglitz has criticized the more monetarist approach of the IMF in recent years. He argues it is failing to take the best policy to improve the welfare of developing countries saying the IMF “was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community.”
3. Devaluations: In earlier days, the IMF has been criticized for allowing inflationary devaluations.
4. Neo-Liberal Criticisms: There is also criticism of neo-liberal policies such as privatization. Arguably these free market policies were not always suitable for the situation of the country. For example, privatization can create lead to the creation of private monopolies that exploit consumers. (BCom International Economic Institutions Notes Study Material)
5. Free Market Criticisms of IMF: As well as being criticized for implementing free-market reforms. Others criticize the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse it is better to allow currencies to reach their market level.

There is also a criticism that bailout countries with large debt create mo hazards. Because of the possibility of getting bailed out, it encourages people to borrow more. (BCom International Economic Institutions Notes Study Material)

6. Lack of Transparency and Involvement: The IMF has been criticized for imposing policies with little or no consultation with affected countries.

Jeffrey Sachs, the head of the Harvard Institute for International Development said: “In Korea, the IMF insisted that all presidential candidates immediately “endorse” an agreement which they had no part in drafting or negotiating and no time to understand. The situation is out of hand… It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people.”

7. Supporting Military Dictatorships: The IMF has been criticized for supporting military dictatorships in Brazil and Argentina, such as Castello Branco in the 1960s received IMF funds denied to other countries.