World Bank and IMF.ppt

Bretton Woods, New Hampshire
United Nations Monetary and Financial Conference 1 - 22 July 1944
World Bank (1945) International Monetary Fund (1946)
(IMF)
2. Plan to establish an
International Trade Organisation
Results:
1. Foundation of
+
ITO
730 delegates from all 45 Allied nations
Origin of the 3 main institutions that govern globalization!
Famous participant:
Purpose: finance the rebuilding of Europe after the devastation of WWII
John Maynard Keynes

3. The Bretton Woods System of fixed exchange rates
Par (equal) value system: USA defined the value of the dollar in terms of gold
One ounce of gold = $ 35
Guarantee: US government will always exchange gold for dollars at that rate
All other members had to define the exchange value of their money in terms of gold
or in terms of the U.S. dollar, and they guaranteed the convertibility of their own currencies
into dollars at a fixed exchange rate.
Changes of the exchange rates (parity) could only be made with the consent of the IMF
Fixed exchange rate system
(Gold exchange standard with the US dollar as key currency)
Member countries had to maintain their parity by buying and selling foreign currency,
usually US dollars
Great advantage: Currencies were kept stable and predictable
Good for international traders and investors
Growth of international trade

- the International Bank for Reconstruction and Development, established in 1945
- the International Finance Corporation, established in 1956
- the International Development Association, established in 1960
- the International Centre for Settlement of Investment Disputes, estd. in 1966
- the Multilateral Investment Guarantee Agency, established in 1988
Governments can choose which of these agencies
they sign up to individually
President: Robert B. Zoellick
The World Bank (Group)
Today: Group of 5 international organizations (agencies):
provision of finance and advice to other countries
Purpose: - economic development and poverty reduction
- encouraging and safeguarding international investment
Headquarters: Washington, DC
IBRD: 184 members

Organisational structure
Board of governors
(1 governor and 1 alternate governor
from each member country, which
appoints them)
usually the ministers of
finance or governors
of the central banks
Executive Board
President
+ 23 other executive directors
by tradition
a US national
various departments
five of them represent
individual countries
(USA, GB, F, G, Japan),
the other 19 represent
groups of countries
all directors
appointed by
their respective
governments

Member governments subscribe to the basic share capital of the World Bank,
with votes proportional to shareholding
Result: the World Bank is controlled primarily by developed countries,
while clients have almost exclusively been developing countries
Total votes, as of 1 November, 2004:
USA: 16.4%
Japan: 7.9%
Germany: 4.5%
United Kingdom: 4.3%
France: 4.3% Major decisions require an 85% majority!

Main goals of the World Bank nowadays:
- fight poverty and improve the living standards of people in the developing world
Measures:
Provision of long-term loans, grants and technical assistance
Areas:
- health and education
- environmental projects
- improvement of infrastructure (dams, roads etc.)
- economic development
Focus nowadays on support for small scale local enterprises,
Rather than on measures for aggregate economic growth
New attitude:
Clean water, education, and sustainable development are essential to economic growth
Heavy investment in such projects

The International Monetary Fund
Background: Situation in the 1930s
unprecedented rates of unemployment
1/4 of the US workforce was unemployed
Great depression
Monetary restrictions of international trade, because
Many countries didn't have enough foreign currency (e.g. because of trade deficits)
Some countries' central banks didn't exchange
enough money into foreign currency not enough foreign currency
available for
growing international trade
Some countries hoarded gold
and money that could be converted into gold
Result:
Competitive devaluations
Countries made their currencies cheaper in order to export more goods
Other countries retaliated
Headquarters: Washington, D.C

- unrestricted conversion from one currency into another
- stabilization of the value for each currency,
- elimination of restrictions and practices like competitive devaluations
1. by stimulating demand to ensure economic growth and stability
Keynes: "In the long run we're all dead!"
- Free markets can't always regulate themselves
free markets can lead to massive long-term unemployment
unemployment is the result of a lack of sufficient aggregate demand!
In this case governments must stimulate demand:
- by increasing public expenditures
- by cutting taxes
and/or
2. by improving restrictive monetary practices
(Classical theory: economic disruptions are only temporary!)
Role of the IMF: Provision of money/loans for "deficit spending"
Belief: Need for collective action at the global level for economic stability!
+ pressure on member countries to act along these lines
Original purpose of the IMF: Prevention of another global depression
Objectives:

Expansionary economic policy:
- increase of public expenditure
(state expenditures)
- lower taxes
- lower interest rates
Contractionary economic policy:
- less public expenditure
(cutting of deficits)
- higher taxes
- higher interest rates
Government:
Central Bank:
Stimulation of demand
Economic growth
(expansion)
Less demand
Less economic growth
(contraction)
Dangers: - inflation
- governments don't repay
their debts in better times
Keynes: The state should play an active role in the economy
Excursus:

Organisational structure
Board of governors
(1 governor and 1 alternate governor
from each member country, which
appoints them)
usually the ministers of
finance or governors
of the central banks
Executive Board
Chairperson
+ 23 other members
by tradition
a non-US national
various departments
http://www.imf.org/external/np/sec/memdir/eds.htm
Dominique
Strauss-Kahn five of them represent
individual countries
(USA, GB, F, G, Japan),
the other 19 represent
groups of countries

Quotas and voting
Members in May 1946: 39 Members today: 184
Each member country contributes a certain sum of money
(quota subscription)
determined by the IMF itself
on the basis of the country's wealth
and economic performance
(reviewed every five years)
Purposes:
- pool of money (2001: $269 bn) from which members
can borrow when they are in financial difficulties
- basis for how much a member country can borrow
- determine the voting power of a country
USA 17,1%
Japan 6,1%
Germany 6%
France 5%
GB 5%
Italy 3,3%
Canada 3%
Russia 2,8%
Major decisions require an 85% majority!
80 poorest countries together 10%
G8 states

The collapse of the Bretton Woods System
Growing world trade Growing demand for money for transaction purposes
not enough gold and dollars available!
1971: USA stopped guarantee to convert dollars into gold
1973: free exchange rates Exchange rates (prices of currencies) are now a result
of market forces on capital markets for most countries
(floating)
IMF lost a great part of its purpose
New field of activities, e.g.
- The IMF now tries to influence the market forces (economic policies)
that determine the exchange rate
- evaluate member countries' economic performances

Three main functions of the IMF today:
1. Surveillance (supervision):
- Examination of all aspects of any member's economy that are relevant
for that member's exchange rate
- Evaluation of member countries' overall economic performance
more influence on members' economic policies
periodic consultations in the member country
Belief: strong and consistent domestic economic policies
will lead to stable exchange rates and a growing and prosperous world economy
2. Financial assistance:
- The IMF lends money to member countries with payment problems
Potential borrower must present a plan of reforms, which usually includes:
- reduction of public expenditure
- tight monetary policy
- privatization of industries

3. Technical assistance:
for members who need expertise in central banking and public finance etc.
e.g. developing countries, Russia

A critical view on IMF policies:
Funds are only provided if countries engage in contractory and neo-liberal policies
Neo-liberal policy: - less state intervention: free markets can regulate things better
- market liberalization: free trade and free flow of capital
Negative results: - Industries in poor countries often can't compete with imported goods,
which are sometimes even subsidised.
- high interest rates and other contractory measures
lead to slow economic growth
- free capital markets: local banks go bankrupt, small businesses
and farmers can't get any more loans
- privatization of nationalized industries
- austerity: reduction of debts by reducing public spending
local industries go bankrupt, foreign MNCs take over
Attraction of foreign investment
Advantages: - MNCs bring expertise and access to foreign markets
- new employment possibilities
- MNCs have better access to sources of finance
- not enough money for health, education and a social safety net

The IMF's most important macroeconomic goal: low inflation
Less important: unemployment, distribution of income and wealth, education, health
(due to its focus on monetary problems)
More attention on help for the poor, health and education and "good governance"
Newest tendency:

Suggestions for a better policy:
Take it slowly!
A functioning market system requires:
- clear property rights and the courts to enforce them
- competition and information
can't be established overnight
Development also requires a transformation of society, e.g.
- Education: All countries which have invested in universal primary education
(including girls) have done better
Successful East Asian countries: - dropped protective barriers slowly and carefully
- state investments for enterprises
- joint-venture companies
China has only just started to dismantle trade barriers after 20 successful years
- Help for the poor (safety net) important to avoid riots and upheaval
- Land reform: In many developing countries a few rich people own most of the land
- Fight against corruption

World Bank
- assists developing countries through
long-term financing
of development projects and programs
- acquires most of its financial resources by
borrowing on the international bond market
- staff of 7,000 drawn from
184 member countries
IMF
- oversees the international monetary system
- promotes exchange stability and orderly
exchange relations among its
member countries
- assists all members - both industrial and
developing countries by providing
short- to medium-term credits
- draws its financial resources principally
from the quota subscriptions
of its member countries
- staff of 2,300 drawn from
184 member countries
- evaluation of member countries'
economic performance
What the h… is the difference?

World Bank and IMF.ppt

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