IMF And world bank - Losing RELEVANCE??

RAGHVENDRA KUMAR

International Monetary Fund• The International Monetary Fund (IMF) is an organization

of 187 countries, working to:

• Foster global monetary cooperation

• Facilitate international trade

• Promote high employment and sustainable economic growth

• Reduce poverty around the world.

History• IMF was conceived in July 1944 at the Bretton Woods

conference

• It came into existence on 29th December 1945.

• Objective - stabilize exchange rates and assist the reconstruction of the world's international payment system.

IMF-Basis For Lending

• Nations with severe budget deficits, rampant inflation, strict price controls, or significantly over-valued or under-valued currencies run the risk of facing balance of payment crises. Such member states may request loans

• In return, countries are usually required to launch certain reforms, which have often been dubbed the "Washington Consensus".

• These reforms are thought to be beneficial to countries with fixed exchange rate policies that may engage in fiscal, monetary, and political practices which may lead to the crisis itself.

• Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.

Uncle Sam’s Dominance• Major decisions require an 85% supermajority

• The United States has always been the only country able to block a supermajority on its own.

• With a quota of 17.09% the United States can veto any major decision.

Source : Wikipedia

SUPPORT TO DICTATORSHIP

Source : Wikipedia

For Example……• 1991 to 1993, Kenya had its worst economic performance since

independence :

a) GDP stagnated

b) Inflation increased – 100%

c) Budget deficit reached about 10% of GDP

• The reason for this meltdown was partly due to the Goldenberg crisis –where millions of shillings were siphoned off the country through illegal means.

•This was again a consequence of Kenya implementing the IMF’s recommendations and opening up its economy to encourage free trade.

To renew its economy, it needed funds from the IMF and the World Bank –but they came at a price. The IMF put conditions on Kenya’s economy in return for the loan – like the lifting of trade barriers on imported agricultural staples among other things.

End effects

• This led to heavy dumping of the US/EU grain surpluses onto the local market spearheading local agricultural producers into bankruptcy.

• Apart from Kenya, Zimbabwe and Malawi were also heavily affected as they were once self-sufficient grain producing countries until 1990 when the IMF ordered dumping of EU/USA grain surpluses, precipitating local farmers to bankruptcy.

• Tightly regulated and controlled by the international agro-business, this oversupply ultimately leads to stagnation of both production and consumption of essential food staples and the impoverishment of farmers throughout the world.

What happened?

1. Argentina was pushed into a devastating economic crisis in December2001/January 2002, when a partial deposit freeze, a partial default onpublic debt, and an abandonment of the fixed exchange rate led to amajor collapse in the output and high levels of unemployment leading topolitical and social turmoil.

2. This has raised questions regarding the country’s relationship with the IMFbecause they happened while its economic policies were under the closescrutiny of an IMF-supported program.

3. Furthermore, the IMF had been almost continuously engaged in Argentinasince 1991, when the “Convertibility Plan” fixed the Argentine peso atparity with the U.S. dollar in a currency board-like arrangement. WhileArgentina experienced strong growth and very low inflation for much ofthe 1990s.

What the IMF did?

1. IMF backed the “Convertibility Plan” of Argentina by providing itwith various aids It arranged massive amounts of loans -- including$40 billion a year ago -- to support the Argentine peso.

2. The IMF also provided extensive technical assistance (TA) duringthe period, dispatching some 50 missions between 1991 and 2002,mainly in the fiscal, monetary and banking areas.

3. Argentina being a member nation of IMF, had to agree to its policyof free trade. With peso at par with the dollar, people could buyvirtually everything they could have thought of. Thus, foreignexchange reserve drastically decreased and the local companiesand factories couldn’t survive the invasion foreign superior goods.All this led to unemployment in Argentina.

Culmination

1. It became clear that they could hardly pay back the loans grantedby IMF and under such a chaos, government changed its policyfrom fixed exchange rate to floating exchange rate. Theoutcome of the change was that the value of peso deterioratedfrom 1$=1 peso to 1$=3.18peso.

2. Almost every company in Argentina dealt its transaction indollars. With the loans taken in dollars it had to repay them indollars.

For Example:

A company having a debt of 1000$ would have had to pay it backwith 1000 peso, but with the new exchange rate it had to pay almostthree times as much.

3. With this bleak scenario, Argentina was declared Bankrupt in inDecember 2001.

Questions to ponder• Why did IMF back the

“Convertibility Plan”?

• Why IMF provided Argentina with

too much financing without

requiring sufficient policy

adjustment?

In either case, the eventual collapse of the convertibility regime and the associated adverse economic and social consequences for the country has, rightly or wrongly, had a reputational cost for the IMF.

The World Bank is an international financial institution that

provides financial and technical assistance to developing

countries for development programs

Headquarters:Washington, DC, and more than 100 country offices

Established:July 1, 1944, during a conference of 44 countries in Bretton Woods.

WB mission is to

Reduce poverty in the globe

Improve the living standard

The World Bank (WB)

The World Bank (WB)

• WB focuses on achievement of the Millennium Development

Goals that call for the elimination of poverty and sustained

development.

• Millennium Development Goals based on Five key factors:

Build capacity

Infrastructure creation

Development of Financial Systems

Combating corruption

Research, Consultancy and Training.

Objective and Function

• Provide assistance to developing countries

• Promote the economic development of the world's poorer

countries

• Finance the poorest developing countries whose per capita GNP

is less than $865 a year special financial assistance through the

International Development Association (IDA).

The Bank offers two basic types of loans:

Investment loans: Support of economic

and social development projects

Development policy loans: Quick

disbursing finance to support countries

World Bank Group agencies• the International Bank for Reconstruction and Development (IBRD),

established in 1945, which provides debt financing on the basis of sovereign guarantees;

• the International Finance Corporation (IFC), established in 1956, which provides various forms of financing without sovereign guarantees, primarily to the private sector;

• the International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees;

• the International Centre for Settlement of Investment Disputes (ICSID), established in 1965, which works with governments to reduce investment risk;

• the Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risk, including political risk, primarily to the private sector.

Areas of operation

Agriculture and Rural Development

Conflict and Development

Development Operations and Activities

Economic Policy

Education

Energy

Environment

Financial Sector

Gender

Governance

Health, Nutrition and Population

Industry

International Economics and Trade

Law and Justice

Macroeconomic and Economic Growth

Mining

Poverty Reduction

Private Sector

Public Sector Governance

Rural Development

Social Development

Social Protection

Trade

Transport

Urban Development

Water Resources

Water Supply and Sanitation

Labor and Social Protections

How is World Bank Run?

• The World Bank is like a cooperative, where its 184 member

countries are shareholders. The shareholders are represented by a

Board of Governors, who are the ultimate policy makers at the

World Bank.

• The governors are member countries' ministers of finance or

ministers of development.

• They meet once a year at the Annual Meetings of the Boards of

Governors of the World Bank Group and the International

Monetary Fund.

• Because the governors only meet annually, they delegate specific

duties to 24 Executive Directors, who work on-site at the bank.

How is World Bank Run?

• The five largest shareholders, France, Germany, Japan, the

United Kingdom and the United States appoint an executive

director,

• The other member countries are represented by 19 executive

directors.

• The President is elected by the Board of Governors for a five-

year, renewable term.

How is World Bank Run?• The executive directors make the boards of directors of the world

bank.

• They normally meet at least twice a week to oversee the bank's

business,

• Including approval of loans and

• Approve guarantees,

• New policies,

• Country assistance strategies and borrowing and financial decisions.

• The world bank operates day-to-day under the leadership and

direction of the president, management and senior staff, and the

vice presidents in charge of regions, sectors, networks and functions

World Bank Voting Powers

Rank Country IBRD Country IFC Country IDA Country MIGA

World 2,074,285 World 2,649,955 World 23,804,709 World 218,321

1 United States 332,630 United States 570,178 United States 2,546,503 United States 32,792

2 Japan 166,056 Japan 163,333 Japan 2,044,447 Japan 9,207

3 China 107,206 Germany 129,707United

Kingdom1,409,037 Germany 9,164

4 Germany 93,113 France 121,814 Germany 1,319,536 France 8,793

5 France 82,904United

Kingdom121,814 France 908,581

United Kingdom

8,793

6United

Kingdom82,904 India 103,652 Saudi Arabia 772,020 China 5,758

7 India 62,502 Russia 103,652 India 661,909 Russia 5,756

8 Canada 58,966 Canada 82,141 Canada 623,798 Saudi Arabia 5,756

9 Italy 51,564 Italy 82,141 Italy 573,632 India 5,599

10 Russia 46,443 China 62,392 China 495,213 Canada 5,453

11 Saudi Arabia 46,443 Netherlands 56,930 Poland 474,294 Italy 5,198

12 Spain 42,910 Belgium 51,409 Netherlands 464,187 Netherlands 4,050

13 Netherlands 42,310 Australia 48,128 Sweden 463,538 Belgium 3,805

14 Brazil 34,634 Switzerland 44,862 Brazil 389,780 Australia 3,247

15 Switzerland 33,258 Brazil 40,278 Australia 293,625 Switzerland 2,871

16 Belgium 33,026 Argentina 38,928 Belgium 258,893 Brazil 2,834

17 Iran 32,105 Spain 37,825 Switzerland 253,747 Spain 2,493

18 South Korea 31,574 Indonesia 30,892 Norway 242,552 Argentina 2,438

19 Australia 30,872 Saudi Arabia 30,861 Denmark 218,104 Indonesia 2,077

20 Turkey 26,255 South Korea 28,894 Spain 206,661 Sweden 2,077

Source of Funds for World Bank

• IBRD lending to developing countries is primarily financed by

selling AAA-rated bonds in the world's financial markets.

• The greater proportion of its income comes from lending out its own

capital.

• This capital consists of reserves built up over the years and money

paid in from the bank's 184 member country shareholders.

• IBRD’s income also pays for world bank operating expenses and has

contributed to IDA and debt relief.

Source of Funds for World Bank (contd.)

• IDA is the world's largest source of interest-free loans and

grant assistance to the poorest countries.

• This source 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

Analytical and Advisory Services

• WB’s roles is to provide analysis, advice and information to our member countries

• This is done to make sure each country can deliver the lasting economic and social improvements their people need.

• This is done:• through economic research on broad issues such as the

environment, poverty, trade and globalization and • through country-specific economic and sector work,• By evaluating a country's economic prospects by examining its

banking systems and financial markets, • By also examining trade, infrastructure, poverty and social safety

net issues.30

Capacity Building

• Another core bank function is to increase the capabilities of:

• It own stuff

• WB partners

• People in developing countries

• This is done to help them to acquire the knowledge and skills:

• they need to provide technical assistance,

• To improve government performance and delivery of services,

• To sustain poverty reduction programs. 31

Criticism • It was started to reduce poverty but it support United States’ business

interests.

• It is deeply implicated in contemporary modes of donor and NGO driven imperialism.

• The President of the Bank is always a citizen of the United States.

• Lack transparency to external publics.

• It is an instrument for the promotion of U.S. or Western interests.

• The decision-making structure is undemocratic.

• It has consistently pushed a “neo-liberal” agenda , imposing policies on developing countries .

• While the World Bank represents 186 countries, it is run by a small number of economically powerful countries.

• The World Bank has dual roles that are contradictory: that of a political organization and that of a practical organization.

• Some analysis shows that the World Bank has increased poverty and been detrimental to the environment, public health and cultural diversity.

• It has been criticized for focusing too much “on issuing loans rather than on achieving concrete development results within a finite period of time”.

The World Bank: Still a 20th Century organization??

• The same outmoded hierarchical bureaucracy that hamstrings big industrial firms and government departments of the US and Europe is pervasive.

• The World Bank still operates for the most part with processes and systems that were designed half a century ago. Each project to be financed is still reviewed by an incredibly heavy governance structure.

• One of the shocks for each incoming president of the World Bank is the discovery of its governance structure.

• Given the number of players involved, any significant change often results in political gridlock.

• The World Bank’s business model is complicated. There are several different institutions (IBRD, IDA, and IFC).

The confused mission of the World Bank

• The World Bank got off to a confused start when it was created, along with the International Monetary Fund (IMF), at the Bretton Woods Conference in 1944.

• As JM Keynes quipped at the time, the Conference had created something called a bank that was actually a fund, as well as something called a fund, that was actually a bank.

• It’s an odd combination of a bank, a university and foundation.

• Although it was started for poverty alleviation, it became a lending machine making poor countries highly indebted.

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