IMF And world bank - Losing RELEVANCE??

RAGHVENDRA KUMAR-131206Navneet VIJAYWARGI-131207

M Abhishek-131245PRIYANKA KUMARI-131213

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.The work of the IMF is of three main types. Surveillance involves the monitoring of economic and financial developments, and the provision of policy advice, aimed especially at crisis-prevention. lends to countries with balance of payments difficulties, to provide temporary financing and to support policies aimed at correcting the underlying problems; loans to low-income countries are also aimed especially at poverty reduction. Third, the IMF provides countries with technical assistance and training in its areas of expertise.

International Monetary Fund

HistoryIMF 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 LendingNations 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 DominanceMajor decisions require an 85% supermajorityThe 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

Neocolonialism

What it means?It is defined as the control of a developed country

or International bodies (such as the IMF or World Bank) over developing countries through economic pressures. A kind of Modern day Imperialism.

It is usually practised in the premise of aid to the poorer crisis ridden countries in the form of money or goods in return for control over their economic policies and other domestic affairs which in turn prove advantageous to the stronger developed countries

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

since independence : a) GDP stagnatedb) 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 effectsThis 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. 

Argentina Crisis 1991-2002

What happened?1. Argentina was pushed into a devastating economic crisis

in December 2001/January 2002, when a partial deposit freeze, a partial default on public debt, and an abandonment of the fixed exchange rate led to a major collapse in the output and high levels of unemployment leading to political and social turmoil.

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

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

What the IMF did?1. IMF backed the “Convertibility Plan” of Argentina by

providing it with 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) during the 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 policy of free trade. With peso at par with the dollar, people could buy virtually everything they could have thought of. Thus, foreign exchange reserve drastically decreased and the local companies and factories couldn’t survive the invasion foreign superior goods. All this led to unemployment in Argentina.

Culmination1. It became clear that they could hardly pay back the

loans granted by IMF and under such a chaos, government changed its policy from fixed exchange rate to floating exchange rate. The outcome of the change was that the value of peso deteriorated from 1$=1 peso to 1$=3.18peso.

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

For Example: A company having a debt of 1000$ would have had to pay it back with 1000 peso, but with the new exchange rate it had to pay almost three times as much.3. With this bleak scenario, Argentina was declared

Bankrupt in in December 2001.

Questions to ponderWhy 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 PowersRank 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 129,707 United Kingdom

1,409,037  Germany 9,164

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

5  France 82,904 United Kingdom

121,814  France 908,581 United Kingdom

8,793

6 United Kingdom

82,904  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

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Analytical and Advisory ServicesWB’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.

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Capacity Building

Another core bank function is to increase the capabilities of:It own stuffWB partnersPeople 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.

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 BankThe 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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