UPSC IAS exam preparation - International Institutions - Lecture 2

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IMF and the World Bank - Part 2

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5.0 THE WORLD BANK

The World Bank is the outcome of the Bretton Woods Conference, held in 1944. It was launched alongside the International Monetary Fund, in the presence of a number of important world delegates, and many important policy makers from the United States of America and Britain. 

The World Bank is an international financial institution that provides loans to developing countries for capital programmes. The World Bank's official goal is the reduction of poverty. According to its Articles of Agreement (as amended effective 16 February 1989), 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

5.1 Management

The President of the Bank is the president of the entire World Bank Group. The president, currently Jim Yong Kim, is responsible for chairing the meetings of the Boards of Directors and for overall management of the Bank. Traditionally, the Bank President has always been a US citizen nominated by the United States, the largest shareholder in the bank. The nominee is subject to confirmation by the Board of Executive Directors, to serve for a five-year, renewable term. While most World Bank presidents have had banking experience, some have not.

The vice presidents of the Bank are its principal managers, in charge of regions, sectors, networks and functions. There are two Executive Vice Presidents, three Senior Vice Presidents, and 24 Vice Presidents.

The Boards of Directors consists of the World Bank Group President and 25 Executive Directors. The President is the presiding officer, and ordinarily has no vote except a deciding vote in case of an equal division. The Executive Directors as individuals cannot exercise any power nor commit or represent the Bank unless specifically authorized by the Boards to do so. With the term beginning 1 November 2010, the number of Executive Directors increased by one, to 25. The World Bank group is made up of 5 different organizations.

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 Center for the Settlement of Investment Disputes (ICSID)

IBRD

Founded in 1944 at the Bretton Woods Conference

• To finance the reconstruction of countries affected by WWII
• Help with development of impoverished nations 
• World Bank's central institution
• Lends to countries with relatively high per capita incomes
• Money is used for

1. development projects (i.e. highways, schools)
2. programs to help governments change the way they manage their economies 
3. Provides technical assistance in projects 

• Funded by

1. through the sale of its bonds in international capital markets 
2. Members' subscriptions to its capital stock 
3. only 10% of the subscriptions is used by the Bank
4. "Callable Capital"  (portion of the subscriptions that the Bank borrows)

IDA

• Established in 1960 
• Assists the poorest developing countries
• Lends to countries with annual per capita incomes of about $800 or less 
• Its loans are knows as "credits"
• It has 161 members 
• Funded by

1. Mostly from governments' voluntary contributions
2. Replenishments 
3. additional contributions which are needed every few years

IFC

1. Established in 1956 to reduce poverty and improve people's lives in an environmentally and socially responsible manner (174 members)
2. Finances private sector investments, mobilizes capital in international financial markets, and provides technical assistance and advice to governments and businesses  
3. Provides both loan and equity finance for business ventures in developing countries

MIGA

1. Established in 1988 
2. Helps developing countries attract foreign investment
3. Provides investment marketing services and legal advisory services to its members 
4. It has 152 members 

ICSID

1. Established in 1966 to promote increased flow of international investment
2. Provides facilities for the reconciliation of disputes between governments and foreign investors

5.2 Changing perspective of the role the World Bank 

The plan of action followed at the onset was to establish the World Bank as an institution that was designed for investment as well as providing loans. France was the first country to receive World Bank aid, over the rejection of Chile and Poland. The $250 million dollar loan was forwarded under strict repayment conditions. In time, the emphasis for suitability was shifted and a number of non-European countries were forwarded aid, on presumption and calculation that the borrowing nation had the capacity to repay the loan in good time. Loans were forwarded to under-developed and developing nations to fund development of transportation systems and power plants.

Later, the focus shifted on poverty alleviation and enabling nations to help their people benefit from access to basic needs. The loan amount and number of loans increased as the funds were made available to also address infrastructural requirements and social services. Robert McNamara, the president in 1968, is credited with the implementation of a new technocratic management of funds.

McNamara made the funds available for building utilities and schools, hospitals, agricultural reforms and to improve literacy rates. Investigations prior to the loan sanctions not only enabled the loan amounts to be forwarded quickly, but also increased loan volume. The bond market was used to increase capital. Through the 1980s, the focus was on structural adjustment and streamlining the economies of several developing countries. Today, the World Bank integrates its lending practices to meet environmental and infrastructural requirements, the world over. The new 'green' focus has made capital available to a number of developing and under-developed nations to improve exports, attain economic equanimity and at the same time guarantee citizens upgraded utilities and services. 

5.3 Controversies surrounding the World Bank 

Several unique factors contribute to dislike and distrust of the World Bank. The World Bank is often accused of ignoring the environmental and social impact of projects it supports. For example, the World Bank helped fund Brazil's Polonoroeste development program, inaugurated in the Amazonian state of Rondonia in 1981. By improving the main highway into the forest, subdividing the land, and granting ownership of the land to settlers, the program caused an intense migration and land rush that resulted in the wide-spread destruction of the rainforest. The World Bank also funded a dam-building project in India that resulted in the forced resettlement of people the Narmada River Valley between 1978 and 1993. As dams were built on the river, territories that have been populated since pre-historic times were lost to man-made reservoirs, causing resentment and social turmoil, for which the World Bank was blamed. Similarly, the World Bank has been attacked for funding the Western Poverty Reduction Project in China that opponents of Chinese control of Tibet say will resettle 37,000 ethnic Chinese in the territory of Tibet. Most recently, the Baku-Ceyhan pipeline mentioned above has garnered opposition because, its critics say, it will increase pollution in the region and world-wide, through further use of fossil fuels, contribute to oil dependency in the economies of the countries involved, damage the forests and water supplies in the region, and contribute to human rights abuses. Another major complaint about the World Bank (as well as the IMF) is its role in causing high debt among developing countries. Although the World Bank's loans are intended to help countries, they also cause those countries to take on debt that they must pay interest on and remain under the conditions of the institution. Over the last 20 years, these debts have piled up so much that, critics say, they amount to "perpetual debt" that the poor people of world are saddled with. According to 50 Years Is Enough, “External debt per capita for sub-Saharan Africa (not including South Africa) is $365, while GNP per capita is just $308”. Many countries, say these critics, spend more on servicing their debt obligations than on basic social services.

6.0 Future role of the World Bank and the IMF 

Inspite of all the controversies the fact cannot be denied that there are countries that unfortunately are going to continue to have significant needs and lack of resources. There will continue to be a need for development financing and development assistance, not only in money but in 'know how'. Institutions might change their particular focus but the fundamental problem of having countries in poverty will still be there. The most serious question for the future is that if debt continues to grow, what is going to happen to the money we currently put into development? The Development banks will continue to play a part but the influences on them are no longer going to be the G7. The BRICS have a very serious claim on leadership.  This will have a positive impact on these institutions: BRICS will bring the institutions closer to the countries they are trying to help. This power shift will also attract a lot of young nationals who will see that they have a future in leadership.

7.0 GLOBALIZATION 4.0

After the World War II, the international community came together to build a shared future. By 2020, it must do so again. Owing to the slow and uneven recovery in the decade since the global financial crisis, a substantial part of society has become disaffected and embittered, not only with politics and politicians, but also with globalization and the entire economic system it underpins. That has led to a massive rise in right-wing populism worldwide. 

7.1 Globalization and globalism

Populist discourse often confounds the substantive distinctions between two concepts: globalization and globalism. Globalization is a phenomenon driven by technology and the movement of ideas, people, and goods. Globalism is an ideology that prioritizes the neoliberal global order over national interests. Nobody can deny that we are living in a globalized world. But whether all of our policies should be "globalist" is highly debatable.

This raises important questions about our global-governance architecture. With more and more voters demanding to "take back control" from "global forces," the challenge is to restore sovereignty in a world that requires cooperation. Rather than closing off economies through protectionism and nationalist politics, we must forge a new social compact between citizens and their leaders, so that everyone feels secure enough at home to remain open to the world at large. Failing that, the ongoing disintegration of our social fabric could ultimately lead to the collapse of democracy.

7.2 The Fourth Industrial Revolution

The challenges associated with the Fourth Industrial Revolution (4IR) are coinciding with the rapid emergence of ecological constraints, the advent of an increasingly multipolar international order, and rising inequality. These integrated developments are ushering in a new era of globalization. Whether it will improve the human condition will depend on whether corporate, local, national, and international governance can adapt in time.

Meanwhile, a new framework for global public-private cooperation has been taking shape. Public-private cooperation is about harnessing the private sector and open markets to drive economic growth for the public good, with environmental sustainability and social inclusiveness always in mind. But to determine the public good, we first must identify the root causes of inequality.

For example, while open markets and increased competition certainly produce winners and losers in the international arena, they may be having an even more pronounced effect on inequality at the national level. Moreover, the growing divide between the precariat and the privileged is being reinforced by 4IR business models, which often derive rents from owning capital or intellectual property. Closing that divide requires us to recognize that we are living in a new type of innovation-driven economy, and that new global norms, standards, policies, and conventions are needed to safeguard the public trust. 

7.3 Technological change

The rapid pace of technological change means that our systems of health, transportation, communication, production, distribution, and energy - just to name a few - will be completely transformed. Managing that change will require not just new frameworks for national and multinational cooperation, but also a new model of education, complete with targeted programs for teaching workers new skills. With advances in robotics and artificial intelligence in the context of aging societies, we will have to move from a narrative of production and consumption toward one of sharing and caring.

Globalization 4.0 has only just begun, but we are already vastly underprepared for it. Clinging to an outdated mindset and tinkering with our existing processes and institutions will not do. Rather, we need to redesign them from the ground up, so that we can capitalize on the new opportunities that await us, while avoiding the kind of disruptions that we are witnessing today. We are not playing a zero-sum game. This is not a matter of free trade or protectionism, technology or jobs, immigration or protecting citizens, and growth or equality. Those are all false dichotomies.

7.4 The road ahead

This will require two things of the international community: wider engagement and heightened imagination. The engagement of all stakeholders in sustained dialogue will be crucial, as will the imagination to think systemically, and beyond one's own short-term institutional and national considerations.

These will be the two organizing principles of the World Economic Forum's upcoming Annual Meeting in Davos-Klosters, which will convene under the theme of "Globalization 4.0: Shaping a New Architecture in the Age of the Fourth Industrial Revolution". Ready or not, a new world is upon us.

BRETTON WOODS INSTITUTIONS & ROAD TO 2030

• What are the purposes of the Bretton Woods Institutions? The International Monetary Fund and the World Bank were both created at an international conference convened in Bretton Woods, New Hampshire, United States in July 1944. The goal of the conference was to establish a framework for economic cooperation and development that would lead to a more stable and prosperous global economy. While this goal remains central to both institutions, their work is constantly evolving in response to new economic developments and challenges.

• The IMF's mandate : The IMF promotes international monetary cooperation and provides policy advice and capacity development support to help countries build and maintain strong economies. The IMF also makes loans and helps countries design policy programs to solve balance of payments problems when sufficient financing on affordable terms cannot be obtained to meet net international payments. IMF loans are short and medium term and funded mainly by the pool of quota contributions that its members provide. IMF staff are primarily economists with wide experience in macroeconomic and financial policies.

• The World Bank's mandate : The World Bank promotes long-term economic development and poverty reduction by providing technical and financial support to help countries reform certain sectors or implement specific projects-such as building schools and health centers, providing water and electricity, fighting disease, and protecting the environment. World Bank assistance is generally long term and is funded both by member country contributions and through bond issuance. World Bank staff are often specialists on particular issues, sectors, or techniques.
• Framework for cooperation : The IMF and World Bank collaborate regularly and at many levels to assist member countries and work together on several initiatives. In 1989, the terms for their cooperation were set out in a concordat to ensure effective collaboration in areas of shared responsibility.
• High-level coordination : During the Annual Meetings of the Boards of Governors of the IMF and the World Bank, Governors consult and present their countries' views on current issues in international economics and finance. The Boards of Governors decide how to address international economic and financial issues and set priorities for the organizations. A group of IMF and World Bank Governors also meet as part of the Development Committee, whose meetings coincide with the Spring and Annual Meetings of the IMF and the World Bank. This committee was established in 1974 to advise the two institutions on critical development issues and on the financial resources required to promote economic development in low-income countries.
• Reducing poverty : In 1999, the IMF and the World Bank launched the Poverty Reduction Strategy Paper (PRSP) approach as a key component in the process leading to debt relief under the HIPC Initiative and an important anchor in concessional lending by the Fund and the Bank. While PRSPs continue to underpin the HIPC Initiative, the World Bank and the IMF adopted in July 2014 and July 2015, respectively, new approaches to country engagement that no longer requires PRSPs. The IMF streamlined its requirement for poverty reduction documentation for programs supported under the Extended Credit Facility (ECF) or the Policy Support Instrument (PSI).
• The 2030 development agenda : Between 2004 and 2015 the IMF and the Bank jointly published the annual Global Monitoring Report (GMR), which assessed progress towards meeting the Millennium Development Goals (MDGs). In 2015, with the replacement of the MDGs with the Sustainable Development Goals (SDGs) under the 2030 Global Development Agenda, the IMF and the Bank have actively engaged in the global effort to support the Development Agenda. Each institution has committed to new initiatives, within their respective remits, to support member countries in reaching their SDGs. They are also working together to better assist the joint membership, including through enhanced support of stronger tax systems in developing countries, and support of the G-20 Compact with Africa to promote private investment in Africa.

 IMF AND THE WTO - WHAT'S COMMON

• The International Monetary Fund (IMF) is an international organization of 189 member countries that works to ensure the stability of the international monetary and financial system. The IMF's mandate includes facilitating the expansion and balanced growth of international trade, promoting exchange stability, and providing the opportunity for the orderly correction of countries' balance of payments problems. The IMF was established in 1945.

• The World Trade Organization (WTO) is an international organization of 164 members that deals with the rules of trade between nations. With Russia's accession in August 2012, the WTO encompasses all major trading economies. The WTO works to help international trade flow smoothly, predictably, and freely, and provides countries with a constructive and fair outlet for dealing with disputes over trade issues. The WTO came into being in 1995, succeeding the General Agreement on Tariffs and Trade (GATT) that was established in 1947.

• The work of the IMF and the WTO is complementary. A sound international financial system is needed to support vibrant international trade, while smoothly flowing trade helps reduce the risk of payments imbalances and financial crisis. The two institutions work together to ensure a strong system of international trade and payments that is open to all countries. Such a system is critical for enabling economic growth, raising living standards, and reducing poverty around the globe.
• The IMF and the WTO work together on many levels, with the aim of ensuring greater coherence in global economic policymaking. A cooperation agreement between the two organizations, covering various aspects of their relationship, was signed shortly after the creation of the WTO.

GLOBAL ECONOMY 2020 AND BEYOND  

• Global growth remains subdued. Since the April 2019 World Economic Outlook (WEO) report, the United States further increased tariffs on certain Chinese imports and China retaliated by raising tariffs on a subset of US imports. Additional escalation was averted following the June G20 summit. Global technology supply chains were threatened by the prospect of US sanctions, Brexit-related uncertainty continued, and rising geopolitical tensions roiled energy prices.
• Against this backdrop, global growth was forecast at 3.2 percent in 2019, picking up to 3.5 percent in 2020 (0.1 percentage point lower than in the April WEO projections for both years). GDP releases so far this year, together with generally softening inflation, point to weaker-than-anticipated global activity. Investment and demand for consumer durables have been subdued across advanced and emerging market economies as firms and households continue to hold back on long-term spending. Accordingly, global trade, which is intensive in machinery and consumer durables, remains sluggish. The projected growth pickup in 2020 is precarious, presuming stabilization in currently stressed emerging market and developing economies and progress toward resolving trade policy differences.
• Risks to the forecast are mainly to the downside. They include further trade and technology tensions that dent sentiment and slow investment; a protracted increase in risk aversion that exposes the financial vulnerabilities continuing to accumulate after years of low interest rates; and mounting disinflationary pressures that increase debt service difficulties, constrain monetary policy space to counter downturns, and make adverse shocks more persistent than normal.
• Multilateral and national policy actions are vital to place global growth on a stronger footing. The pressing needs include reducing trade and technology tensions and expeditiously resolving uncertainty around trade agreements (including between the United Kingdom and the European Union and the free trade area encompassing Canada, Mexico, and the United States). Specifically, countries should not use tariffs to target bilateral trade balances or as a substitute for dialogue to pressure others for reforms. With subdued final demand and muted inflation, accommodative monetary policy is appropriate in advanced economies and in emerging market and developing economies where expectations are anchored. Fiscal policy should balance multiple objectives: smoothing demand as needed, protecting the vulnerable, bolstering growth potential with spending that supports structural reforms, and ensuring sustainable public finances over the medium term. If growth weakens relative to the baseline, macroeconomic policies will need to turn more accommodative, depending on country circumstances. Priorities across all economies are to enhance inclusion, strengthen resilience, and address constraints on potential output growth.

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