Contemporary Reviewer

Chapter 2: The Global Economy

The World Bank - an International Financial Institution that provides financial and technical assistance to developing countries
for development programs.

- The World Bank is like a cooperative, where the 184 member countries are shareholders.

- Shareholders are represented by a Board of Governors, who are ultimate policy makers at the World Bank

- Its Headquarters can be found in Washington, DC and has more than 100 country offices.

- Was established on July 1, 1944, during the conference of the 44 countries in Bretton Woods.

- The current President of WB is Robert B. Zoellick.

- It has 185 country-members and has a staff of about 10,000 all over the world.

- Unlike other financial institutions, WB does not operate for profit.

Two types of loans that the WB can offer:

a) Investment Loans: Support economic and social development projects

b) Development Policy Loans: Quick disbursing finance to support a country.

The World Bank’s two closely affiliated entities:

The International Bank of Reconstruction and Development (IBRD)

- Founded in 1944 at the Bretton Woods Conference to finance the reconstruction of countries affected by WWII.
- World’s Bank Central Institution and help with the developments of improvised nations.
- It has 181 member countries.
- Lends to countries with relatively high per capital incomes.

The International Development Association (IDA)

- Established in 1960
- Assist the poorest developing countries.
- Lends to countries with annual per capital incomes of about $800 or less.
- It’s loans are known as “credits”
- the world’s largest source of interest-free loans and grant assistance to the poorest countries

In addition to the IBRD and the IDA, three other institutions are closely associated with the World Bank:

The Internal Finance Corporation (IDFC)

- Established in 1956 to reduce poverty and improve people’s lives in an environmentally and socially responsible
manner
- It has 174 members
- Finances private sector investment, mobilizes capital in international financial markets, and advice to governments
and business
- Provides both loan and equity finance for business ventures in developing countries.

The Multilateral Investment Guarantee Agency (MIGA)

- Established in 1988
- Helps developing countries to attract foreign investment.
- Provides investment marketing services and legal advisory services to its 152 members
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The International Centre for Settlement of Investment Disputes (ICSID)

- Established in 1966 to promote increased flow of international investment

- Provides facilities for the reconciliation of disputes between governments and foreign investors
- It has 131 members

Processes in World Bank:

- The World Bank is like a cooperative, where the 184 member countries are shareholders. The shareholders a are represented
by a Board of Governors, who are ultimate policy makers at the World Bank

- The governors are member countries minister if finance or ministers of development.

- They meet once a year at the Annual of the Bards 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.

- The other member countries are represented by 19 executive directors.

- The President is elected by the Board of the Governors for a five-year renewable term.

- The executive directors make the boards of directions of the world bank. They normally meet at least twice a week to oversee
the bank’s business including approval of loans & approve guarantees country

- The world bank operates day-to-day under the leadership and the direction of the president, management and senior staff,
and the vice presidents in charge of regions, sectors, and networks and function.

5 Largest Shareholders of World bank:

1. France- 4.30%

2. Germany- 4.49%

3. Japan- 7.87%

4. United Kingdom- 4.30%

5. United States- 16.39%

International Monetary Fund

- The first half of the 20th century was marked by two world wars that caused enormous physical and economic
destruction in Europe and a Great Depression that wrought economic devastation in both Europe and the United
States.
- an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic growth, and reduce poverty around the
world.

- headed by a board of governors, each of whom represents one of the organization’s approximately 180 member
states.

- Governors, who are usually their countries’ finance ministers or central banks directors, attend annual meetings on IMF
issues.

- The fund’s day-to-day operations are administered by an executive board, which consists of 24 executive directors who
meet at least three times a week.
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- Eight directors represent individual countries (China,France,Germny, Japan, Russia, Saudi Arabiam UK, and the US),
and the other 16 represent the fund’s remaining members, grouped by world regions. Because it makes most decisions
by consensus, the executive board rarely conducts formal voting. The board is chaired by a managing director, who is
appointed by the board for a renewable five-year term and supervises the fund’s staff of about 2,700 employees from
more than 140 countries

Membership

The original members of the Fund shall be those of the countries represented at the United Nations Monetary and Financial
Conference Bretton Woods Conference whose governments accept membership before December 31, 1945.

Purposes

The purposes of the International Monetary Fund are:

 To promote international monetary cooperation through a permanent institution which provides the machinery for
consultation and collaboration on international monetary problems.

 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.

 To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive
exchange depreciation.

 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 which hamper the growth of world trade.

 To give confidence to members by making the general resources of the Fund temporarily available to them under adequate
safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to
measures destructive of national or international prosperity.

 In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances
of payments of members

- The Board of Governors, the highest decision-making body of the IMF, consists of one governor and one alternate governor
for each member country. The governor is appointed by the member country and is usually the minister of finance or the
governor of the central bank. All powers of the IMF are vested in the Board of Governors. The Board of Governors may
delegate to the Executive Board all except certain reserved powers. The Board of Governors normally meets once a year.

- The Executive Board (the Board) is responsible for conducting the day-to-day business of the IMF . It is composed of 24
Directors, who are elected by member countries or by groups of countries, and the Managing Director, who serves as its
Chairman. The Board usually meets several times each week. It carries out itswork largely on the basis of papers prepared by
IMF management and staff.

- It has Managing Director, who is the staff and Chairperson of the ExecutiveBoard. It is appointed by the Executive Boards for
renewable term of 5 years and is assisted by a First Deputy Managing Director and 3 Deputy Managing Directors.

IMF Function

Ensure the stability of the international monetary system. It does so in three ways:

1. Keeping track of the global economy and the economies of member countries,

2. Lending to Countries with balance of payments difficulties

3. Giving help to members

IMF Resources:

- Most resources for IMF loans are provided by member countries, primarily
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through their payment of quotas.

- Each member country of the IMF is assigned a quota, based broadly on its

relative position in the world economy.

Effects of Quota in terms of :

- Subscriptions. A member's quota subscription determines the maximum amount of financial resources the member is obliged
to provide to the IMF. A member must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in SDRs or
foreign currencies acceptable to the IMF (such as the US dollar, the euro, the Chinese renminbi, the Japanese yen, or the British
pound sterling), while the rest is paid in the member's own currency.

- Voting power. The quota largely determines a member's voting power in IMF decisions. Each IMF member’s votes are
comprised of basic votes plus one additional vote for each SDR100,000 of quota. The 2008 reforms fixed the number of basic
votes at 5.502 percent of total votes. The current share of basic votes in total votes represents close to a tripling of their share
prior to the implementation of the 2008 reforms.

- Access to financing. The amount of financing a member can obtain from the IMF (its access limit) is based on its quota. For
example, under Stand-By and Extended Arrangements, a member can borrow up to 145 percent of its quota annually and 435
percent cumulatively.

IMF provides loans to help members rebuild:

1. International Reserves

2. Stabilize their Currencies

3. Continue Paying for Imports

4. Restore conditions for strong economic growth

5. While correcting underlying problems.

How IMF lends?

- When a country undergo such problems IMF staff team holds discussions with the government to assess the economic and
financial situation, and the size of the country’s overall financing needs, and agree on the appropriate policy response.

Special Drawing Rights (SDR)

- The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official
reserves.

Transparency

- The IMF Giving Together campaign guides the IMF's humanitarian and community outreach efforts.

FACTS ABOUT IMF:

- IMF is still one of the world’s largest official holders of gold.

- The largest precautionary loans: Mexico, Colombia, Morocco
- The largest borrowers: Argentina, Ukraine, Greece, Egypt