International Financial Institutions

in the Global Economy

International Financial Institutions
• Membership organizations made up of
signatory nations.
• Focus on two broad areas:
– The international financial system's
policy framework, function and stability
– Economic development
• Most capital is “callable”, i.e., not paid-in by
member states
• Many of the funds used by the banks are
borrowed in international capital markets
International Financial Institutions
• Have “hard” and “soft” loan windows for
borrowers
• Technical assistance is a major part of
activities
• Provides resources to the private and public
sectors
 The IFI's
• The International Monetary Fund
• The World Bank Group
• The Regional Multilateral Development
Banks (or MDBs)
– Asian Development Bank
– African Development Bank
– Latin American Development Bank
– European Bank for Reconstruction and
Development
• The Bank for International Settlements-1930
 Original Concept Behind
Creation of IFIs
• Economic growth, assisted by free trade, would
create a middle class with property interests that
would be hostile to political instability and Soviet
Communism
• Note: Soviet Union refused to join, although it did
participate in Bretton Woods negotiations
• China (i.e., Nationalist China or Taiwan) was a
founding member
 Some Assumptions
of Founders of the IFIs
• Private flows of long-term capital would be limited
by governments
• Economic growth depended on capital investments
and access to foreign exchange
• Major infrastructure projects and investments were
typically made by governments
• Exchange rates would be fixed but flexible
• Wealthy countries would remain in charge
• Gold would remain a part of the system
 Historical Overview of the IFIs
Bretton Woods Conference – 1944

– Forty-five nations, led by WWII allies, met at a

resort in Bretton Woods, New Hampshire to plan
the reconstruction of the world economy.
Meeting sought to address:
• Memories of Great Depression of 1930’s
• Exchange rate stabilization
• Physical destruction of World War II
 Historical Overview (cont.)
Bretton Woods – 1944

– Most Significant Outcome:

• International Monetary Fund
• International Bank for Reconstruction and
Development (The World Bank)
• World Trade Organization discussed, not
adopted but leading to GATT in 1947
 Post-WWII Functions of IFIs
• World Bank and IMF began operations immediately
after end of World War II
• Marshall Plan and other bilateral aid programs
diminished World Bank's role in reconstruction right at
the start, especially in Western Europe. USSR
diminished WB's role elsewhere in Europe
• World Bank evolved into a development and aid bank
for the non-industrialized nations
• IMF became a source of policy and resources for the
the international financial system, dominated by the
United States and its western allies
The International Monetary Fund

Based in Washington, D.C. Currently 185 member
nations, each considered a voting share holder
 Overseen by a Board of Governors made up of
representatives (Ministerial level) of each member
nation – with a really big Annual Meeting.
 Executive Board of 24, working with a Managing
Director (usually European) as Board Chairman,
overseas operations. 3000 staff
 Voting on major decisions based on share of
“ownership” - as in Credit Union - Key Issue
 The International Monetary Fund
• IMF focused on administering the Bretton Woods
exchange rate system until early 1970s and to
facilitate international transactions in support of trade
• The original concept of providing financial support for
short-term balance of payments needs of member
nations has evolved into ongoing financial support for
longer-term development and financial stability
issues.
• No project financing
 The IMF – Original Purpose
IMF originally was designed to:
• Assist countries to attain and maintain currency
convertibility in the current account
• Did not focus on capital controls – capital account
convertibility not seen as likely given national
sovereignty
• Supported stable exchange rates for its member
countries with the dollar (and gold) as anchor.
• By the early 1970s, the Nixon Administration ended
the dollar's link to gold and thereby marked the end
of the post-war Bretton Woods monetary system.
$35/ounce.
 IMF Basics

 Shares are allocated by “quotas,” or the amount of

resources each member is expected to “deposit” with
the IMF
 One quarter of each members quota is required to be
in hard currency

Resources available to all members, regardless of
economic status

New administration in Washington under pressure to
loosen voting requirements in IMF
 IMF Basics – the SDR(cont.)

 In 1960s IMF created a “reserve asset” as a “unit of

account”, the SDR. The SDR was to supplement
members quotas.
 Not a reserve currency, and not intended as a world
currency (but moving that way?).
 Allocated to each member and may be used
internally in exchange for reserve (i.e., hard)
currency. May be used freely up to specified limit.
 Based on a basket of currency, currently just under
$1.57/SDR.
 The SDR

 Basket of key international currencies - US$,

Yen, Euro, UK pound
 Can be exchanged for freely convertible
currencies by members.
 Was made less critical by rise in capital flows
and flexible exchange rates.
 At the end of 2009, SDR Allocation to all
members increased by over 200 billion SDRs
 The SDR

 IMF Staff is thinking . . . .

 Issuing SDR-denominated bonds could create a
new class of reserve assets
 Pricing both world trade and international financial
assets could provide a buffer from exchange rate
volatility.
 All part of a reform of the international monetary
system
 France (now IMF) is thinking . . . .
 International Monetary Fund
Voting Shares* (vs Quota shares)

1 United States 16.48 5 France 4

2 Japan 6.2 7 Italy 3
3 China (inc Korea and Singapore)
6.07 8 Saudi Arabia 2
4 Germany 5.3 9 Canada 2.2
5 UK 4 10 Russia 2.6

*As percent of total shares, October 2011

 IMF Functions
• Regulatory
– Ensure members adhere to Article VII
provisions related to currency convertibility
• Consultative
– Annual Article IV consultations – economic
reviews
– Surveillance over member policies
• Data collection
– International Financial Statistics
– Debt information (with World Bank and BIS)
 IMF Functions
• Services
– Technical assistance programs – voluntary
– Data and accounting advice

• Financial – heart of the IMF's role today

– IMF provides resources to member states
through numerous programs and “facilities”
– At market and concessional terms
– Usually involves some degree of conditionality
 IMF Financial Functions
• Lending operations funded out of the pool of
resources provided the IMF by its members
• Total “quotas” (sort of like deposits) equaled
$328 billion in August 2010.
• Goal for ($767 billion )
• 2010 review shifted 6 % quota shares to
dynamic economies
• Japan in 2009 agreed to offer a line of credit to
IMF equal to $100 billion to supplement Fund's
lending capacity. US agreed in June 2009 to
up to $100 billion in additional funds.
 IMF Financial Functions
Lending position as of (September 2010):

 Loans committed (mid-2010): $200 billion, of

which $146 billion have not been drawn
 Loans outstanding: $76.4 billion to over 65
countries
 of which: concessional loans: around $10 billion
to 57countries
 Biggest borrowers: Romania, Ukraine, Hungary
 IMF Financial Functions
• Non-concessional “window” includes:
• “Stand-by arrangements” and other programs which
offer funds at market based rates, usually in the form
of a type of line of credit
• Conditions are stipulated, including specific policies
and measures a country has agreed to implement to
resolve its balance of payments problem
• Limited by member's quotas and reserve currency
holdings.
• Time limit imposed for repayment
IMF Lending Rate
 IMF Concessional Financing

• Current concessional facilities are available for low

income countries:
• Poverty Reduction and Growth Facility (PRGF)
• Exogenous Shocks Facility (ESF)
• Heavily Indebted Poor Countries (HIPC)
• Multilateral Debt Relief Initiative (MDRI)
• Fund staff prepares a Poverty Reduction Strategy
Paper along with any access to financing
IMF Concessional Financing (cont.)

• Currently 22 nations with a PRGF program

• Three with an ESF program
• Total outstanding drawn: just over $2 billion
 IMF Conditionality
• Is a part of almost every credit extended
• Focuses on policy changes in fiscal and
monetary areas
• Typically,
– Spending cuts
– Tax increases
– Interest rates adjustments
– Market oriented policies
 IMF Conditionality (cont.)
• The target of most criticisms of IMF activities:
• IMF policy prescriptions on macroeconomic policies
viewed as interference in the internal affairs of the
member state seeking aid
• Considered insensitive to the domestic economic
development needs, especially in low income states
• Calls for tighter monetary and fiscal policies seen to
hurt growth and employment
 IMF Conditionality Challenged
• The target of most criticisms of IMF activities:

• . . . .that the whole system is under the control of

the United States and other industrialized
economies
• . . . . that exchange rates valuations are biased
toward hard currencies that hurt the interests of
developing and NICs alike.
– Asia crisis 1997/98
– Argentina 2001
IMF Conditionality Challenged (cont.)
• What if IMF had no conditionality?
• There wouldn't be an IMF. . . . at least not as we
know it.
• As lender of last resort
• As source of (free) technical advice
• Would no longer provide someone to blame –
scapegoat for beleaguered governments around the
world.
IMF Conditionality Challenged (cont.)

• World its role be greatly diminished given its

moderate resources?
• Would loosening voting rules lead to relaxing
lending standards?
• Would there be conflict with new economic powers?
• Difficult to avoid moral hazard issue if conditionality
rules were relaxed and access to Fund resources
enhanced.
• If IMF no longer acts as lender of last resort, what
does?
 The World Bank Group
1. The International Bank for Reconstruction
and Development (IBRD)
2. The International Development Association
(IDA)
3. The International Finance Corporation (IFC)
4. Multilateral Investment Guarantee Agency
(MIGA)
5. The International Centre for Settlement of
Investment Disputes (ICSID)
 The World Bank Group
• New IBRD and IDA commitments or lending
totaled $24.7 billion in 2008
• No change from 2007, but up 23.5 percent
from 2004
• Sources of funds are donor nations, most from
industrialized countries
• Number of projects about 300
• Projects selected on economic and political
basis
 1. The World Bank
• The IBRD, generally called “The World Bank”
is focused on project lending in a range of
developing countries.
• Projects are selected on economic and
political basis
• Range from massive hydro electric dams to
micro projects
• 670 projects outstanding in 2008
• Gave up on Structural Adjustment Lending
2. The International Development
Association
• IDA provides long-term, interest free loans
and grants to the 82 poorest countries.
• IDA eligible countries must have per capita
incomes of less than $1,065 or do not qualify
to borrow from the IBRD
• Focus is on sub-Saharan Africa
• China and Egypt graduated from IDA
eligibility, now donor countries
• Cummulative commitments: $193 billion
 Pressures on World Bank
• Over the years, pressure has been on Bank to
meet basic human needs
• To avoid supporting projects with adverse
environmental issues
– Three Gorges Dam in China in 1980s and
1990s
• To support private sector in the developing
economies
• To encourage foreign investment into the
recipient countries
 3. The International Finance
Corporation
• The IFC supports private investments in
developing and “transition” countries.
• Provides long-term loans and other forms of
capital for economic development projects
but through the private sector.
• Projects are selected on economic and
political basis
 4. Multilateral Investment
Guarantee Agency (MIGA)
• Provides political risk insurance and
guarantees to promote foreign investment in
developing countries
• Small agency compared to other parts of the
group – net exposure of $3.6 billion, less than
half in IDA countries
• Cumulative guarantees issued $19.5 billion,
$2.1 billion in 2008
 5. The International Centre for
Settlement of Investment
Disputes (ICSID)
• Provides facilities for arbitration of international
investment disputes between foreign investors
and host countries
• Can be critical factor in attracting new foreign
investment
Bank for International Settlements
• Central Banks' Central Bank – Has 55 member
banks
• Founded in 1930 and based in Basel, Switzerland
• Collects data on international banking, including
many aspects of international lending
• Works with other agencies, such as OECD and
Bank/Fund
• Primary role is to help set international rules for
bank accounting standards
Bank for International Settlements
• In 1988 set out the Basel Capital Accord in which
the central banks from the G-10 countries agreed to
apply common minimum capital standards to their
banking industries
• Updated in 2006 – Working on Basle III
• Focused originally on credit risk, now more broadly
market risk
• Provides for a percentage of capital that must be
held in reserve to support lending activities
 Financial Stability Board - 2009
• Now houses the Secretariate of the Financial Stability
Board
• Created in April 2009 in response to the financial crisis.
• Members are G20 plus a few more – about 25 nations
plus other authorities
• To monitor potential risks in the world economy
• All “systemically important” financial institutions,
instruments and markets to be overseen – including
hedge funds.
• To prevent another debt bubble, could recommend
financial companies maintain provisions against credit
losses and impose constraints on borrowing.
 Conclusion
• Are IFIs still relevant in a dynamic and ever
changing international financial system?
• Can they provide the financial and technical
resources to really make a difference in the
poorest countries?
• Robert Zoellick, President of World Bank, in
2009 called for 1% of stimulus package to be
spent on a “vulnerability fund” for assisting
developing nations: - how realistic is this and
other spending proposals?
 Conclusion
1. Vulnerability Fund would focus on three areas
1. Safety net for the poorest
2. Investments in infrastructure
3. Support small and medium-sized enterprises
and microfinance institutions
 Conclusion
Vulnerability Fund Questions
• What is the absorptive capacity of these
nations?
• Economically and politically?
• Oversight? World Bank & UN?
• Role of private sector?
• Priorities of donor nations? France? China?
• Reaction of the donor nation populations?
• Would IMF reforms have an impact?
 Conclusion
• More resources?
• Less oversight?
• Accountability?
• Amount to loosening credit standards?
• Can a “prequalification” process work for the
IMF?