INTERNATIONAL ORGANISATIONS

FINANCIAL & MONETARY RELATIONS ROLE OF THE INTERNATIONAL FINANCIAL INSTITUTIONS

The incentive to cooperate

International Monetary Fund (IMF)
Lawrence Hardy, Lecturer in Politics, School of Political, Social and International Studies, University of East Anglia

World Bank Group (WB)

Evaluating the International Financial Institutions

THE INCENTIVE TO COOPERATE

THE WELFARE DILEMMA

If several states make use of devaluation or currency controls for short-term economic, financial & monetary gain international financial & monetary relations suffer to the detriment of all
threat of reciprocal action

International financial institutions (IMF & World Bank) aim to overcome the welfare dilemma

INTERNATIONAL MONETARY FUND (IMF)

Macroeconomic stability & fixed exchange rate system for currencies to strengthen liberal trade

Fixed exchange rates mean business without fear of fluctuations which would affect value of services or goods
Based on all currencies linked to US dollar Operated until collapse of fixed exchange rates in early 1971 when exchange rates were floated IMF continues to deal with macroeconomic stability & balance of payment difficulties MS must orientate economic & financial policies to ensure international equilibrium

Bretton Woods

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1944 - new international monetary system

 MS transfer currency reserves (quotas) to IMF & these are available for loans to be drawn in times of need Amount of loan ('drawing rights') calculated in relation to amount of currency reserve which state has put at IMF disposal

When balance of payment problems occur, a state may borrow 100% of quota without having to fulfil conditions
ORGANIZATION OF IMF Hybrid of IO & a Bank Like an IO the IMF addresses problems to achieve international cooperation Like Bank IMF charges interest on loans to MS, at level sufficient to cover operating costs & losses from defaults

Managing Director IMF European; MD of World Bank from US

DECISION MAKING

Voting proportionate to share of working capital contributed Large states have control - US, EU & Japan have majority Most decisions simple majority Major structural changes requires 85% - US can vote down major proposals but all the countries of Africa together cannot Decisions delegated to managing director & executive staff Board of Governors of finance ministers or central bank directors of MS

IMF OPERATIONS
Surveillance - dialogue on economic & financial policies

financial assistance: lending money & extending credit

technical assistance Loans

DIFFERENT TYPES OF IMF LOAN

Stand-By Arrangements for short term balance of payments problems Extended Fund Facility for structural difficulties Emergency Financing Mechanism for sudden balance of payments problems Supplemental Reserve Facility to sustain states with sudden loss of confidence of financial markets

SUPPORT FOR LOW INCOME COUNTRIES

Changing IMF responding to the Crisis - Link to IMF website page Stepping up lending & becoming more flexible Drawing lessons from the crisis for policy, regulation & reform Overhauled lending framework
Doubling member country access to IMF resources Streamlined approach aims to reduce stigma of borrowing New focus on objectives rather than specific actions Increased focus on social spending More concessional terms for low-income countries

Poverty Reduction & Growth Trust

Extended Credit Facility (ECF) Standby Credit Facility (SCF Rapid Credit Facility (RCF) sharp increase in concessional lending to poorest nations More flexible, fewer conditions Financial safety net Doubling access to Fund resources

WORLD BANK GROUP

ORIGINS & DEVELOPMENT Set up Bretton Woods Conference 1944

Hybrid - an IO & a Bank

Financial and technical assistance for projects Originally focused on reconstruction & development in Europe From 1970s supported projects in developing countries Low-interest loans, interest-free credits & grants to developing countries Education, health, public administration, infrastructure, financial & private sector development, agriculture, and environmental and natural resource management (WB website)

PROGRAMMES
1970s - agricultural & rural development, basic needs 1980s - structural adjustment to removing developmental disparities - influence of neoclassical economics

1990s - Comprehensive Development Framework to halve absolute poverty, 2/3 reduction child mortality & primary education for all with focus on structural, social & human aspects of development less imposition, more dialogue
Global development strategy covering states & types of projects for support formally decided by Board of Directors, but in practice President & bureaucracy, which Board approves or rejects

WORLD BANK GROUP - ORGANIZATION

IMF single Fund, WB regional development banks
International Bank for Reconstruction & Development poverty reduction middle-income & creditworthy poor states International Development Association - poorest countries International Finance Corporation Multilateral Investment Guarantee Agency International Centre for the Settlement of Investment Disputes

Loans to stimulate private & foreign direct investment Board of Governors, one for each MS, who elect President Funded by MS subscriptions, which determines voting weight but most World Bank funds come from capital markets IMF lends for general purposes, WB to finance projects IMF = macroeconomic stability, WB = microeconomic growth

EVALUATING IMF & WORLD BANK

THE IMF
Lender of last resort - knowing IMF is there creates moral hazard CLIP & states would try harder to avoid problems if they knew nothing was there to bail them out Powerful unelected experts - but has increased transparency & works with NGOs to make lending conditions reflect views other than those of economists on IMF staff IMF loans contingent on macroeconomic policy conditions reducing budget deficits, fiscal transparency, opening markets, reforming domestic financial & banking structures, privatising Govtheld business is unpopular Conditionality runs counter to national sovereignty - neocolonialism?

But IMF not participatory democracy - economic rather than political governance & IMF needs to be insulated from politics?

BARNETT & FINNEMORE (2004)

IMF a very different organization from that envisaged by founders in 1944

More intrusive, intervening in monetary, fiscal, income, labour, industrial & environmental policies Mission expansion due not to decisions of states, but internal developments within IMF Ability of staff to shape agenda through executive board & staff's development of expertise & development of modes that created intellectual connections between domestic economic governance & balance of payments position

Recommend policies that dont regulate MS domestic economies but reconstitute them

EVALUATING THE WORLD BANK

Effective in transfer of resources through projects Preoccupied with stability but neglects interests of developing countries & countries in transition Responded by altering structural reform programmes to focus on fight against poverty & assist developing countries in escaping from debt trap but cosmetic? Basic institutional structure does not allow it to reform itself effectively Environmental & social side effects a distraction? Are development banks necessary in a globalizing world in which free movement of capital & no. of financial mechanisms that developing countries can use to raise capital on world markets?

GLOBALIZATION & ITS DISCONTENTS

IMF - flawed economic theories & policies based on neoliberal assumptions lack of transparency and accountability pursues special corporate interests acts against the interests of developing countries Stiglitz (2002) Nobel laureate & former chief economist at World Bank

Advances in economic theory show when information is imperfect and markets incomplete as in developing countries the invisible hand of the market works most imperfectly

 Desirable government interventions can improve upon the efficiency of the market IMF failures contributed to: East Asian financial crisis Argentine economic crisis failure of Russia's conversion to market economy low levels of development in Sub-Saharan Africa Specific IMF policies criticised by Stiglitz: fiscal austerity high interest rates trade liberalization liberalization of capital markets insistence on privatisation of state assets

CRITICISMS OF GLOBALIZATION & ITS DISCONTENTS

wrongly characterising government failures as market failure

allowing more debt will only add to problems of developing countries Stiglitz allows political prejudice to distort objectivity

BUT.. The new rulers of the world?

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