The IMF and the World Bank

1
The IMF and the World Bank
2
Origins

• Both institutions were created in the Bretton
  Woods conferences in New Hampshire at the closing
  of WWII in 1944-1945
• The purpose of this meeting was to reconstruct
  stable world economies to promote peace

3
A Gold Standard, Sort Of

• At this conference world currencies were tied to
  the U.S. dollar and the dollar was tied to gold
• The US agreed to buy and sell gold at 35 per
  ounce, and the other countries agreed to buy and
  sell dollars to keep their currencies stable
  against the dollar
• Indirectly all currencies were then tied to gold
  if five francs equaled one dollar, then 175
  francs equaled one ounce of gold (though you had
  to buy it in the US)

4
The IMFs Role in the Bretton Woods System

• IMF was originally created to lend countries the
  dollar reserves with which they bought their own
  currencies to keep them at the fixed rate (peg)
• The BW System believed that only fixed exchange
  rates could provide enough stability in the
  post-WWII era to restore world trade

United Nations, UN Pictoral History 40s,
lthttp//www.un.org/UN50/Photos/un50-014.gifgt (23
May 2006).
5
Bill Whitey Sanders, The Silliest Show on
Earth, Comic Opera, 20 July 1973,
lthttp//www.wku.edu/Library/onlinexh/sanders/carto
ons/business/gold_standard.jpggt (23 May 2006).
6
The Problem for the U.S.

• Other countries could decide to devalue their
  currency by just changing the fixed peg against
  the dollar, which was not necessarily any
  different than really allowing floating exchange
  rates
• Because the dollar was fixed in price against
  gold, the U.S. was the only country who could not
  do this
• As a result the dollar became extremely
  overvalued, causing a chronic current account
  deficit and weakened export industries
• As a result, in 1971 Nixon announced that the
  U.S. would no longer buy or sell gold at 35 an
  ounce
• After some futile attempts to restore fixed
  exchange rates, the whole system was scrapped and
  the gold standard ended

7
New Role of the IMF

• Not just to lend reserves, anymore
• More of a fire and rescue squad
• Made up of 184 member nations, which it
  constantly monitors and gives unsolicited
  advice
• The IMF's statutory purposes include promoting 1)
  the balanced expansion of world trade 2) the
  stability of exchange rates 3) the avoidance of
  competitive currency devaluations and 4) the
  orderly correction of a country's balance of
  payments problems.

8
IMF to the Rescue

• If a country has a serious financial crisis, it
  comes to the IMF for a loanwhich it gets, but
  with strings attached
• Often countries come when they have large current
  account (trade) deficits and they need more
  reserves to pay for their high imports
• IMF insists upon contractionary fiscal and
  monetary policy to curb imports contractionary
  fiscal policy reduces consumer incomes and
  contractionary monetary policy raises interest
  rates and draws in foreign investment
• Often this creates a recession and the IMF has
  become deeply unpopular in many countries as a
  result

9
B. Deutsch (Ampersand), This is Your Brain on
the IMF, Portland Independent Media Center,
lthttp//portland.indymedia.org/en/2002/06/13202.sh
tmlgt (23 May 2006).
10
I think youre about to meet our liquidity
problem.
Brick, Debtspeak A NI Guide to the Language of
Loans, New Internationalist, no. 312 (May 1999),
lthttp//www.newint.org/issue312/debtspeak.htmgt
(23 May 2006).
11
Failed Fixed Exchange Rates

• Often countries tried to peg their currencies to
  the dollar and avoid depreciation
• When the currency eventually plummets, the
  country cannot pay its international loans and
  bills off (including bonds)
• IMF steps in with a loan, but usually the country
  endures a recession, too

12
Should the IMF bail them out?

• Some critics complain that by bailing out these
  countries or institutions, they are giving the
  system a safety net that will promote greater
  risk-taking and reckless behavior
• Letting them fail, though, is easier said than
  done
• All information on IMF from William J. Baumol and
  Alan S. Blinder, Macroeconomics Principles and
  Policy (Fort Worth, Tex. Harcourt College
  Publishers, 2000), 375-79.

13
Brick, Debtspeak A NI Guide to the Language of
Loans, New Internationalist, no. 312 (May 1999),
lthttp//www.newint.org/issue312/debtspeak.htmgt
(23 May 2006).
14
The World Bank

• Originally conceived to help rebuild Europe after
  the war began with a 250 million loan to France
  in 1947
• Reconstruction is still a major focus of loans
  and aid
• Major goal now overall is poverty reduction
  world-wide
• In 2004 the World Bank provided 20.1 billion for
  245 projects in developing countries worldwide,
  with its finance and/or technical expertise aimed
  at helping those countries reduce poverty.
• It is the largest external source of funding for
  education and AIDS research worldwide
• All information from The World Banks website at
  ltwww.worldbank.orggt (accessed 11 November 2004).

15
Organization

• Made up of 184 member countries who finance its
  work
• Not really a bank
• Made up of five separate agencies that have
  certain specialties and guidelines

16
International Bank for Reconstruction and
Development

• 394 billion lent total
• Fiscal 2004 lending 11 billion for 87 new
  operations in 33 countries
• IBRD aims to reduce poverty in middle-income and
  creditworthy poorer countries by promoting
  sustainable development through loans,
  guarantees, and (nonlending) analytical and
  advisory services.
• The World Bank, About Us Five Agencies, One
  Group, http//web.worldbank.org/WBSITE/EXTERNAL/E
  XTABOUTUS/0,,contentMDK20122644menuPK278902pag
  ePK34542piPK36600theSitePK29708,00.html (11
  November 2004).

17
International Development Association

• Cumulative commitment 151 million
• Fiscal 2004 commitments 9 billion for 158 new
  operations in 62 countries
• Contributions to IDA enable the World Bank to
  provide approximately 6 billion to 9 billion a
  year in highly concessional financing to the
  worlds 81 poorest countries (home to 2.5 billion
  people). IDAs interest-free credits and grants
  are vital because these countries have little or
  no capacity to borrow on market terms. In most of
  these countries, the great majority of people
  live on less than 2 a day. IDAs resources help
  support country-led poverty reduction strategies
  in key policy areas, including raising
  productivity, providing accountable governance,
  improving the private investment climate, and
  improving access to education and health care for
  poor people. (World Bank, About Us)

18
Top Ten IDA Borrowers
19
Funded by Donor Replenishments

• Currently the 13th Replenishment (until 2004)
• U.S., Japan, Germany, U.K. biggest donors
• Working on 14th Replenishment now

20
What they donate to

• In the 12 months to June 30, 2003, IDAs support
  for projects was targeted at human development
  such as education, health, social safety nets,
  water supply and sanitation (44), infrastructure
  (26), and agriculture and rural development
  (11). (World Bank, About Us)

21
International Finance Corporation

• Committed portfolio 23.5 billion (includes 5.5
  billion in syndicated loans)
• Fiscal 2004 commitments 4.8 billion for 217
  projects in 65 countries
• IFC promotes economic development through the
  private sector. Working with business partners,
  it invests in sustainable private enterprises in
  developing countries without accepting government
  guarantees.It provides finance in markets deemed
  too risky by commercial investors in the absence
  of IFC participation and adds value to the
  projects it finances through its corporate
  governance, environmental, and social expertise.
  (World Bank, About Us)

22
Multilateral Investment Guarantee Agency

• Cumulative guarantees issued 13.5 billion
  (Amounts include funds leveraged through the
  Cooperative Underwriting Program)
• Fiscal 2004 guarantees issued 1.1 billion
• MIGA helps promote foreign direct investment in
  developing countries by providing guarantees to
  investors against noncommercial risks, such as
  expropriation, currency inconvertibility and
  transfer restrictions, war and civil disturbance,
  and breach of contract. (World Bank, About Us)

23
The International Centre for Settlement of
Investment Disputes

• Total cases registered 159
• Fiscal 2004 cases registered 30
• ICSID helps encourage foreign investment by
  providing international facilities for
  conciliation and arbitration of investment
  disputes, thereby helping foster an atmosphere of
  mutual confidence between states and foreign
  investors.

24
AFP, Wolfowitz Takes Up World Bank Job, BBC
News, lthttp//news.bbc.co.uk/1/hi/business/4599351
.stmgt (23 May 2006).
25
Mike Flugennock, Washington D.C. 08.30.99, News
via Mike Flugennocks Mikeyzine, 30 August
1999, lthttp//www.sinkers.org/worldbank_demo_Aug30
99/gt (23 May 2006).
26
Mike Flugennock, Washington D.C. 08.30.99, News
via Mike Flugennocks Mikeyzine, 30 August
1999, lthttp//www.sinkers.org/worldbank_demo_Aug30
99/gt (23 May 2006).
27
Declan McCullagh, international socialist
organization 2 photo, Declan McCullagh
Photography, lthttp//www.mccullagh.org/image/d30-2
8/international-socialist-organization-2.htmlgt
(23 May 2006).
28
Declan McCullagh, stop imf world bank sticker
photo, Declan McCullagh Photography,
lthttp//www.mccullagh.org/image/d30-28/stop-imf-wo
rld-bank-sticker.htmlgt (23 May 2006).