3B Flashcards
3 international institutions proposed after WW2?
- Conference was held in Bretton Woods town, New Hampshire in USA after the WW2 (1939-45) to restore the global economy.
- Total 44 nations participated, incl. India. It proposed 3 international institutions:
- International Bank for Reconstruction and Development (IBRD), commonly known as World Bank and International Monetary Fund (IMF). - These two are considered “Specialized Agencies of UN”
- (Proposed) International Trade Organization (ITO). But could not materialize due to American opposition. Instead, the countries later setup GATT → WTO - WTO is considered “Related organization” of UN because it doesn’t fulfil all requirements of UN charter on specialized agencies
Objective of the World Bank? World Bank consists of? World bank group consists of?
Bretton Woods → World Bank ,Washington, 1945
originally focused on reconstructing war-torn European countries. After 50s, focusing on poor countries of Asia and Africa.
World Bank = IBRD + IDA.
World Bank Group = comprises of 5 institutions, namely
1) International Bank for Reconstruction and Development (IBRD) - Commonly known as the world bank. Gives development loans with interest.
2) International Development Association (IDA) - Assists the poorest countries via interest- free long-term loans (= “Concessional Loans or “soft loans”).
3) International Finance Corporation (IFC) - supports enterprise of developing countries. Known for its Masala Bonds.
4) Multilateral Investment Guarantee Agency (MIGA) - offers (foreign) investors insurance against non-commercial risk (such as political instability, regime change etc.). This helps 3rd world nations attract foreign investment.
5) International Centre for the Settlement of Investment Disputes (ICSID) - Helps in dispute resolution related to foreign investment / foreign companies in 3rd world countries. India is not a member of this organization.
Voting power off World bank group?
- In the first four organizations- IBRD, IDA, IFC, MIGA - voting power depends on the share capital provided by a country. USA highest, followed by various European giants.
- Fifth is a “dispute settlement” body, so the concept of ‘each country’s voting power’ does not apply to it.
World Bank President?
- Since USA and European powers collectively command large shareholding in World Bank & IMF, so their informal arrangement is- USA’s favorite will be picked as World
Bank chief, while European countries’ favorite will be picked as IMF Chief. - 2017: Jim Yong Kim (USA) given 5 years tenure, but resigned at 2019-Feb. New President: David Malpass (USA).
- 2019: SBI Managing Director Anshula Kant has been appointed as the Managing Director and Chief Financial Officer of the World bank.
World Bank is known for which Reports?
World Development Report,
Ease of doing business Index,
Remittance & Migration Report,
Global Economic Prospects report 2019 titled “Darkening Skies”.
What is a multilateral development bank?
A multilateral development bank (MDB) is an institution, created by a group of countries, that provides financing and professional advising for the purpose of development.
EG: BNDB and AIIB
(BRICS Bank) New Development Bank (NDB) - Started in, members, voting power, HQ, corona loan to India?
AIIB - Started in, members, voting power, HQ, corona loan to india?
New Development Bank (NDB)
Started in - 6th BRICS Summit in Fortaleza (2014) members signed treaty
members- Brazil, Russia, India, China, South Africa
voting power- Each member is given equal 20% voting power.
HQ: Shanghai, China
Corona loan to India - $1 billion. (2020-Apr)
AIIB: Asian Infrastructure Investment Bank
Started in - 2015-16
members - China, India, UK, Switzerland, >100 nations as of 2020.
voting power - Based on share capital provided.
- Asian countries control about 75% voting.
- China largest ~27%, India second largest shareholding ~7%. India is the largest borrower.
HQ: Beijing, China
Corona loan to India - $750 million (2020-June)
- BRICS member have also setup $100 billion BRICS Contingent Reserve Arrangement to help members during BoP crisis- similar to IMF.
- BRICS nations also planning to setup their BRICS payment system parallel to SWIFT and BRICS rating agency
❓MCQ. (Pre19-SetA Q71). Find correct statement(s) about AIIB:
1. AIIB has more than 80 member nations.
2. India is the largest shareholder in AIIB.
3. AIIB does not have any members from outside Asia.
Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 only
a
❓MCQ. (CDS2019-II). Which one of the following countries is not a founding member of the New Development Bank? (a) Brazil (b) Canada (c) Russia (d) India
b
Other Multilateral Development Banks?
BIS: Bank for International Settlements -
- 1930: setup in BASEL, Switzerland.
- Made up of 60 countries’ Central Banks. Its committee on banking supervision set norms in 1988 (I), 2004 (II), 2011(III) to ensure global financial stability.
African Development Bank -
1964: setup in Abidjan in Ivory Coast
India is a member, also gets loans.
Asian Development Bank (ADB) -
- 1966: setup in Manila, Philippines
- India is a member, also gets loans.
- Corona loan 2 India $1.5 billion (2020-Apr)
European Bank for Reconstruction & Development (EBRD) -
- 1991: setup at London.
- India became member (shareholder) in 2018. India will not be eligible for loans from EBRD but India can initiate joint loan proposals for Asian, African, European nations for its soft-diplomacy. (usually India does it for winning poor nations friendship. so they vote in favour of India during Kashmir-Arunanchal etc resolutions in UN General Assembly)
❓MCQ. Find correct statement(s):(Asked in UPSC-Pre-2016)
1. New Development Bank has been set up by APEC.
2. The headquarters of New Development Bank is in Shanghai.
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
b
What is IMF?
BRETTONWOODS →2)IMF, WASHINGTON, 1945, DEC
- International Monetary Fund (IMF) helps in global currency exchange stability, helps against balance of payment crisis.
- Acts as a reservoir of the currencies of all the member countries, from which a borrower nation can borrow the currency of other nations- using the Special Drawing
Rights (SDR) mechanism. - IMF important decisions need to be passed with 85% majority. USA has 16.52% voting power so it can effectively block/veto it.
- 2020-May: IMF wanted to issue $500 billion FRESH SDR to help member countries combat the corona crisis. But the USA blocked it. India also supported the USA. India
has 2.6% voting rights.
Who is the IMF chief?
IMF Chief?
o 2019: Christine Lagarde (France) resigned to become chief of European Central Bank (ECB, HQ Frankfurt, Germany). Then,
o Kristalina Georgieva (Bulgarian economist, previously CEO of the World Bank) becomes the second woman IMF Chief after Christine Lagarde. Her five-year term starts on October 1, 2019.
IMF’ Chief Economist (CE)?
Gita Gopinath, an Indian-American economist, she became the first woman to be the Chief Economist of IMF (2019-Jan).
Previously Raghuram Rajan has also served in this position.
Notable reports of IMF?
Global Financial Stability Report, World Economic Outlook
Conditions for IMF’s loan to Pakistan (2019)
2019-July: IMF approved $6 billion loan to Pakistan. It’ll be released in tranches (=instalments) over the next three-years depending on the conditional reforms taken by Pakistan’s Government, which includes:
- Pakistan will have to comply with Financial Action Task Force (FATF) norms against anti-money laundering and terror financing → so, if Pak gets added in FATF-blacklist, then Pak’s IMF loan release may stop.
- Fiscal Deficit and Primary deficit must be controlled to x% of GDP → indirectly, Pak will be forced to cut down on its Defence Expenditure
- Pak Govt will have to ⏬subsidy on gas & electricity
- Loss making PSUs like Pakistan Steel Mills, Pakistan International Airlines and Pakistan Railways etc. have to A) become profit making OR B) be Privatized OR C) be Shutdown.
❓MCQ. ‘Global Financial Stability Report’ is prepared by :(Asked in UPSC-Pre-2016)
a) European Central Bank
b) International Monetary Fund
c) International Bank for Reconstruction and Development
d) Organization for Economic Cooperation and Development
b
❓MCQ. Which of the following organizations brings out the publication known as ‘World Economic Outlook’? (Asked in UPSC-Pre-2014)
(a) The International Monetary Fund (b) UN Development Programme
(c) The World Economic Forum (d) The World Bank
a
What are the Theories of International Trade?
- Mercantilist Theory
- Adam Smith’s Theory of Absolute Cost Advantage (1776)
- David Ricardo’s Theory of Comparative/Relative Cost Advantage (1817)
- Heckscher and Ohlin’s Factor - Proportions Theory (1919)
What is Mercantilist Theory?
- From the 16th to 18th century, economists believed in mercantilism i.e. The amount of wealth in the world is static.
- A nation’s wealth and power were best served by increasing exports and receiving payments in gold, silver and precious metals.
- Therefore, any import was seen as loss of nation’s wealth in gold payment.
- So, colonial powers tried to flood their colonies with readymade goods but always prevented entry of goods in their home country.
What is Adam Smith’s Theory of Absolute Cost Advantage (1776)?
- India has an absolute cost advantage over China in wheat production.
- So, India should focus on producing more wheat, and import rice from China. India should not try to be a ‘rice production specialist’.
- Adam Smith’s theory assumes 1) there are no production costs except labourers 2) no transport cost 3) there is free trade (no taxes on import exports)
What is David Ricardo’s Theory of Comparative/Relative Cost Advantage (1817)?
Here, we can see England requires less workers than France to produce wine and textiles. So, as per Adam Smith’s absolute cost advantage, England should not import anything from France!
- But, if plotted on graphs, it’ll appear that for England per unit labour cost to produce 1 meter textile is (relatively) cheaper than 1 bottle of wine.
- So, England should shift domestic English wine workers towards textiles. England should export textile to France and import wine from France. England should not try to become a ‘Wine production specialist’.
What is Heckscher and Ohlin’s Factor - Proportions Theory (1919)?
- Capital-abundant country will export the capital intensive goods. E.g. USA’s Boeing company exporting Jet planes.
- Labour-Abundant Country will export labour-intensive goods. E.g. India exporting cotton (and imports jet planes from USA).
How did WTO come to be?
BRETTON WOODS → GATT → WTO (GENEVA)
- Initially, Bretton Woods conference proposed set up the International Trade Organisation (ITO) But USA opposed → the idea could not materialize
- 1948: General Agreement for Tariffs and Trade (GATT)
- 1986-1993: Uruguay Round of GATT negotiations → set up a permanent institution to encourage international trade in goods & services and Intellectual Property Rights (IPR) →
- 1994: Marrakesh treaty → WTO started functioning from 1/1/1995 at Geneva, Switzerland. India is a founding member.