International Financial Institutions (IFIs)

Question 1

What is the CURRENT function of the IMF?

Answer 1

• To monitor exchange rates
• To lend reserve currencies to nations with trade deficits
• To encourage and further international trade

Three areas of responsibility:
1) Surveillance: observing global trends and advising on macroeconomic issues

2) Technical assistance: assisting low and middle income countries in managing their economies
3) Lending: providing support to help countries avoid balance of payment deficit and potential bankruptcy

Question 2

What is the CURRENT function of the World Bank?

Answer 2

• To lend money to war-ravaged countries
• To provide loans to developing-world countries at lower interest rates than those of private international banks –> these loans were directed towards building infrastructure for development

Question 3

Criticisms of the IMF/World Bank

Answer 3

• Neo-liberal approach: Free-market –> represent a Western ideal of economic interaction, which might not be suitable for all countries –> includes free market trade and the deregulation of financial markets
• Conditionality: Structural Adjustment Programmes (SAPs): unfair economic policies for developing countries that have been promoted by the IMF/World Bank by providing loans that are conditional on the adoption of such policies

Question 4

What was the INITIAL function of the IMF?

Answer 4

• Original purpose was limited: to provide financial resources to allow countries to solve balance-of-payments crises without devaluing their currencies –> this would help to maintain the system if stable exchange rates established at Bretton Woods that facilitated stable international trade

Question 5

What was the INITIAL function of the World Bank?

Answer 5

• To provide financing for post-war reconstruction and development projects

Question 6

IMF quotas

Answer 6

• When joining the IMF, each country must pay a subscription quota based on the size of its economy
• Its measured in Special Drawing Rights (SDRs) - the IMF’s unit of account (not technically a currency) –> they represent a claim to currency held by the IMF member countries for which they may be exchanged
• A member’s quota determines:
  1) its financial commitment to the IMF
  2) its voting power within the institution
  3) how much a country can borrow from the IMF in times of crisis
• A country can borrow 100% of its quota annually, to a limit of 300% cumulatively –> (these limits can be waived under special circumstances)
• Quota sizes are reviewed every 5 years

Question 7

World Bank subscriptions

Answer 7

• Define voting rights
• Member governments must “subscribe” to a portion of the Bank’s capital stock by pledging to purchase a specified number of shares according to their financial capacity
• Members are required to purchase only a small portion of their subscription (PAID-IN CAPITAL), while the remaining portion (CALLABLE CAPITAL) remains outstanding
• Given that the IBRD raises the majority of its capital through bond issues, it has never had to request callable capital from its members

Question 8

What is the International Bank for Reconstruction and Development (IBRD)?

Answer 8

• Lending arm of the World Bank Group
• Offers loans to middle-income developing countries
• Has four sister agencies:
  1) (IDA) –> International Development Association
  2) (IFC) –> International Finance Corporation
  3) (MIGA) –> Multilateral Investment Guarantee Agency
  4) (ICSID) –> International Center for the Settlement of Investment Disputes

Question 9

Bretton Woods System

Answer 9

• Bretton Woods institutions: The IMF and the World Bank
• A set of unified rules and policies that provided the framework necessary to create fixed international currency exchange rates
• Collapse of Bretton Woods System between 1971-1973
• The US decision to suspend gold convertibility ended a key aspect of the Bretton Woods system
• A key reason for Bretton Woods’ collapse was the inflationary monetary policy

Question 10

Crisis of Legitimacy for the IFIs

Answer 10

Bretton Woods Institutions:

• lack of perceived accountability to democratic actors
• concern over negative impacts on communities
• response: more openness, inspection panel, ESS standards
• -> INSPECTION PANEL:
• intended to limit negative publicity
• has caused World Bank to stop projects
• panel composed of independent experts
• group making claim must:
  1) show it is materially affected (NGO alliances)
  2) show that the World Bank has violated its own procedures
• -> ENVIRONMENTAL AND SOCIAL STANDARDS (ESS):
  1) assessment and management of ES risks
  2) labour and work conditions
  3) pollution prevention
  4) community health and safety
  5) land acquisition/resettlement
  6) biodiversity, conservation, sustainable management
  7) indigenous peoples/ Sub-Saharan communities
  8) Cultural heritage
  9) Financial intermediates
  10) Stakeholder engagement

The United Nations:

• mostly legitimate, except in the eyes of some conservatives and US (Republican) Congress
• dual critique: too bureaucratic and ineffective; yet fear of giving it too much autonomy
• gap between principles and ability to deliver undermines legitimacy and credibility