Midterm 1 Flashcards

Question

IMF: Changes Over Time

Answer 1

The IMF began as a tool to regulate the value of the US dollar to ensure that it stayed pegged to the price of gold. After Bretton Woods collapsed in 1971 and the gold standard was thrown out, the IMF leaned into its other role of offering aid to lower income countries in financial crises to assist them in regulating their economies. They offered loans with conditions for countries to follow to ensure that their reconstruction was successful. There was also a significant transition in the types of conditions offered to states. When the IMF began it offered few conditions to using aid. As it developed and perceived that states might be using funding in improper ways they began to add more conditions. When this new strategy didn’t work, the IMF doubled down on conditions and added very strict limits on what countries could do with their funds.

Answer 2

Surveillance (of financial developments through all echelons) Encouragement (of policies that foster economic stability and reduce vulnerability to crises) Financial Leeway (states to correct balance of payment problems and develop appropriate financing plans) (Largest borrows of 2024 are Argenina, Egypt, Ukraine, Pakistan, and Ecuador; also large precautionary loan to North Macedonia) Technical Assistance (train and help to assist member countries in developing and implementing effective financial policies and procedures)

Answer 3

IMF accountable to its member country governments Top of IMF: board of governors: one governor and one alternate governor from each member country (generally from the central bank or ministry of finance) Meets once a year. twenty four governors sit on IMFC (international monetary and financial committee) and meet twice a year BoG delegates day-to-day management to executive board (EB) which is 24 members Guided by IMFC and supported IMF staff. the Managing Director (MD) is head of IMF staff and chair of EB - traditionally American

Answer 4

Proposed reforms are broken down into two categories Changing the system of representation Changing the conditions attached to the IMF programs

Answer 5

Mexican government in 1993-95 running large deficits, carrying high debt – Debt financed by tesobonos, indexed to US $ * Debt crisis triggered by: – Low oil prices – Armed rebellion in Chiapas – Assassination of presidential candidate in 1994 * Zedillo let the peso float – Fell from a value of 4 pesos: $1 to 7.2 pesos: $1

Answer 6

* Japan wants to help Thailand, Indonesia,...– provides liquidity – Coordinated regional lending to crisis countries, for example $16 billion to Thailand – In September, proposes an Asian Monetary Fund with $100 billion in funding – Forced to withdraw this proposal in November in the face of U.S. and Chinese opposition * US worried about “moral hazard”

Answer 7

a situation where a country or actor takes excessive risks because they expect another party, like a powerful nation or international organization, to bear the consequences of those risks

Answer 8

Sort of the opposite side of Moral Hazard * Political interests are at stake * Economic ties with the crisis-country are dense * This approach will provide a quick recovery of the crisis economy * Benefits creditors

Answer 9

* $100 billion * 10 members: – Australia, China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand – NOT the United States

Answer 10

IMF: – Exchange rate stability & monetary policy – Large loans for macro-targets ($100s millions to billions) – Staff: around 2000 people – mostly in DC World Bank - Development – Smaller loans than IMF ($10s millions to $100 millions) – Specific projects (dam, schools, oil pipeline) – Multiple projects in one country * big countries may have several project loans, e.g., India >10 – Staff ~ 10,000 people – also mostly in DC but 100 offices worldwide 4

Answer 11

World bank also puts conditions on aid

Answer 12

* Officially, does the World Bank interfere with the political affairs of its members/clients? – No; focus on human capital, food security, climate, development * But does politics influence its lending decisions?

Answer 13

– Even officially, however, the World Bank does try to improve “governance” – this is a euphemism for “democracy.” Many members (e.g., China) would object if “democracy” were used officially.

Answer 14

* International Bank for Reconstruction and Development * IBRD (often called “the World Bank”) * International Development Association * IDA – created in 1960 – concessional financing * “WORLD BANK” * IBRD & IDA are tightly connected – work as a single unit (though the terms of their loans are quite different) * International Finance Corporation * IFC – lends to private companies for private sector projects. Has its own building, own executive vice pres. & staff (more “entrepreneurial”) * Multilateral Investment Guarantee Agency * MIGA – provides insurance to private companies against political risk * ICSID – International Center for the Settlement of Investment Disputes

Answer 15

* Middle-income countries. * Per capita incomes in this group are below the IBRD graduation threshold (~$6000 per cap) * But too high for the countries to be eligible for credits or grants from the IDA (~$1000 per cap) * Some of these countries elect not to borrow from IBRD but the Bank often provides analysis and advice (South Africa, Gulf States)

Answer 16

* Eligible for IDA credits – not considered creditworthy for IBRD loans. * Almost all African countries. * Loans at concessional rates

Answer 17

* Eligible for both IDA (by per capita income) and IBRD lending (creditworthiness standards) and elect to borrow from both. E.g.: India and Nigeria.

Answer 18

Member countries that are not eligible for either IBRD or IDA lending because of armed conflict, economic mismanagement, or failure to service World Bank debts. * Myanmar/Burma. * WB performs low level of operational work “watching brief”

Answer 19

* Especially countries in post-conflict and post- crisis situations * Some are ineligible for IDA or IBRD financing nonetheless participate in multi-donor program financed by special funds, often administered in trust by the World Bank * E.g.: Liberia, Timor Leste (prior to independence), the Occupied Palestinian Territories, Iraq

Answer 20

* Countries considered too rich to borrow from the World Bank * Above per capita of $6,000 (IBRD threshold). * Some are “graduates” * De-graduation possible: countries that had ended their lending relationship ran into difficulties and sought renewed World Bank support.

Answer 21

* Is there any irony in the World Bank’s “dream” (A world without poverty)? – It would go out of business. – Bureaucratic perspective? * Washington Consensus – World Bank has historically promoted market solutions, but its projects are non- market 24

Answer 22

* Closed to non-African countries until 1982 * Board of Executive Directors made up of member countries * The voting power determined by the size of each member's share * Currently 60%-40% between African and “non-regional” member countries (“donors”) – e.g., US, Japan, China, & Korea (since 1982) * The largest African Development Bank shareholder is Nigeria with nearly 8.7 percent of the votes * “No member country, or a group of countries has veto power; Board decisions are generally made through discussion and consensus rather than through the exercise of voting powers. ”

Answer 23

* “the main source of development financing for Latin American and the Caribbean” * The IADB lends money and provides grants. With a triple-A rating, the Bank borrows in international markets at competitive rates. Hence, it can structure loans at competitive conditions for its clients in its 26 borrowing member countries. (48 members) * Countries that receive IADB financing also hold a majority of its shares.

Answer 24

* Initially founded to provide development aid to Eastern bloc countries after the collapse of the Soviet Union * Now lends to over 30 democracies extending to Central Asia and North Africa * US largest shareholder (surprise?)

Answer 25

* Founded 1966 – Modeled on the World Bank * Regional/non-regional vote shares: 65/35

Answer 26

* ADB mandate is apolitical – Should base lending on need and development effectiveness * Should be more independent than bilateral aid agencies US and Japan are dominant

Answer 27

The AIIB was proposed by China in 2013. From its founding, the AIIB quickly gained support from numerous Asian countries. While primarily focused on Asia, the AIIB has attracted global interest. The AIIB has a capital base of around $100 billion, with regional members holding the majority. The AIIB began operations in 2016. The AIIB is headquartered in Beijing. There have been concerns about Chinese dominance and the AIIB's neutrality. Some countries, including the US, have chosen not to join.

Answer 28

The major stated goal of the AIIB is to address a major infrastructure funding gap in Asia. Another motivation for establishing the AIIB on the part of China is Chinese frustration with the very slow pace of reform in existing global economic institutions. Providing capital for investment in the region would also suit China’s goals of developing friendlier relations with its neighbors, many of whom (such as the Phillipines and Malaysia) have regional security disputes with China.

Answer 29

Board of Governors is composed of one Governor from each member country. Meets annually to discuss and make high-level decisions. Board of Directors: Consists of 12 Directors. Nine Directors are elected by regional members (Asia and Oceania as defined by the UN). Three Directors are elected by non-regional members. Responsible for the day-to-day operations and decision-making of the AIIB. President: Elected by the Board of Governors. Membership: Any country that is a member of the International Bank for Reconstruction and Development (IBRD) or the Asian Development Bank (ADB) is eligible to join the AIIB. Admission decisions are made by the Board of Governors, ensuring a controlled and strategic expansion of membership. Voting Power: Voting power is determined by a combination of Basic Votes, Share Votes, and additional votes for Founding Members.

Answer 30

The main public objection to the AIIB is that it may not follow the same good governance practices that the World Bank and ADB follow. The U.S. points in particular to the potential for problems related to the environmental consequences of development projects and attention to social standards. However, the larger underlying U.S. concern is that the AIIB may really be “China’s Trojan Horse,” a mechanism for undermining the existing U.S.-led financial system. The AIIB represents China’s attempt to begin exercising full-fledged economic leadership in Asia. China’s initial proposals for the AIIB raised further concerns. Prior to major changes in March 2015, China envisioned the AIIB as being open only to Asian states. Some Chinese officials used language suggesting that the AIIB would act as China’s aid agency, or that it would essentially be a bank that would invest looking to make high profits.

Answer 31

-China wants more influence in Asian IOs (limited power in WB and ADB) -China heavily promoted the AIIB and has plans to use it as a branch of the Chinese aid agency (therefore, US and Japan oppose it) -57 states signed up as Prospective Founding Members -AIIB becoming a part of a network of investment multilateral IOs to create competition and accountability -Might not be so bad and US should consider joining

Midterm 1 Flashcards

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