bretton woods institutions and multilateral development banks 2018

1 The International Monetary Fund IMF 2 The World Bank 3 The General Agreement on Tariffs and Trade GATT in place of ITO 4?. 2 Executive Board The Executive Board is composed of 25 Exec

Class 4 Bretton Woods Institutions and Multilateral Development Banks

1 The Birth of the Bretton Woods Institutions (Refer to Reference/Appendix 1)

 What did happen in the process of creating the Bretton Woods Institutions vis-à-vis the International Trade Organization (ITO) and the United Nations (UN)?

2 Impact of the Bretton Woods Institutions

 Have the Bretton Woods Institutions contributed to world economic stabilization and development?

3 Visions and Realities

 How have visions and realities of the Bretton Woods institutions deferred over time?

(1) The International Monetary Fund (IMF)

(2) The World Bank

(3) The General Agreement on Tariffs and Trade (GATT in place of ITO)

4 Fatal Flaws

 Why the Bretton Woods Institutions are not functioning as expected today? What went wrong with the Bretton Woods Institutions?

5 A Blueprint for Reform

(1) IMF

 What kinds of specific reform measures are thinkable?

(2) The World Bank

 What kinds of specific reform measures are considered?

(Study Reference 1/Appendix 1 “Chapter 14 of Mahbub ul Haq’s Reflection on

Human Development, 1995.”)

6 Reform Proposals for IMF and Multilateral Development Banks (Appendix 2)

 How should IMF and MDBs be reformed? Comment on Appendix 2

(1) Meltzer Report (2000)

(2) Lawrence Summer’s Proposal (1999)

(Study Reference 2/Appendix 2 “A Comparison of Reform Proposals for the IMF and Multilateral Development Banks.”)

Bretton Woods Institutions Today

1 International Monetary Fund: IMF

Headquarters: 700 19th Street, N.W., Washington D.C 20431, U.S.A

Establishment: Established in December 1945

Operation started in March 1947

Purposes (Article I - Purposes):

(i) To promote international monetary cooperation;

(ii) To facilitate the expansion and balanced growth of international trade; (iii ) To promote exchange stability;

(iv) To assist in the establishment of a multilateral system of payments; and (v) To make its resources available (under adequate safeguards) to members experiencing balance of payment difficulties

Membership: 189 countries (as of 2017) Japan joined IMF in August 1952

Organization:

(1) Board of Governors

The Board of Governors is the highest decision-making body of the IMF It

consists of one governor and one alternate governor for each member country The governor is appointed by the member country and is usually the minister of finance or the governor of the central bank All powers are vested in the Board of Governors The Board of Governors may delegate to the Executive Board all except certain reserved powers The Board of Governors normally meets once a year at the IMF-World Bank Annual Meetings

(2) Executive Board

The Executive Board is composed of 25 Executive Directors and their

Alternates appointed (6) or elected (19) by member countries

The day-to-day work of the IMF is conducted at its Washington DC

headquarters by its 24-member Executive Board; this work is guided by the IMFC and supported by the IMF’s professional staff The Managing Director is the Head

of IMF staff and Chairman of the Executive Board

The Executive Board meets regularly and normally three times a week

(3) Managing Director

Ms Christine Lagarde from France is the Managing Director She succeeded Mr

Dominique Strauss-Kahn from France on July 5, 2011 The term is 5 years

(4) International Monetary and Financial Committee

The IMFC was established on September 30, 1999, by a resolution of the IMF

Board of Governors, to replace the Interim Committee of the Board of Governors

on the International Monetary System (usually known simply as the Interim Committee), which had been established in 1974 As the Interim Committee did, the IMFC usually meets twice a year, in September or October before the IMT-World Bank Annual Meetings, and in March or April at what are referred to

as the Spring Meetings

Like the Interim Committee, the IMFC has the responsibility of advising, and

reporting to, the Board of Governors on matters relating to the Board of Governors’ functions supervising the management and adaptation of the international monetary and financial system, including the operation of the adjustment process, and in this connection reviewing developments in global liquidity and the transfer of resources to developing countries; considering proposals by the Executive Board to amend the articles of Agreement; and dealing with disturbances that might threaten the system

The IMFC has 24 members who are Governors of the IMF (generally ministers

of finance or central bank governors) The membership reflects the composition of the IMF’s Executive Board: each member country that appoints, and each group

of member countries that elects, an Executive Director appoints a member of the IMFC A number of international institutions, including the World Bank, participate as observers in the IMFC’s meeting

(5) Development Committee

The Joint Ministerial Committee of the Boards of Governors of the Bank and

Fund on the Transfer of Real Resources to Developing Countries, better known as the Development Committee, was established in October 1974 to advise the Board

of Governors of the IMF and World Bank on critical development issues and on the financial resources required to promote economic development in developing countries Over the years, the Committee has interpreted its mandate to include trade and global environmental issues in addition to traditional development matters The Committee usually meets twice a year, just like the IMFC

The Development Committee has 24 members (usually ministers of finance or

development) who together represent the full membership of the IMF and World Bank Each is appointed for periods of two years by one of the countries or groups

of countries that designates a member to the World Bank’s or the IMF’s Executive Board In addition, there is a chairman Altogether, there are 25 members in the

Committee

(6) Staff

There are approximately 2,700 employees from 148 countries (as of 2017)

Resources:

(1) Accounts

(i) General Department Accounts (General Resources Account, Special Disbursement Account and Investment Account)

(ii) SDR Department Account

(iii) Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust Account

(iv) PRGF-HIPC Trust and Related Accounts

(v) The Other Administered Accounts

(2) IMF Quotas

Quota subscriptions generate most of the IMF’s financial resources Each member

of the IMF is assigned a quota, based broadly on its relative size in the world economy A member’s quota determines its maximum financial commitment to the IMF and its voting power, and has a bearing on its access to IMF financing A member must pay its subscription in full upon joining the Fund: up to 25% must be paid in SDRs or widely accepted currencies (such as the U.S dollar, the euro, the yen, or the pound sterling), while the rest is paid in the member’s own currency Total quotas as of February 2017 were SDR 475.4 billion (about US$668 billion)

Table 1 Quota and Votes of Major Countries as of 2017

Country Quota (Millions of SDRs) Votes U.S.A 82,994.2 (17.46%) 831,406 (16.53%) Japan 30,820.5 (6.48%) 309,669 (6.16%) China 30,482.9 (6.41%) 306,293 (6.09%) Germany 26,634.4 (5.60%) 267,808 (5.32%) U.K 20,155.1 (4.24%) 203,015 (4.04%) France 20,155.1 (4.24%) 203,015 (4.04%) Total 475,383 (100%) 5,030,526 (100%)

(3) IMF Borrowing Arrangements

While quota subscriptions of member countries are its main source of financing, the IMF can activate supplementary borrowing arrangements if it believes that resources might fall short of members’ needs Through the General Arrangements to

Borrow (GAB) and the New Arrangements to Borrow (NAB), a number of member countries stand ready to lend additional funds to the IMF

(i) GAB since 1962

GAB enables the IMF to borrow specified amounts of currencies from 11 industrial countries (or their central banks), under certain circumstances, at market-related rates of interest The potential amount of credit available to the IMF under GAB totals SDR 17 billion (about $25 billion), with an additional SDR 1.5 billion available under an associated arrangement with Saudi Arabia (ii) NAB since 1998

The Mexican financial crisis caused the creation of NAB NAB is a set of credit arrangements between the IMF and 26 members and institutions to provide supplementary resources to the IMF to forestall or cope with an impairment of the international monetary system or to deal with an exceptional threat to the stability

of that system

NAB does not replace GAB However, NAB would typically be the first and principal resource in the event of a need to provide supplementary resources to the IMF The maximum amount or resources available to the IMF under both borrowing arrangements is SDR 34 billion (about $50 billion)

Lending:

The core responsibility of the IMF is to provide loans to countries experiencing balance of payment problems This financial assistance enables countries to rebuild their international reserves; stabilize their currencies; continue paying for imports; and restore conditions for strong economic growth Unlike development banks, the IMF does not lend for specific projects

(1) Concessional Facilities for LICs

► Extended Credit Facility (ECF)

ECF was introduced in January 2010 to succeed the Poverty Reduction and Growth Facility PRGF) as the Fund’s main tool for providing medium-term support to LICs with protracted balance of payments problems Financing under the ECF currently carries a zero interest rate, with a grace period of 5½ years, and

a final maturity of 10 years

► Standby Credit Facility (SCF)

SCF was introduced in January 2010 to provide financial assistance to LICs with short-term balance of payments needs The SCF replaces the High-Access Component of the Exogenous Shocks Facility (ESF), and can be used in a wide range of circumstances, including on a precautionary basis Financing under the

SCF currently carries a zero interest rate, with a grace period of 4 years, and a final maturity of 8 years

► Rapid Credit Facility (RCF)

RCF was introduced in January 2010 to provide rapid financial assistance with limited conditionality to LICs facing an urgent balance of payments need The RCF streamlines the Fund’s emergency assistance for LICs, and can be used flexibly in a wide range of circumstances Financing under the RFC currently carries a zero interest rate, has a grace period of 5½ years, and a final maturity of

10 years

(2) General Facilities

► Stand-By Arrangements (SBA)

The SBA is designed to help countries address short-term balance of payment problems The bulk of Fund assistance to middle-income countries is provided through SBAs The length of a SBA is typically 12 – 24 months, and repayment

is normally expected within 3¼ – 5 years SBAs may be provided on a precautionary basis – where countries choose not to draw upon approved amounts

to retain the option to do so if conditions deteriorate – both within the normal access limits and in cases of exceptional access The SBA provides for flexibility with respect to phasing, with front-loaded access where appropriate

► Extended Fund Facility (EFF)

The EFF was established in 1974 to help countries address their long-term balance of payments problems that require fundamental economic reforms Arrangements under the EFF are thus longer than SBAs – usually 3 years

Repayment is normally expected within 4¼ – 10 years

► Supplemental Reserve Facility (SRF) ⇒ Abolished in March 2009

SRF was introduced in 1997 to meet a need for very short-term financing on a large scale The motivation for the SRF was the sudden loss of market confidence experienced by emerging market economies in the 1990s, which led to massive outflows of capital and required financing on a much large scale than the IMF had previously provided Countries are expected to repay loans within 2 – 2½ years, but may request an extension of up to an additional six months All SRF loans carry a substantial surcharge of 3 – 5% points

► Compensatory Financing Facility (CFF) ⇒ Abolished in March 2009

CFF was established in 1963 to assist countries experiencing either a sudden shortfall in export earnings or an increase in the cost of cereal imports, often caused by fluctuating world commodity prices Financial terms are similar to

those applying to SBA, except that CFF loans carry no surcharge

► Emergency Assistance (EA)

EA was established in 1962 to assist countries that have experienced a natural disaster or are emerging from conflict Emergency loans are subject to the basic rate of charge, although interest subsidies are available for some countries, subject to availability Loans must be repaid within 3¼ – 5 years

► Flexible Credit Line (FCL)

FCL was introduced in 2009 to support countries with very strong fundamentals, policies, and track records of policy implementation and is particularly useful for crisis prevention purposes FCL arrangements are approved for countries meeting pre-set qualification criteria The length of the FCL is 6 months or 1 year (with a mid-term review) and the repayment period the same as for the SBA Access is determined on a case-by-case basis, is no subject to the normal access limits, and is available in a single up-front disbursement rather than phased Disbursements under the FCL are not conditioned on implementation of specific policy understandings as is the case under the SBA There is flexibility to draw o the credit line at the time it is approved, or it may be treated as precautionary

2 International Bank for Reconstruction and Development: IBRD (also known as the World Bank)

Headquarters: 1818 H Street, N.W Washington D.C 20433, U.S.A

Establishment: Established in December 1945

Operations started in June 1946

Purposes:

(i) To support the long-term human and social development needs that

private creditors do not finance (ii) Preserve borrowers’ financial strength by providing support in crisis

periods, which is when poor people are most adversely affected; (iii) To use the leverage of financing to promote key policy and institutional

reforms (such as safety nets or anticorruption reforms);

(iv) To create a favorable investment climate in order to catalyze the

provision of private capital;

(v) To provide financial support (in the form of grants made available from

the IBRD’s net income) in areas that are critical to the well-being of

poor people in all countries

Membership: 189 member countries (as of 2017) Japan joined in 1952

Japan borrowed from the IBRD $822.9 million (31 loans between 1953

and 1966)

Organization:

(1) Board of Governors:

Shareholders are represented by the Board of Governors, who are the ultimate

policy makers at the World Bank Generally, the governors are member countries’ ministers of finance or ministers of development They meet once a year at the Annual Meeting of the Board of Governors of the World Bank Group and the International Monetary Fund

Because the governors only meet annually, they delegate specific duties to 24

Executive Directors, who work on-site at the World Bank The five largest shareholders, France, Germany, Japan, the United Kingdom and the United States appoint an executive director, while other member countries are represented by 19 rotated executive directors

(2) Board of Executive Directors:

The World Bank Group Board of Executive Directors are responsible for

conducting the day-to-day business of the World Bank The Boards are composed

of 24 Execute Directors, who are appointed or elected by member countries or by groups of countries, and the resident, who serves as its Chairman Regular meetings are usually held once or twice a week on Tuesdays and Thursdays (3) President:

The present President of the World Bank is Mr Jim Yong Kim, who succeeded

Mr Robert B Zoellick in April 2012 The US President nominates the position The term can be five years and is renewable

(4) World Bank Group:

The World Bank Group consists of the International Bank for Reconstruction

and Development (IBRD or World Bank), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Center for Settlement

of Investment Disputes (ICSID) The first four institutions maintain a Board of Directors The Executive Directors serving on these Boards are usually the same Under the Articles of IDA and IFC, Executive Directors and Alternate Directors of

the Bank serve ex officio as Executive Directors and Alternates of IDA and IFC, as

long as the country that appoints them, or any one of the countries that have

elected them, is a member of IFC and IDA Furthermore, it is customary for the Directors of MIGA to be the same individuals as the Executive Directors of the World Bank

(5) Development Committee: (Refer to the IMF)

(6) Staff: Approximately 10,000 (as of 2017)

Table 1 Subscribed Capital, Paid-in Capital and Voting Power of Major Countries

S u b s c r i b e d C a p i t a l P a i d - i n C a p i t a l N o o f V o t e s S h a r e o f V o t e s ( % )

Lending:

(1) Magnitude of Operation

World Bank Commitments and Disbursements

IBRD Operational Summary, Fiscal Years 2012-16

millions of dollars

Of which development policy lending 10,333 7,080 7,997 7,207 13,210

Of which development policy lending 9,052 5,972 9,786 8,935 12,068

Principal repayments (including prepayments) 11,970 9,470 9,805 9,005 9,327

IDA Operational Summary, Fiscal Years 2012-16

millions of dollars

Of which development policy lending 1,827 1,954 2,489 2,597 1,890

Of which development policy lending 2,092 1,662 2,644 2,005 2,564

Principal repayments (including prepayments) 4,023 3,845 3,636 4,085 4,327

World Bank Lending by Theme, Fiscal Years 2012-16

millions of dollars

IBRD

Environment and Natural Resources Management 2,429 1,308 1,231 1,836 3,758 Financial and Private Sector Development 3,313 2,700 5,102 6,214 6,838

IDA

Environment and Natural Resources Management 1,568 1,163 2,652 1,329 1,122 Financial and Private Sector Development 1,430 1,680 2,926 2,282 2,385

Note: Numbers may not add to totals because of rounding

World Bank Lending by Sector, Fiscal Years 2012-16

millions of dollars

IBRD

IDA

Note: Numbers may not add to totals because of rounding