Topic 3 International Economic Institutions

Bretton Woods 1944.

In 1944, in the wake of World War 2, the Bretton Woods conference took place at the Mount Washington Hotel, New Hampshire, New York, USA and lasted for three weeks from the 1^st to 22^nd July, 1944. There were 44 nations present at the conference and by the end of the three weeks; many of the tools for modern international commerce were established. We would be looking at some of these organizations and agreements and their objectives and contributions to the economic development of member countries.

International Monetary Fund (IMF)

The International Monetary Fund was established on December 27^th 1945 and began its financial operating on the 1^st March 1947. As of 13^th June, 2012, the IMF has a global membership of 188 countries. Papua New Guinea became a member of the IMF on the 9^th October, 1975. The IMF seeks to foster global monetary cooperation between member countries, secure financial stability, facilitate international trade and focus on promoting employment opportunities and sustainable economic growth as well as reducing poverty around the world. Students are encouraged to visit the IMF web site to learn more about this organization on; www.imf.org

Primary Purposes of the International Monetary Fund are as follows;

·         Promote international monetary cooperation.

·         Facilitate the expansion and balanced growth of international trade.

·         Promote exchange stability and maintain orderly exchange arrangement among member countries.

·         Assist in establishing a multilateral system of payments in respect of current transactions between member countries and assist in eliminating foreign exchange restrictions that hamper the growth of world trade.

·         Make available to members the IMF general resources on a temporary basis to enable them to correct balance of payments problems without resorting to measures that would harm national or international prosperity.

·         Shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

Organizational Structure and Management of the IMF;

IMF articles of Agreement provides for a Board of Governors, Executive Board, a Managing Director who is appointed for a renewable term of five years. The Managing Director is assisted by the First Deputy Managing and three Deputy Managing Directors. They are assisted by staff of international civil servants.

The Board of Governors – The highest decision making body of the IMF, consists of one governor and one alternate for each member country. The governor appointed by the member country is usually the minister for finance or the central bank governor.

The Executive Board (the Board) - is responsible for conducting the business of the IMF. The board comprises 24 Directors who are appointed and elected by member countries of by a group of countries. The Board usually meets several times each week.
 

Resources

The resources of the IMF comes from two sources; Subscription by members and borrowing

Quotas and Subscriptions – Every member of the Fund is required to subscribe to fund and amount equivalent to its quota expressed in Special drawing Rights (SDR). Quotas are used to determine the voting power of members, their contribution to the fund resources, their access to these resources and their share in the allocation of Special Drawing Rights (SDRs).

What is a SDR? Special Drawing Rights is neither a currency, nor a claim on the IMF, rather it is a potential claim on the freely usable currencies of IMF members. It is an international reserve asset created by the IMF in 1969 to supplement the existing official reserves of members’ countries. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways; firstly, through the arrangement of voluntary exchange between members and secondly by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

 Borrowings – The IMF is authorized under its Articles of Agreement to supplement its ordinary resources and in 1998 created the New Arrangement to Borrow (NAB). Following the Mexican financial in December 1994, it becomes clear that more resources are needed to respond to future financial crisis thus the NAB of 1998.

Financing Facilities and Policies

Under its financing facilities and policies, the IMF provides financial assistance to help member countries correct balance of payments problems in a manner that sustain growth. Assistances are provided subjected to member countries commitment to address the cause of its payments imbalances.

Regular Lending Facilities – This is the principle way the IMF makes its resources available to members. The IMF sells members’ currencies to other members for their own currencies. Let look at one example to make it clearer; PNG need US Dollars to pay for its loan obligations. PNG will purchase the US Dollars from the IMF by exchanging PNG Kina.

The members to which the fund sells currencies or SDRs is said to make purchase which also referred to as drawings from the fund.

Stand-By Arrangement – Under this type of arrangement, a country carry out a program that it has designed in consultation with the IMF to resolve balance of payments problems of a largely cyclical nature. Stand-By Arrangement is normally for 2 to 3 years. There are criteria that may be placed on the member country such as performance indicators against program implementations.

Extended Fund Facility (EFF) – Under the EFF, the IMF provides financial support to its members for longer periods. Extended arrangements are designed to correct balance of payments difficulties in structural programs.
 

Special Lending Facilities

Supplemental Reserve Facility (SRF) – This facility was established in 1997 in response to the unprecedented demand for IMF assistance resulting from the Asian financial crisis. Access to the SRF is based on members financing needs, and its ability to repay the IMF.

Technical Assistance

The IMF provides technical assistance in areas within its core mandate;

·         Macroeconomic Policy

·         Monetary and Foreign Exchange Policy & Systems

·         Fiscal Policy & Management

·         External Debts

·         Macroeconomic Statistics

Under the above core mandate, the IMF provides technical assistance in the following three broad areas;

·         Designing and implementing fiscal and monetary policies.

·         Drafting and reviewing economic and financial legislation, regulations and procedures, thereby helping to resolve difficulties that often lie at the heart of macroeconomic imbalances.

·         Institution and capacity building, such as the central bank, treasuries, tax and custom agencies and statistical services.

The World Bank

The International Bank for Reconstruction and Development (IBRD) or the World Bank was established in 1945 (from the 1944 Bretton Woods conference).

The IBRD has two affiliates and these are the International Development Assistance (IDA) and the International Finance Corporation (IFC)

Purposes

Under its Articles of Agreements, the purposes of the World Bank are as follows;

·         To assist in the reconstruction and development of the territories of the members, by facilitating the investment of capital for productive purposes, including restorations, reconversion and development of production facilities.

 

·         To promote private foreign investment by means of guarantees or participation in loans and other investments made by private investors and supplements private investments by providing suitable conditions etc. 

·         To promote the long-range balance growth of international trade and the maintenance of equilibrium in the balance of payments by encouraging international investment of the productive resources of members (raising productivity). 

Guiding Principles

The Bank is guided by certain policies (formulated on the basis of the Articles of Agreement).

1.      The bank should properly assess the repayment prospects of the loans, by considering the availability of resources and plant capacity etc. 

2.      The bank should lend only for specific projects which are economically and technically sound and of high priority nature. 

3.      The bank lends only to enable a country to meet the foreign exchange content of any project cost through the member countries mobilizing its domestic resources. 

4.      The Bank expects and encourages the borrower to spend the loan to procure machinery and goods for bank financed projects. 

5.      The bank to maintain continued relations with borrowers with a view to check the progress of projects, economic development of the borrowing country.

6.      The Bank indirectly attaches special importance to the promotion of local private enterprise.

 Lending Programmes

The bank has financed all kinds of infrastructure facilities from roads and bridges, telecommunication facilities to power and ports and at the same time place emphasis on on investments that can have an impact on the well-being of the masses of the poor people of developing economies. Some of the programs that the bank has come with are as follows;

Structural Adjustment Lending – This program assist developing countries that are struggling in certain areas of their economic growth such as specific policy changes, institutional changes and efficient use of resources etc.

Special Action Program – Design to assist countries struggling against external economic environment brought about through global recession etc.

B-Loans and Export Credit – New set of co-financing instruments to help the Bank’s borrowers increase and stabilise flows of private capital on approved terms by linking part of commercial bank flow to IBRD operations.

 

International Development Association

Is an affiliate of the IBRD and was established in 1960 to provide assistance for the same purpose as the IBRD. There are three criteria for IDA approval and these are;

·         Poverty Test – limited to the poorest countries facing severe handicap

·         Performance Test – Looks at satisfactory overall economic policies and past success in project execution

·         Project test – Advance of soft loan. Test is to see financial and economic returns which are adequate to justify the use of scare capital.

 International Finance Corporation

An affiliate of the World Bank was established in 1956. Some of the main features of the IFC assistance are;

·         Make its investment in partnership with private investors from capital exporting country.

·         Envisaged that the corporation’s investments will never be more than half of the capital requirements of the enterprise.

·         Minimum investment that IFC will make in an enterprise is fixed at $1.0 million or its equivalent,

·         Eligibility of the enterprise should be predominantly industrial and contributes to the economic development of the country

·         Interest rates can be negotiated.

·         IFC will not seek or accept a government guarantee.

 Asian Development Bank

The Asian Development Bank (ADB) was established to assist with the development of developing countries. The ADB was set up in December 1966 with its headquarters in Manila.

Objectives

The main objectives of the ADB are as follows;

·         To promote investment in the Economic Commission for Asia and Far East (ECAFE) region of public and private capital for development. 

·         To utilize the available resources for financing development, giving priority to those regional, sub-regional as well as national projects and programmes which contributes to economic development.

 UNCTAD (United Nation Conferences on Trade and Development)

Functions of UNCTAD

1.      To promote international trade with a view to accelerating economic development. 

2.      To formulate principles of and policies on international trade and related problems of economic development. 

3.      To negotiate multinational trade agreements. 

4.      To make proposals for putting its principles and policies into effect.

 Basic Principles

UNCTAD’s action programme and priorities have been laid down in the various recommendations adopted by the first conference in 1964. Recommendations are based on the following basic principles of;

1.      Every country has the sovereign right freely to dispose of its natural resources in the interest of the economic development and wellbeing of its own people and freely trade with other countries. 

2.      Economic relations between countries, including trade relations, shall be based on respect for the principles of sovereign equality of state, self-determination of people, and non-interferences in the internal affairs of other countries.

3.      There shall be no discrimination on the basis of differences in socio-economic systems and the adoption of various trading methods and trading policies shall be consistent with this principle.

There are other organizations which I would like you to read about and these are;

·         UNIDO (United Nations Industrial Development Organization)

·         International Trade Centre

·         World Trade Organization (WTO)

Please read and understand the purposes and objectives of these organizations and its contribution to international trade and international economic developments.

Source:

F. Cherunilam, International Business Environment, (2009) Himalaya Publishing House
Subba Rao. International Business, (2012) Himalaya Publishing House