Lesson 3 - IMF and World Bank PDF

Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES Chapter 3: IMF and World Bank in the Inte...

Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES Chapter 3: IMF and World Bank in the International System Introduction This chapter presents the difference between International Monetary Fund and World Bank in terms of their purpose and role as international organization administering the worldwide financial system. These both international institutions take into consideration the nature as lending institution and the policy condition that are attached on it. Learning Outcomes 1. Identify the difference between International Monetary fund and World Bank 2. Analyze the purpose and function of IMF and World Bank as international organization 3. Explain the key activities of the IMF that is classified under three areas 4. Explain the five (5) Institution that contained in the World Bank 5. Discuss the nature of both organization as lending institution and its policies Content What is International Monetary Fund? The International Monetary Fund was conceived in July 1944, at a United Nations conference in Bretton Woods, New Hampshire, United States. The 44 participating governments sought to build a framework for economic cooperation that would forestall any repetition of the disastrous policies, including competitive devaluations, that contributed to the Great Depression of the 1930s and, ultimately, to World War II. The world has changed dramatically since 1945, bringing extensive prosperity to many countries and lifting millions out of poverty. The organization has played a central role within the international financial architecture. With its near-global membership of 189 countries, the IMF is uniquely positioned to help its member governments to take advantage of the opportunities and manage the challenges posed by globalization and economic development. Also, International Monetary Fund was set to formulate and implement monetary arrangements, pertaining to exchange rates and international payment mechanisms, for the post-war period. What is World Bank? The International Bank for Reconstruction and Development was established in 1944 and renamed as World Bank and there headquarter was located at Washington, D.C., United States. This international financial institution has 183 countries as members together with five development institutions that include International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID). World Bank offers loans to help developing countries in order to end or reduce poverty, for reconstruction and rebuilding to achieve development and progress (World Bank Organization).  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES The difference of International Monetary Fund and World Bank These two international financial institutions were established at Bretton Woods Conference during 1994 and have a distinct difference to each other. The World Bank helps and assists the governmental finances and giving technical and policy advices at the same time helping private sectors from developing countries to achieve progress. Hence, the International Monetary Fund oversees the international economy and the budgets of its members as they provide lending and assistance to their members. In addition, the World Bank main focus is to aide developing countries in order to lessen the poverty and expand economic stability, while, International Monetary Fund main focus is to sustain international monetary system and observe global currencies (World Bank Organization). Picture/ Table Citation: Kungu, E. (2018, July 17). Difference Between IMF and World Bank. Difference Between Similar Terms and Objects. Retrieved from http://www.differencebetween.net/business/difference-between-imf-and-world-bank/ Purpose and Function of International Monetary Fund The IMF is a cooperative international monetary organization whose nearly universal membership comprises 189 countries. It was established in 1945, together with the International Bank for Reconstruction and Development (known as the World Bank), under agreements reached by delegates from 45 countries who convened during July 1944 at the Bretton Woods  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES Conference. The responsibilities of the IMF derive from the basic purposes for which the institution was established, as set out in Article I of the IMF Articles of Agreement—the charter that governs all policies and activities of the IMF: To promote international monetary cooperation through a permanent institution this provides the machinery for consultation and collaboration on international monetary problems. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. Purpose and Function of World Bank The World Bank aids military conflict countries by providing them with reconstruction loans as they help poor countries to increasing their economic growth, lessen poverty, and improve their living standards. It also lends money to governments for irrigation, agriculture, water supply, health, and education, among other things. In addition, the World Bank gives member countries with economic, monetary, and technical guidance on any of their initiatives, and it promotes the growth of industries in developing countries. The purpose of World Bank aspires to foster an investment-friendly environment. It also aspires to improve economic stability through lowering poverty. As a result, it is aiming to achieve long-term growth. Increasing the number of job and commercial possibilities in poor member countries. It intends to improve the society's socioeconomic standing through investment. It also strives to make sure that judicial and legal institutions are developed and that individual rights are safeguarded. By encouraging education, it aims to strengthen the governments of its member countries. Combating corruption and ensuring that proper training and research facilities are available. It aspires to offer low-interest loans.  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES Key activities of the IMF that is classified under three areas The key activities of the IMF can be classified under three areas—lending, surveillance, and the provision of capacity-building services: Lending functions of the IMF are tailored to address the specific circumstances of its diverse membership. The IMF is probably best known as a financial institution that provides resources to member countries experiencing temporary balance of payments problems (actual or potential). This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while implementing policies to correct underlying problems. The IMF is also actively engaged in promoting economic growth and poverty reduction for its poorer members facing a protracted or short-term balance of payments need by providing financing on concessional terms. Surveillance functions stem primarily from the IMF’s responsibility for overseeing the international monetary system and the policies of its members, a task entrusted to the IMF following the collapse of the Bretton Woods fixed exchange rate system in the early 1970s. These activities include bilateral surveillance, which is the regular monitoring and peer review by other members of economic and financial developments and policies in each member country. Regional and multilateral surveillance is conducted through ongoing reviews of world economic conditions, financial markets, fiscal developments and outlooks, and through oversight of the international monetary system. Capacity building and other services to members of the IMF include provision of technical assistance and external training; creation and distribution of international statistical information and methodologies; and establishment and monitoring of standards and codes for international best practice in several areas, including timely country economic and financial statistics, monetary and fiscal transparency, assessment of financial sector soundness, and promotion of good governance. Five (5) Institution that contained in the World Bank International Bank for Reconstruction and Development (IBRD) This institution under World Bank provides investments and policy guidance to different nations in order to achieve poverty reduction and to sustain development (Kenton, 2021). It is also a global development cooperative with all the 189 member countries as owners. International Development Association (IDA) This institution assists countries that are under severe poverty by giving lending with zero to low interest in order for them to create programs that can lessen poverty, improve the economy, and enhance the living condition of the people (International Development Association) International Finance Corporation (IFC) An institution under World Bank that focuses on encouraging private sectors wherein the main aim of this institution is to improve economic growth and enhance people lives by making  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES new markets, encourage investors to invest, and give guidance (International Finance Corporation). Multilateral Investment Guarantee Agency (MIGA) This institution focuses on promoting direct investment in both political and economic risk insurance to all developing countries as this agency support to achieve the development of economy, lessen the poverty, and give people a positive living (Kenton, 2020). International Centre for Settlement of Investment Disputes (ICSID) An institution under World Bank that focuses on the settlement of International Investment Dispute as this institution will take care all the international investment cases. Member’s states assent International Centre for Settlement of Investment Disputes as a forum for investor- State dispute settlement in international investment treaties, laws and contracts (International Centre for Settlement of Investment Disputes). Nature of both organization as lending institution and its policies International Monetary Fund The IMF provides financing to its members through three channels, all of which serve the common purpose of transferring reserve currencies to member countries: regular (nonconcessional) lending from the General Resources Account (GRA), concessional lending from the Poverty Reduction and Growth Trust (PRGT), and the SDR Department. Regular and concessional lending operations involve the provision of financing to member countries under “arrangements” with the IMF that are similar to lines of credit. A large majority of IMF lending arrangements condition use of these lines of credit (facilities) on achievement of economic stabilization objectives agreed between the borrowing member and the IMF. The IMF may also create international reserve assets by allocating SDRs to members, which can use them to obtain foreign exchange from other members. Use of SDRs is unconditional, although a market-based interest rate is charged. World Bank World Bank loans have been adjusted in terms of its interest rates (now at 7-5 percent) and a grace period up to 5 years and implied that they are on longer and softer terms (with a higher grant element) than commercial credits, which are usually limited up to 3-5 years. This organization lends monetary to middle - income countries with lower interest rates on loans than business banks, while, when poorest developing countries borrows money there is no interest rate. All the borrowers of World Bank have a longer period to pay their loans and debts (World Bank Organization). Conclusion International Monetary Fund and World Bank is a financial institution that allows its members to borrow money in order to fight poverty and develop economic growth. Both of them was established during 1994 at Bretton Wood Conference where in World Bank is considered as  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES development institution with main goal of lessening the poverty while the International Monetary Fund is monetary institution with a main goal of overseeing the whole economy and sustaining financial stability. Teaching and Learning Activity Activity 3: Let us see how much you have learned in the topic, apply that knowledge by making infographics that showcases the importance of International Monetary Fund and World Bank. Rubrics for Info 5pts 3pts 1pt graphics Content The data are relevant One mistake in The content is and clearly explained. vocabularies or terms not relevant to All the data should be and data should be the topic. cited properly and the cited. The data are info graphics should relevant but not focus on the importance explained properly. of World Bank and IMF. Creativity Other elements are Other elements such as No other presented such as pictures are used but it elements are pictures to enhance the doesn’t enhance the used such as info graphics. info graphics. pictures. Design The layout is organized Good layout but has a Overall layout and the details are minor inconsistency to needs more consistent. Fonts should the details. Fonts are improvement. be readable and the use readable but not clear. of colors is complementary to the design. Total: /15pts Recommended learning materials and resources for supplementary reading Weser, M, K & Guggenheim, S. (2021). Social Development in the World Bank. Springer. Moosa, M., & Moosa, N. (2019). Eliminating the IMF An Analysis of Debate to Keep, Reform orAbolish the Fund. Springer International Publishing & Palgrave Macmillan Reference Bazbauers, A. R. (2018). The World Bank and Transferring Development: Policy Movement through Technical Assistance. Palgrave Magmillan. International Monetary Fund. (2018). IMF Financial Operation. Washington, D.C: International Monetary Fund. International Development Association World Bank Group. (n.d). What is IDA?. Retrieved from  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES https://ida.worldbank.org/about/what-is-ida International Finance Corporation World Bank Group. (n.d). About IFC. Retrieved from https://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc_n ew International Centre for Settlement of Investment Disputes World Bank Group.(n.d). About ICSID. Retrieved from https://icsid.worldbank.org/About/ICSID John Ravenhill (ed.), Global Political Economy (Oxford, 5th edition, 2016) Kenton, W. (2020). Multilateral Investment Guarantee Agency (MIGA). Retrieved from https://www.investopedia.com/terms/m/multilateral-investment-guarantee-agency-miga.asp Kenton, W. (2021). International Bank for Reconstruction and Development (IBRD). Retrieved from https://www.investopedia.com/terms/i/international-bank-of-reconstruction-and- development.asp World Bank Organization. (n.d).History. Retrieved from https://www.worldbank.org/en/about/history World Bank Organization. (n.d) The World Bank Group and the International Monetary Fund (IMF). Retrieved from https://www.worldbank.org/en/about/history/the-world-bank-group-and- the-imf