The IMF and the World Bank: How Do They Differ?
At the recent UN General Assembly, South Korea's President Moon Jae-in was discussing North Korea's strides to build relations and open up to the world. To become a member of the World Bank, which describes itself as. The current international economic order, spearheaded by the of financial- sector developments and their impact on the real economy, for changes to economic relationships resulting from globalisation, liberalisation and deregulation. Yet year after year, top government officials at the IMF/World Bank. Since its founding in , the World Bank has evolved from a was created at the Bretton Woods Conference in New Hampshire in The IMF, which through tacit agreement would be led by a In recent decades, the bank's primary focus has shifted from .. © Council on Foreign Relations.
But the crisis did not appear out of nowhere to challenge a healthy economic order. On the contrary, the evolution of the global order had long been outpaced by structural economic changes on the ground, with multilateral governance institutions taking too long to recognise fully the significance of financial-sector developments and their impact on the real economy, or to make adequate room for emerging economies.
For example, governance structures, including voting power, correspond better to the economic realities of yesterday than to those of today and tomorrow. Several other countries, particularly among the advanced economies, have also failed to transform their domestic policies to account for changes to economic relationships resulting from globalisation, liberalisation and deregulation.
As a result of all of this, the balance of winners and losers has become increasingly extreme and more difficult to manage, not just economically, but also politically and socially.
With too many people feeling marginalized, forgotten and dispossessed — and angry at the leaders and institutions that have allowed this to happen — domestic policy pressure has intensified, causing countries to turn inward. All are casting a shadow on the future of the global economic system. These dynamics are stoking trade tensions and raising the risk of economic fragmentation. If this trend continues, the global economic and financial configuration will become increasingly unstable, amplifying geopolitical and security threats at a time when better cross-border coordination is vital to address threats from non-state actors and disruptive regimes, such as North Korea.
Over time, the risks associated with this shift toward a global economic non-order could have severe adverse effects on geopolitics and national security. None of this is new. The Bank employs a staff with an astonishing range of expertise: Source of Funding The World Bank is an investment bank, intermediating between investors and recipients, borrowing from the one and lending to the other. The IBRD obtains most of the funds it lends to finance development by market borrowing through the issue of bonds which carry an AAA rating because repayment is guaranteed by member governments to individuals and private institutions in more than countries.
Its concessional loan associate, IDA, is largely financed by grants from donor nations. The Bank is a major borrower in the world's capital markets and the largest nonresident borrower in virtually all countries where its issues are sold. It also borrows money by selling bonds and notes directly to governments, their agencies, and central banks.
The proceeds of these bond sales are lent in turn to developing countries at affordable rates of interest to help finance projects and policy reform programs that give promise of success.
Despite Lord Keynes's profession of confusion, the IMF is not a bank and does not intermediate between investors and recipients. These resources come from quota subscriptions, or membership fees, paid in by the IMF's member countries.
Each member contributes to this pool of resources a certain amount of money proportionate to its economic size and strength richer countries pay more, poorer less.
While the Bank borrows and lends, the IMF is more like a credit union whose members have access to a common pool of resources the sum total of their individual contributions to assist them in times of need. Although under special and highly restrictive circumstances the IMF borrows from official entities but not from private marketsit relies principally on its quota subscriptions to finance its operations.
The adequacy of these resources is reviewed every five years. Recipients of Funding Neither wealthy countries nor private individuals borrow from the World Bank, which lends only to creditworthy governments of developing nations.
The poorer the country, the more favorable the conditions under which it can borrow from the Bank. Per capita GNP, a less formidable term than it sounds, is a measure of wealth, obtained by dividing the value of goods and services produced in a country during one year by the number of people in that country. These loans carry an interest rate slightly above the market rate at which the Bank itself borrows and must generally be repaid within years.
IDA loans are interest free and have a maturity of 35 or 40 years. In contrast, all member nations, both wealthy and poor, have the right to financial assistance from the IMF. Maintaining an orderly and stable international monetary system requires all participants in that system to fulfill their financial obligations to other participants.
Membership in the IMF gives to each country that experiences a shortage of foreign exchange--preventing it from fulfilling these obligations--temporary access to the IMF's pool of currencies to resolve this difficulty, usually referred to as a balance of payments problem. These problems are no respecter of economic size or level of per capita GNP, with the result that over the years almost all members of the IMF, from the smallest developing country to the largest industrial country, have at one time or other had recourse to the IMF and received from it financial assistance to tide them over difficult periods.
Money received from the IMF must normally be repaid within three to five years, and in no case later than ten years. Interest rates are slightly below market rates, but are not so concessional as those assigned to the World Bank's IDA loans.
Through the use of IMF resources, countries have been able to buy time to rectify economic policies and to restore growth without having to resort to actions damaging to other members' economies. World Bank Operations The World Bank exists to encourage poor countries to develop by providing them with technical assistance and funding for projects and policies that will realize the countries' economic potential.
The Bank views development as a long-term, integrated endeavor. During the first two decades of its existence, two thirds of the assistance provided by the Bank went to electric power and transportation projects. Although these so-called infrastructure projects remain important, the Bank has diversified its activities in recent years as it has gained experience with and acquired new insights into the development process.
The Bank gives particular attention to projects that can directly benefit the poorest people in developing countries. The direct involvement of the poorest in economic activity is being promoted through lending for agriculture and rural development, small-scale enterprises, and urban development.
The Bank is helping the poor to be more productive and to gain access to such necessities as safe water and waste-disposal facilities, health care, family-planning assistance, nutrition, education, and housing. Within infrastructure projects there have also been changes. In transportation projects, greater attention is given to constructing farm-to-market roads. Rather than concentrating exclusively on cities, power projects increasingly provide lighting and power for villages and small farms.
Industrial projects place greater emphasis on creating jobs in small enterprises. Labor-intensive construction is used where practical.
In addition to electric power, the Bank is supporting development of oil, gas, coal, fuelwood, and biomass as alternative sources of energy. The Bank provides most of its financial and technical assistance to developing countries by supporting specific projects. Although IBRD loans and IDA credits are made on different financial terms, the two institutions use the same standards in assessing the soundness of projects.
The decision whether a project will receive IBRD or IDA financing depends on the economic condition of the country and not on the characteristics of the project. Its borrowing member countries also look to the Bank as a source of technical assistance. But the amount of Bank-financed technical assistance for free-standing loans and to prepare projects has also increased.
The Bank serves as executing agency for technical assistance projects financed by the United Nations Development Program in agriculture and rural development, energy, and economic planning. In response to the economic climate in many of its member countries, the Bank is now emphasizing technical assistance for institutional development and macroeconomic policy formulation.
Every project supported by the Bank is designed in close collaboration with national governments and local agencies, and often in cooperation with other multilateral assistance organizations. Indeed, about half of all Bank-assisted projects also receive cofinancing from official sources, that is, governments, multilateral financial institutions, and export-credit agencies that directly finance the procurement of goods and services, and from private sources, such as commercial banks.
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In making loans to developing countries, the Bank does not compete with other sources of finance. It assists only those projects for which the required capital is not available from other sources on reasonable terms. Through its work, the Bank seeks to strengthen the economies of borrowing nations so that they can graduate from reliance on Bank resources and meet their financial needs, on terms they can afford directly from conventional sources of capital.
The range of the Bank's activities is far broader than its lending operations. Since the Bank's lending decisions depend heavily on the economic condition of the borrowing country, the Bank carefully studies its economy and the needs of the sectors for which lending is contemplated.
These analyses help in formulating an appropriate long-term development assistance strategy for the economy. Of the 34 very poor countries that borrowed money from IDA during the earliest years, more than two dozen have made enough progress for them no longer to need IDA money, leaving that money available to other countries that joined the Bank more recently.
The World Bank Group and the International Monetary Fund (IMF)
Similarly, about 20 countries that formerly borrowed money from the IBRD no longer have to do so. An outstanding example is Japan. For a period of 14 years, it borrowed from the IBRD. During the first phase, ending inthe IMF oversaw the adoption of general convertibility among the major currencies, supervised a system of fixed exchange rates tied to the value of gold, and provided short-term financing to countries in need of a quick infusion of foreign exchange to keep their currencies at par value or to adjust to changing economic circumstances.
Difficulties encountered in maintaining a system of fixed exchange rates gave rise to unstable monetary and financial conditions throughout the world and led the international community to reconsider how the IMF could most effectively function in a regime of flexible exchange rates. After five years of analysis and negotiationthe IMF's second phase began with the amendment of its constitution inbroadening its functions to enable it to grapple with the challenges that have arisen since the collapse of the par value system.
These functions are three. First, the IMF continues to urge its members to allow their national currencies to be exchanged without restriction for the currencies of other member countries. As of Maymembers had agreed to full convertibility of their national currencies. Second, in place of monitoring members' compliance with their obligations in a fixed exchange system, the IMF supervises economic policies that influence their balance of payments in the presently legalized flexible exchange rate environment.
This supervision provides opportunities for an early warning of any exchange rate or balance of payments problem.
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In this, the IMF's role is principally advisory. It confers at regular intervals usually once a year with its members, analyzing their economic positions and apprising them of actual or potential problems arising from their policies, and keeps the entire membership informed of these developments.
Third, the IMF continues to provide short- and medium-term financial assistance to member nations that run into temporary balance of payments difficulties. The financial assistance usually involves the provision by the IMF of convertible currencies to augment the afflicted member's dwindling foreign exchange reserves, but only in return for the government's promise to reform the economic policies that caused the balance of payments problem in the first place.
The IMF sees its financial role in these cases not as subsidizing further deficits but as easing a country's painful transition to living within its means. How in practice does the IMF assist its members? The key opening the door to IMF assistance is the member's balance of payments, the tally of its payments and receipts with other nations. Foreign payments should be in rough balance: When financial problems cause the price of a member's currency and the price of its goods to fall out of line, balance of payments difficulties are sure to follow.
If this happens, the member country may, by virtue of the Articles of Agreement, apply to the IMF for assistance.
To illustrate, let us take the example of a small country whose economy is based on agriculture. For convenience in trade, the government of such a country generally pegs the domestic currency to a convertible currency: Unless the exchange rate is adjusted from time to time to take account of changes in relative prices, the domestic currency will tend to become overvalued, with an exchange rate, say, of one unit of domestic currency to one U.
Governments, however, often succumb to the temptation to tolerate overvaluation, because an overvalued currency makes imports cheaper than they would be if the currency were correctly priced. The other side of the coin, unfortunately, is that overvaluation makes the country's exports more expensive and hence less attractive to foreign buyers. If the currency is thus overvalued, the country will eventually experience a fall-off in export earnings exports are too expensive and a rise in import expenditures imports are apparently cheap and are bought on credit.The Nigerian Economy: Reviewing World Bank-IMF Meetings
In effect, the country is earning less, spending more, and going into debt, a predicament as unsustainable for a country as it is for any of us. Moreover, this situation is usually attended by a host of other economic ills for the country.
Finding a diminished market for their export crops and receiving low prices from the government marketing board for produce consumed domestically, farmers either resort to illegal black market exports or lose the incentive to produce. Many of them abandon the farm to seek employment in overcrowded cities, where they become part of larger social and economic problems.
Declining domestic agricultural productivity forces the government to use scarce foreign exchange reserves scarce because export earnings are down to buy food from abroad. The balance of payments becomes dangerously distorted. As an IMF member, a country finding itself in this bind can turn to the IMF for consultative and financial assistance.