Q: Do you agree with what Mr. Rajan is talking about the role of WB and IMF now?

Critically assess the reading with your reasoning with additional research done by you on these
organizations.

BRETTONWOODS SISTERS HISTORY AND INTRODUCTION
The Bretton Woods sisters as they are called are the World Bank and the International Monetary
fund (IMF). The Brettonwoods institutions, both the IMF and the World Bank were a set up at a
meeting of 43 countries in Bretton Woods, USA in 1944. The major aims of these multilateral
institutions were to help rebuild the war ravaged economies of the world and to promote
international economic co-operation. These two institutions were set up based on the ideas of
eminent experts like Henry Morganthau, US treasury secretary, Dexter White and John Keynes.
They had the hindsight to establish a post-war economic order based on consensual decision
making and machineries to facilitate trade and economic relations. The economic powers like US
and Britain felt the need for a frame work to overcome global economic depression and trade
wars previously.
The IMF emphasizes towards creating a controlled and stable circumstance by creating harmony
in its members monetary policies and maintain exchange rate stability. Under the IMF initiative,
primarily it was able to provide temporary financial assistance to countries having hiccups with
their balance of payments. The Fund acts as a lender of last resort, disbursing its foreign
exchange reserves for short periods to any member in difficulties.
The World Bank focused heavily on improving the capability of war-torn economies of the
world by lending money for their development projects aimed at reconstructing the economy.
The World Bank is also known as the international bank for re-construction and development.
During the Brettonwoods conference, initiations also took place for the setting up of ITO and
WTO as well but it took time as late as 1990s to implement these trade organizations.
CRISIS RESPONSE INITIATIVES BY MULTI-LATERAL INSTITUTIONS
The IMF and World Bank offers help to nations when there are economic turmoils. In 2008, the
major crisis that rocked the world was the Global Economic Depression as a result of the sub-
prime lending crisis in the US. Since dollar is the universal and most commonly used exchange
rate and many of the U.S investors in other countries, almost all the world economies was
affected. It happened even in India, but this nation being a mixed economy the adversities were
limited. In reaction to this, the IMF initiated an emergency funding scheme for all the economies
suffering depression due to the economic downfall.
In 2010, it committed around $200 billion in lending to a number of economies affected by the
crisis. The biggest borrowers were Hungary, Romania and Ukraine.
The eurozone crisis of 2010 gave rise to an extensive intervention by the IMF, including
lumpsum bail-outs for countries such as Greece and Ireland.
Past interventions by the IMF included providing funds for countries involved up in the 1997
Asian financial crisis, and loans to help South American countries such as Argentina and Brazil
stave off debt default crises. The crisis initiatives by the IMF requires applaud by its member
countries.


OPERATIONAL ASPECTS OF IMF AND WORLD BANK

World Bank

The Bank gives attention to projects that can directly benefit the people in developing countries.
The involvement of the poverty affected people 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. 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.

IMF

After five years of analysis the IMF amended its constitution in 1978, broadening its functions
to cope up with the challenges. 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. 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. Third, the IMF continues to provide short- and medium-term
financial assistance to member nations that run into temporary balance of payments difficulties..
How practical is IMFin assisting 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: a country ideally should take in just about what it
pays out. 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.

FINDINGS FROM THE CASE STUDY :

Multilateral institutions will have to change, doing old tasks in new ways as also performing new
tasks such as slowing climate change. In the past, private capital flows were limited, and the
World Bank could bridge the gap between a poor countrys desired investment and domestic
savings with its own money.
If foreign private financing is not forthcoming, it could mean (a) the project is unviable (b) the
risk bearing capacity of the private sector is limited (c) the project is deemed too costly given the
government support that is on offer (d) the governments promises (including promises not to
expropriate) are not credible.

Raghuram Rajan asks the Brettonwoods sisters, if they should still finance the economies if there
is lack of private foreign financing. Here, he questions the credibility of the project. The findings
of Raghuaram Rajan are true to the sense that economic viability should be considered before
lending to its member countries. He further states that, fundamental missing ingredient in many
projects is not capital but government capability and credibility.
The World Bank may be better able to rely on government repayment than the foreign
private sector.World bank and imf loans should be the last resort.

If a multilateral lender has greater power to get repaid, should it lend in the normal course where
the private sector will not?

The collateral damage resulting from an improperly conceived project negotiated by an
untrustworthy government will fall on the countrys taxpayers or its other creditors.
Freeing the government from the impartial scrutiny of the private sector or, temporarily, tax
payers, the Bank may do more harm than good.
Instead of being a senior claimant on a projects cash flows as is normal practice, with a
government guarantee of repayment, the World Bank ought to have its investment at risk if the
project does not pan out, so that it has an incentive to do appropriate amounts of due-diligence,
project structuring, and monitoring, all areas where the World Bank can contribute immense
amounts of experience. Indeed, the International Finance Corporation, an arm of the World Bank
Group, already takes equity positions, and there is no reason why the model should not be more
widely followed.


IMF
IMFs role should shift from intervening in a panic to attempting to prevent a crisis in the first
place.At present, if a country faces financial difficulty and calls on the Fund, the Fund evaluates
its needs, negotiates the conditions it will require to ensure the country can regain access to
financial markets, and if a program is agreed to, initiates lending .A second concern potential
emerging market borrowers have is that they will be open to all manner of intrusive conditions if
they approach the Fund for a loan, including those motivated by the need of powerful members
to secure a political or competitive advantage.
The Fund has worked hard on streamlining conditionality, but it could do more. A greater focus
on identifying which countries have adopted sensible policies in normal times could reduce the
need for program conditionality, especially conditionality that aims to change the structure of
a countrys economy in abnormal times countries earn the trust of the international community
through their ownership of sensible policies in good times so that the Fund can rely on the
country authorities to do what is needed when unexpected adversity hits.
Such pre-commitment would reduce uncertainty, thus reducing the need for countries to follow
distortionary policies to build reserves A last concern is that the IMF Board, which would be
making the final assessments, is still dominated by those who will never borrow. If reform (see
later) takes too long, another alternative would be for emerging countries to pool part of their
reserves, and allow commitments by the pool.
Cross-country experience can be helpful in describing what has worked elsewhere, but those
experiences cannot be translated lock stock and barrel. Moreover, any policy that eventually
emerges could well founder on the rocks of implementation.
offer a second best solution that recognizes specific political constraints and capacities in the
country, and utilizes the knowledge of the political authorities in that country in formulating
feasible paths. The true value of World Bank and the IMF advice lies, however, in using their
independence from local interests to steer the policies to a better place,talented economists to
offer country-specific analysis that can help advance the public debate over the strategy and even
sell it. While multilateral institutions should be tolerant of experimentation, if they disagree
strongly with elements of the strategy, they should do so publicly and be vociferous about their
disagreement A compromise is for the multilateral institution to not reveal confidential data or
policies that rely on surprise, but to be completely honest and open about the rest.

In short, successfully tested micro interventions may still not lead us to our desired macro
objectives.
CONCLUSION
As an improvement to the future of IMF and World Bank, the BRICS have initiated the
formation of a new bank for multi-lateral transaction. It should not be a clone of these two banks,
instead as Mr. Rajan says it must re-negotiate the conditions of the Brettonwood and work
towards working with governments for the implementation of the developmental projects.


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