Unit II Module 3

INTERNATIONAL INSTITUTIONS
Learning Objectives:
1. Indentify the three major international institutions;
2. Explain the role and functions of the World Bank;
3. Identify some of the criticisms of the World Bank;
4. Identify the functions of the International Monetary Fund;
5. Explain the role and functions of the World Trade Organization.
GLOBALIZATION AND INTERNATIONAL INSTITUTIONS
Globalization has resulted in a significant expansion in the amount of business being
conducted among different countries. The regulatory environment, which is the set of
international rules governing trade and capital flows, is determined by Government
officials and global governing bodies or internal institutions. Three major international
institutions which play key roles in the global regulatory environment are:
1. The World Bank (WB)
2. The International Monetary Fund (IMF)
3. The World Trade Organization (WTO)
The IMF and the World Bank are international financial institutions which support each
others activities. The World Banks main objective is to promote the reduction of poverty
and to encourage the long term development of nations by lending to developing
countries. In particular, it facilitates such transition of economies by financing specific
infrastructural projects and structural reform to various sectors of the economy. The
IMF focuses primarily on macroeconomic fundamentals and financial sector policies of
developing countries. It provides financing for the general support of macroeconomic
stability such as loans to cover balance of payments and exchange rate crises.
As we will outline, the World Bank is more acutely involved in structural adjustment
policies while the IMF is more engaged in stabilization policies.
The WTO is an international trade related institution. It is responsible for monitoring
national trading policies, handling trade disputes, and enforcing trade agreements. It
also has the objective of further encouraging the liberalization of trade through the
reduction of tariffs and other barriers to international trade, as well as the elimination of
preferential trading arrangements.
THE WORLD BANK AND DEVELOPMENT
The World Bank or the International Bank for Reconstruction and Development (IBRD)
includes both the International Finance Corporation (IFC) and the International

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Development Association (IDA). This was established in 1944 to promote post World War
II reconstruction in Europe.
In the current context, the Bank functions as an international organization that aims to
eliminate poverty and to provide assistance to poor countries by offering loans, policy
advice, and technical assistance and training in both the private and public sectors. The
World Bank also assists transitional countries (i.e. countries that are in the process of
moving from developing country status to developed country status), to achieve
sustainable development by macroeconomic reform and by financing infrastructural
projects such as power stations, road building, improvements to water supply, as well as
human capital investments such as health and education programmes. The ultimate
aim of the World Bank is to promote long term economic growth and development across
developing countries.
THE INTERNATIONAL FINANCE CORPORATION
The International Finance Corporation (IFC) is the private sector division of the World
Bank that promotes private sector investments. It may do so by directly providing
finances for private sector project in Least Developed Countries (LDCs) or it may assist
private companies in LDCs to raise finance in international financial markets. It also
offers standardized financial market information through its publications and also
provides advisory services to investors and businesses. In addition, the IFC directly
participates as an investor in various capital markets and facilitates the privatization of
inefficient public sector enterprises.
THE INTERNATIONAL DEVELOPMENT ASSOCIATION
The International Development Association (IDA) is the arm of the World Bank that offers
loans to LDCs on lenient lending conditions such as exceptionally low interest, lengthy
grace periods before repayment commences and extended payback periods. Such loans
usually target developmental projects that address basic needs such as: primary
education, basic health services, clean water and sanitation. Since 1960, the IDA has
lent $135 billion for development projects.
STRUCTURE OF THE WORLD BANK
The World Bank is owned by its 184 shareholder member countries. Membership in the
World Bank can only be gained if a country is already a member, of the International
Monetary Fund. Members shareholdings in the bank are dependent on the economic
size of the member country. The president of the Bank comes from the largest
shareholder, which is the United States (US), and members interests are represented by
a Board of Governors from various member countries.

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The hierarchical structure is such that larger, more influential economies have relatively
greater representation than the smaller economies. Each of the two subsidiaries of the
World Bank (IFC and IDA), receive financing from different sources. The IFC raises most
of its funds from issuing bonds on various capital markets throughout the world. The
IDA is funded largely by contributions from the Governments of wealthier or
industrialized member countries.

CRITICISMS OF THE WORLD BANK

While the World Bank strives to create a poverty free world and sustainable development
among poorer countries, in many parts of the world poverty is still widespread and many
critics have voiced concern against the conduct of this international institution. Three of
the main criticisms raises by such associates are:
1. World Bank Conditionality
World Bank developmental programmes are usually accompanied by conditionality
known as structural adjustment programmes (SAPs). These programmes encompass
the promotion of macroeconomic stability as well as initiatives undertaken to endorse
increased competitiveness and trade openness in the economy. This often requires
Government spending cutbacks, privatization of inefficient state enterprises,
increases in taxation and policies aimed at lowering the external value of the
countrys currency. These measures sometimes result in increased unemployment
and declining living standards among the middle and lower classes in society. The
burden of structural adjustment therefore falls disproportionately on the most
vulnerable within the economy.
Although World Bank developmental loans may be accompanied by such economic
restructuring which may be painful in the short term, advocates argue that long term
economic prosperity is promoted. This is because if developing countries borrow and
accumulate debt without addressing the underlying macroeconomic problems of the
economy, then long term sustainable growth would be hampered. The fundamental
economic problems of the economy would continue and more funds would have to be
borrowed from the World Bank to deal with the structural weaknesses of the country.
If policy makers in developing countries tackle the macroeconomic problems when it
borrows from the World Bank, then improvements in the macroeconomy over the long
term would facilitate debt repayments and may even eliminate the need to borrow.

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2. Inappropriate One Size Fits All Policy Recommendations
Another criticism of World Bank is that its policy recommendations aimed at
promoting development in third world countries may not be appropriate. This is
because the World Bank typically administers the same structural adjustment policy
solutions to all developing countries irrespective of the unique challenges the
individual economies may face. Furthermore, policies are usually formulated by
World Bank officials from developed countries who may not be thoroughly familiar
with the root problems faced in developing countries. This can result in policies that
are not necessarily the best for the developing country in question, as they do not
take into account the individual challenges faced by specific countries. In some
cases, the implementation of these policies may actually worsen the problems
plaguing developing countries.
3. Debt Repayment
World Bank loans to developing countries increases their indebtedness and debt
burdens which may put a strain on the limited resources possessed by such
countries. In particular, as Government revenues are diverted towards debt
repayment, spending on health, education, and other social programmes may have to
be sacrificed. Opponents argue that grants, rather than loans to developing countries
may be more effective in promoting sustainable development, especially to the worlds
poorest countries.
THE ORIGINS OF THE INTERNATIONAL MONETARY FUND (IMF)
The International Monetary Fund was established by international treaty in 1945 to help
promote the health of the world economy. Headquartered in Washington, D.C., it is
governed by its almost global membership of 184 countries. The IMF was conceived out
of the general proposal amongst delegates from Governments throughout the world. It
proposed a framework for economic cooperation partly designed to avoid a repetition of
the disastrous nationalistic economic policies that had contributed to the Great
Depression of the late 1930s. The statutory purpose enshrined in its Articles of
Agreement was to oversee the international monetary system and to promote both
the elimination of exchange restrictions relating to trade in goods and services,
and the endorsement of stability in exchange rates.
Major changes in the world economic environment since the establishment of the IMF
have reiterated the role and the underlying purpose served by the IMF. These changes
include the rapid advances in technology and communications which have fostered an
increased degree of international integration of markets and national economies. This
high degree of global inter-linkage means financial crises erupting in one country may
spreads rapidly among several countries, an effect which is known as the contagion
effect. In such a highly integrated world, any countrys prosperity depends more than
ever on both the economic performance of other countries and the existence of an open
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and stable global economic environment. Globalization thus calls for greater
international cooperation, which in turn increases the responsibilities of international
institutions such as the IMF.
FUNCTIONS OF THE IMF
The International Monetary Fund (IMF) is the central institution of the international
monetary system which oversees international payments and exchange rates among
national currencies. Its primary role is to promote international financial stability and
prevent crises by assisting countries experiencing balance of payments difficulties.
STABILIZATION POLICIES
As the name suggests, the IMF funds member countries in need of temporary financing
to address balance of payments problems. These policies are usually referred to as IMF
stabilization policies which include the following:
1.

Lending to member countries which face balance of payments crises. Lending

to such countries is not only for financing the deficit but also for the
implementation of adjustment and reform policies aimed at addressing the
fundamental problems of the economy. These reforms are commonly referred to as
IMF conditionalities and are essentially similar to World Bank structural
adjustments programmes. These measures are geared towards the removal of
structural weaknesses in an economy so as to ensure long run balance of
payments and exchange rate stability. This usually encompasses economic
reforms so as to maximize foreign earnings and minimize Government
expenditure. The different lending facilities offered by the IMF include:

Stand-By Arrangements This forms the core of the IMFs lending policies
which provides assurance to a member country experiencing external crises
that it can borrow over short term periods of 12 to 18 months, to help stabilize
exchange rates and deal with a short term balance of payments problem.
For example, in July 1988, for example, the Central Bank of Trinidad and
Tobago announced the exhaustion of its international reserves which had
previously stood at US$3.3 billion in 1981. Faced with an external crisis to
meet foreign debt obligation, the Government of Trinidad and Tobago sought
assistance from the IMF in November 1988 for a 14 month Standby
Arrangement totalling US$547 million. In exchange for assistance, the
Government pledged its commitment to undertake a host of stabilization
policies which included:
a) Reducing public spending from 7 percent to 4 percent of GDP;
b) Decreasing the size of the public sector workforce by 15 percent;
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c) Suspension of the Cost of Living allowances to public sector workers;
d) Enactment of a total liberalization of imports;
e) Elimination of price controls.

2.

Extended Fund Facility: This provides support where assurance is given to

member countries that loans would be given up to a predetermined limit for
over the medium term of about three to four years. These loans would deal
with structural economic problems responsible for the weak external position.

Poverty Reduction and Growth Facility: This is a low interest lending facility
aimed at helping the poorest member countries which face prolonged balance
of payments problems.

Supplemental Reserve Facility: This provides additional short term

financing to member countries experiencing exceptional balance of payments
problems as a result of capital outflow due to a financial pull out on the part of
foreign investors. The interest rates on such loans, however, are usually higher
than that on other IMF loans.

Emergency Assistance: This type of lending was introduced in 1962 to help

members cope with balance of payments problems arising from sudden and
unforeseeable natural disasters. In 1995, it was amended to include
assistance needed to restore disrupted institutional and administrative services
in member countries which have emerged from military conflicts.

Monitoring macroeconomic and financial developments and policies, in

member countries and at the global level. The IMF gives macroeconomic policy
and financial sector advice to its members based on over fifty years of experience.
In determining sound economic policies, the IMF looks mainly at the
macroeconomic performance of an economy as a whole. This includes analysis of:
aggregate spending (and its major components like consumer spending and
business investment), output, employment, inflation, and the countrys balance of
payments.
Focus is also given to a countrys macroeconomic policies such as its fiscal
directive as outlined in the national budget, the management of interest rates, its
exchange rate policy and its financial sector policies, including the regulation and
supervision of commercial banks and other financial institutions.

THE WORLD TRADE ORGANIZATION (WTO)

The World Trade Organization (WTO) is the sole international organization governing the
global rules of trade between nations. The WTO came into being on 1 January 1995 as
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the successor organization to the General Agreement on Terms and Tariff (GATT)
negotiations which had governed international trade up to that time.
Essentially, GATT which was established in 1948 was an international agreement among
the major economic nations aimed at stabilizing world trade. Trade negotiations which
were carried out among Governmental representatives from member countries were done
through meetings from time to time which were called rounds of discussions. In
September 1986, the final round of discussion had begun which ended in April 1994
with the transformation of the GATT into the World Trade Organization (WTO). This final
round is known as The Uruguay Round as it was launched in Punta del Este in Uruguay.
The WTOs main function is to ensure that trade flows as smoothly, predictably and freely
as possible. The World Trade Organization helps to promote free trade by persuading
countries to abolish import tariffs and other trade barriers that restrict free trade. It is
responsible for:
Administration of trade agreements;
Acting as a forum for trade negotiations;
Settling trade disputes;
Reviewing national trade policies;
Assisting developing countries with trade policy issues;
Cooperating with other international organizations.
The WTO has nearly 150 members which includes the great majority of countries across
the world. These countries account for over 97 percent of world trade. Membership
involves signing up to a package of free trade agreements covering everything from farm
goods and textiles to banking and intellectual property. WTO members operate via a
multilateral trading system which enforces a non-discriminatory trading structure that
spells out their rights and obligations as set out by WTO agreements. These agreements
are the legal ground rules negotiated and signed by Governments which bind them to
keep their international trade policies within these agreed limits. Particularly, each
country receives the guarantee that its exports will be treated fairly and consistently in
other countries markets, while at the same time it promises to do the same for imported
goods and services.
Free trade can be beneficial to some countries but at the same time some countries may
stand to lose. The losers are more likely to be the developing countries which have
relatively low international competitiveness and thus trade liberalization exposes these
countries to fierce foreign competition which may have negative impacts on their balance
of payments.
Virtually all decisions in the WTO are taken by consensus among all member countries
and they are ratified by members parliaments. Any trade dispute that arises is settled
by the WTOs dispute resolution process. This is an independent dispute settlement
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process which examines conformity to trade agreements and commitments on the part of
the parties involved. In this way, the possibility of disputes deteriorating into political or
military conflict is moderated.
In addition, the WTO also contributes to the improvement of the welfare of the people
within member countries. Consumers have the assurance that they can obtain secure
supplies and greater choice in terms of access to: finished products, components, raw
materials and services that they use. Producers and exporters also have the assurance
that foreign markets will remain accessible and open to them. The result is a more
prosperous, diplomatic and accountable economic world. The alternative to such a
multilateral trading system are bilateral commercial relations. Such a system would lack
a concrete independent dispute settlement process. Moreover, the disparity between
economic and political power means that small countries would be at the mercy of the
larger trading powers in such bilateral trading agreements.
Critics of the WTO claim that poorer countries do not have the type of manufacturing
infrastructure and economies of scale to enjoy the benefits of free trade. Furthermore,
they may also argue that many rich countries have managed to override WTO mandates
of removing trade impediments and continue to maintain protectionist policies. The end
result is increased inequality among nations where the poor seem to have become
relatively poorer as a result of free trade.