The System of Bretton woods 1.

Introduction
In times of globalisation the economic environment changes rapidly. Capital movements
become larger and at the same time less controllable. Therefore, the need for a stabilising system
becomes more and more apparent. In the past such a system has been established at the
conference of Bretton Woods. Already in 1944 the British economist John Maynard Keynes
emphasised the importance of rule-based regimes to stabilise business expectationssomething
he accepted in the Bretton Woods system of fixed exchanged rates.1 Recently leading industrial
nations have been calling for a renewal of the purpose and the spirit of this system in order to
cope with the growing size of international trade and capital flows. This essay gives a short
overview of the systems development from 1944 until today and stresses especially problems
and obstacles. It identifies mistakes that have been made and points out aspects that have to be
taken into account when implementing a new system of Bretton Woods.
2. Development of the system
2.1. The international economic situation After World War I most countries wanted to return to
the old financial security and stable situation of pre-war times as soon as possible. Discussions
about a return to the gold standard began and by 1926 all leading economies had re-established
the system, according to which every nations circulating money had to be backed by reserves of
gold and foreign currencies to a certain extent. But several mistakes in implementing the gold
standard (mainly that a weakened Great Britain had to take the leading part and that a number of
main currencies where over- or undervalued) led to a collapse of the economic and financial
relations, peaking in the Great Depression in 1929. Every single country tried to increase the
competitiveness of its export products in order to reduce its payment balance deficit by deflating
its currency. This strategy only led to success as long as a country was deflating faster and more
strongly than all other nations. This fact resulted in an international deflation competition that
caused mass unemployment, bankruptcy of enterprises, the failing of credit institutions, as well
as hyper inflations in the countries concerned. In the 1930s several conferences dealing with the
world monetary problems caused by the Great Depression had ended in failure. But after World
War II the need for a stabilizing system that avoided the mistakes, which had been made earlier,
became evident. Plans were made for an innovative monetary system and a supervising
institution to monitor all actions. First negotiations took place under wartime conditions.
2.2. The conference of Bretton Woods
In 1944 an international conference took place in Bretton Woods, New Hampshire (USA). 44
countries attended this conference in order to restructure international finance and currency
relationships. The participants of this conference created the International Monetary Fund (IMF)
and the International Bank for Reconstruction and Development (IBRD/World Bank).

Additionally, they agreed on implementing a system of fixed exchange rates with the U.S. dollar
as the key currency.
The plans for the system of Bretton Woods were developed by two important economists of
these days, the American minister of state in the U.S. treasury, Harry Dexter White, and the
British economist John Maynard Keynes who stated: We, the delegates of this Conference, Mr
President, have been trying to accomplish something very difficult to accomplish.[...] It has been
our task to find a common measure, a common standard, a common rule acceptable to each and
not irksome to any. 2 This statement outlines the difficulty of creating a system that every
nation could accept. The ideas of John Maynard Keynes and Harry Dexter White have been
described as very different from each other on several occasions but in fact there are
extraordinary similarities. According to the White plan, a Bank for Reconstruction (today the
World Bank) and an International Stabilisation Fund should be established. The Keynes plan
called for the same. The only difference was that Keynes wanted to vest the IMF with
possibilities to create money (a fact that can easily be understood in the background of Great
Britains suffering from the deflation policies in the Inter-War period) and with the authority to
take actions on a much larger scale. In case of balance of payments imbalances John Maynard
Keynes recommended that both sides, debtors and creditors, should change their policies.
Countries with payment surpluses should increase their imports from the deficit countries and
thereby create a foreign trade equilibrium. Harry Dexter White, on the other hand, saw an
imbalance as a problem only of the deficit country. Economists today agree that White was
mistaken and Keynes was more farsighted.3 However, Keynes plan was never discussed
seriously at Bretton Woods and the participants agreed on the White plan. The United States
defined the value of its dollar in terms of gold, so that one ounce of gold was equal to $ 35. All
other members had to define the value of their money according to what was called the par
value system in terms of U.S. dollars or gold.
2.3. The dominant role of the USA
The USA has been and still is the dominating power of the Bretton Woods system. After World
War II the United States was the country with the biggest economic potential. The U.S. dollar
was the currency with the most purchasing power and it was the only currency that was backed
by gold. Additionally, all European nations that had been involved in World War II were highly
in debt and transferred large amounts of gold into the United States, a fact that contributed to the
supremacy of the USA. Thus, the U.S. dollar was strongly appreciated in the rest of the world
and therefore became the key currency of the Bretton Woods system. The headquarters of the
two main institutions (the IMF and the World Bank) are situated in Washington D.C. The
dominant role of the USA already became apparent when the American ideas of the Bretton
Woods system gained more acceptance than those of Great Britain. The plans of the British
economist John Maynard Keynes were rejected and the model of the American economist White
was favoured. Despite Keyness part in constructing the Bretton Woods system, [...] his vain

struggle, over five wartime missions to Washington, to preserve Britains financial independence
from the United States 4 the Bretton Woods system is dominated by the USA.
3. The International Monetary Fund
3.1. Purpose The IMF was officially established on December 27, 1945, when the 29
participating countries at the conference of Bretton Woods signed its Articles of Agreement. It
commenced its financial operations on March 1, 1947. The IMF is an international organisation,
which today consists of 183 member countries. The purposes of the IMF are to promote
international monetary cooperation by establishing a global monitoring agency that supervises,
consults, and collaborates on monetary problems. It facilitates world trade expansion and thereby
contributes to the promotion and maintenance of high levels of employment and real income.
Furthermore, the IMF ensures exchange rate stability to avoid competitive exchange
depreciation. It eliminates foreign exchange restrictions and assists in creating systems of
payment for multilateral trade. Moreover, member countries with disequilibriums in their
balance of payments are provided with the opportunity to correct their problems by making the
financial resources of the IMF available for them.
3.2. Operations
When joining the IMF, each country must contribute a certain sum of money, which is called a
quota subscription and is a sort of credit deposit. These quotas form the largest source of money
at the IMFs disposal and the IMF uses this money to grant loans to member countries with
financial difficulties. Each nation that has joined the system can immediately withdraw 25 per
cent of its quota in case of payment problems and it may request more if this sum is insufficient.
The debts have to be paid back as soon as possible. Additionally, the country must demonstrate
how the payment difficulties will be solved. The higher a countrys contribution is, the higher is
the sum of money it can borrow from the IMF. Furthermore, the quotas determine the voting
power of each member.
The money, which the IMF lends, should not be compared to a loan of a conventional credit
institution. For the country that files an application it is rather an opportunity to buy a foreign
currency and paying with gold or the national currency. Within three to five years the country has
to pay back its debts. According to the IMF in the course of a typical year circa 20 currencies are
borrowed and most potential borrowers want only the major convertible currencies: the U.S.
dollar, the Japanese yen, the deutsche mark, the pound sterling, and the French Franc.5
Therefore, although quotas are worth about $193 billion in theory, the sum at the IMFs disposal
is deceptively large.

3.3. Organization
The IMF has no control over national economic policies of its members. On the contrary, the
chain of command runs from the governments of the member countries to the IMF. The highest
authority is the Board of Governors, which consists of one Governor (usually the minister of
finance or the head of the central bank) of each member country. Additionally, there is an equal
number of Alternates (representative Governors). The Board of Governors gathers only on the
occasion of annual meetings.
The IMFs day-to-day work is managed by the Executive Board, which is formed of 24
Executive Directors who meet at least three times a week to supervise the implementation of the
IMFs policies. The member countries with the highest quotas send one Executive Director to the
Board, who has as many votes as the quota regulation assigns to his country. The remaining
Directors are elected by the rest of the countries and they only have as many votes as they had in
the election. This point illustrates the dominance of the USA in the System of Bretton Woods as
the United States, with the worlds largest economy, contributes most to the IMF, providing
about 18 percent of total quotas (about $35 billion).6 Thus the USA have most votes, by now
more than 265.000.
4. The World Bank
4.1. Goals The World Bank is the worlds most important source of financial aid for developing
nations. It provides nearly $16 billion in loans annually to its client countries. It uses its
financial resources, highly trained staff, and extensive knowledge base to help each developing
country onto a path of stable, sustainable, and equitable growth in the fight against poverty.7 Its
goals are to improve living standards and to eliminate the worst forms of poverty. It supports the
restructuring process of economies and provides capital for productive investments. Furthermore,
it encourages foreign direct investment by making guarantees or accepting partnerships with
investors. The World Bank aims to keep payments in developing countries balanced and fosters
international trade. It is active in more than 100 developing economies. It forms assistance
strategies by cooperating with government agencies, nongovernmental institutions and private
enterprises. It offers financial services, analytical, advisory, and capacity building.
4.3. Organisation
The World Bank is an independent organisation of the United Nations. Each country that wants
to join it, has to be a member of the IMF. The highest authority of the World Bank is the Council
of Governors, which consists of one representative of each country. The Executive Board
consists of five Directors to whom the Council of Governors transfers responsibility for nearly
all issues. The President of the World Bank is de facto elected by the U.S. government and then
confirmed by the Executive Board. He is involved in the current activities

5. Adjustments and reactions to the changing environment

5.1. Integration of developing countries
Only a few years after the establishment of the Bretton Woods System an economic
restructuring throughout the world necessitated a new orientation of the organizations. In the
1950s the decolonialization of many developing countries took place. In order to meet the
challenge of integrating those countries into the Western world and solving their social and
economic problems the IMF and the World Bank changed their plans and founded new
organizations. However, in this phase the developing countries were seen only as suppliers of
important resources, a fact that led to vehement protests of the developing nations and the
Eastern-Block states, since they did not perceive this role as promoting. For this reason two
affiliated organizations of the World Bank were created. In 1956 the International Finance
Cooperation (IFC) was established. Its purpose is to grant credits to private organizations that
lack capital for projects in the developing world. In 1961 the International Development
Association (IDA) was founded and its main function is to grant credits to especially poor
countries at very favorable conditions. For example the period of repayment can be up to 50
years and the interest rates are far below market standard. The establishment of both mentioned
organizations made the World Bank the centre of foreign aid of the United Nations today.
5.2. Special Drawing Rights
In the 1960s the world experienced a substantial economic expansion, especially the warring
nations of World War II grew unexpectedly fast. This led to a weakening of the position of the
USA and a devaluation of the U.S. dollar. It appeared that the reserves were inadequate to back
the trade expansion and slowed down economic development. The IMF reacted by issuing
Special Drawing Rights (SDRs), which member countries could add to their holdings of foreign
currencies and gold. SDRs were assigned with a value based on the average worth of the worlds
major currencies. These were the U.S. dollar, the French franc, the pound sterling, the Japanese
yen, and the German mark.
5.3. Crisis of the system
In the 1960s and 1970s enduring imbalances of payments between the Western industrialized
countries weakened the system of Bretton Woods. One substantial problem was that one national
currency (the U.S. dollar) had to be an international reserve currency at the same time. This made
the national monetary and fiscal policy of the United States free from external economic
pressures, while heavily influencing those external economies. To ensure international liquidity
the USA was forced to run deficits in their balance of payments, otherwise a world inflation

would have been caused. However, in the 1960s they ran a very inflationary policy and limited
the convertibility of the U.S. dollar because the reserves were insufficient to meet the demand for
their currency. The other member countries were not willing to accept the high inflation rates that
the par value system would have caused and the dollar ended up being weak and unwanted, just
as predicted by Greshams law: Bad money drives out good money.8 The system of Bretton
Woods collapsed.
Another fundamental problem was the delayed adjustment of the parities to changes in the
economic environment of the countries. It was always a great political risk for a government to
adjust the parity and each change in the par value of a major currency tended to become a crisis
for the whole system.9 This led to a lack of trust and destabilizing speculations.
In March 1973 the par value system was abandoned and the member countries agreed on
permitting different kinds of ways for determining the exchange value of a nations money. The
IMF required that the countries no longer based this value on gold and that it was common
knowledge how each nation determined its currencys value. Today many large developed
countries allow their currencies to float freely, which means that only supply and demand at the
market determine what it is worth. Some nations try to influence this process by buying and
selling their own currency. Another method is to peg the value of the money to one of the main
currencies. After this reform the system of Bretton Woods was more about information
exchange and consultation, conditional policy understandings, than about rule based
guarantees.10 In the years of floating exchange rates the level of cooperation varied with the
economic and political developments.
5.4. Recent activities
The field of activities of the Bretton Woods institutions was broadened by the deep-rooted
changes in the East-bloc economies and the collapse of the Soviet Union. In the past the
communist states had feared entrance into the IMF and the World Bank because of the economic
superiority of the United States but after the changes in their own economies they saw the chance
of solving their problems by joining those organizations. Thus, supporting the process of
economic restructuring is one of the main activities of the Bretton Woods institutions nowadays.
A massive campaign was started to establish free-enterprise systems and to shift from centrally
planned to market economies.
Furthermore, the IMF and the World Bank want to ensure that their mechanisms and operations
meet the requirements of the new world of integrated global markets. Especially the heavy
financial crises in Mexico and Asia during the 1990s exposed weaknesses in the international
financial system. The increasing size and importance of cross-border capital flows necessitated a
better surveillance of the member countries. In particular the assessment of potential risks in
member countries has been improved by collecting more timely and accurate data to ensure
transparency. A second major field is the development and assessment of internationally accepted

standards of good practices. To prevent future crises the IMF created the Contingent Credit Lines
in 1999, which motivate countries to adopt strong policies, be transparent, adhere to
internationally accepted standards, and have a sound financial system.
6. The future of the system of Bretton Woods
During the last five to ten years especially the system of Bretton Woods has been topic of many
public discussions with controversial opinions. Human rights activists argue that the
programmers for the structural adjustment of the developing countries initiated by the World
Bank and the IMF led to a third worldisation of the East-bloc states, which means that they
dramatically increased poverty in those countries. Large-scale agrarian and industrial projects
destabilized national economies, destroyed the environment and social patterns. It is pointed out
that the inner structure of the Bretton Woods institutions, where the right to say is proportional to
the amount of money that each country contributes, is symbolic of the capitalistic ideology,
which completely ignores the interests of the people living in developing countries. Thus, human
rights activists demand that the IMF and the World Bank stop interfering in national policies of
sovereign countries. The World Bank is well aware of the problems that can be caused by
projects in less developed areas. It reacted by providing the possibility to file requests to an
Inspection Panel. A person that files a request to the World Bank has to show that he/she lives in
the project area and will most likely be affected negatively by activities related to the project.
These negative effects must be caused by a failure from the World Bank to follow its policies and
procedures. Additionally, the request must have been discussed with the Bank management with
an unsatisfactory outcome contrast to these discussions the major industrialized nations have
begun to worry about the implications of the growing size and the speculative nature of financial
movements in times of globalization. Calls for a new system of Bretton Woods could be heard
in almost every industrialized country. In 1996, Michel Camdessus, the Managing Director of the
IMF, stated that even though the monetary system had changed since 1944 the goals of Bretton
Woods were as valid today as they had been in the past. He underlined that international
cooperation would be required to create a new Bretton Woods system, which in his point of view
means that countries must make a greater effort to understand the economic policies of other
countries and that they must listen to the judgment of others about their own national policies. It
also means that they must take a more enlightened view of their own national interests,
recognizing that it is in their own self-interest to take the interests of other countries into
account.

Chapter 2 WORLD BANK

Introduction
In 1944, as the 2nd World War neared its end, a conference was convened by the victorious
countries in Bretton Wood, in the United States. It was here that the World Bank and the
International Monetary fund were born- in the hope that they would provide the foundation of
a peaceful and prosperous future for the world.
69years later, these two multi-lateral institutions also known as Bretton Woods
Institutions (BWIs) occupy a dominant position in the global political economy, but they are the
target of powerful attack- both in the streets and in media. And in the course of these 69years,
they have been joined by a whole range of other multilateral institutions. These institutions also
play an important role in elimination of world poverty.

World Bank:
Formation: - 27 December, 1945.
Headquarter:-Washington D.C, United States.
President:- Mr. Jim Yong Kim
No. Of. Member Countries:- 188 member countries
Currencies mainly used:- $, Pound, Yen, Euro.
Languages used:- English, French, Spanish.
The World Bank group is a partner in opening markets and strengthening economies. Its
goal is to improve the quality of life and expand prosperity for people everywhere, especially the
worlds poorest.

The World Bank group of institutions is:1) The International Bank For Reconstruction and Development (IBRD) founded in
1944 in the single developing countries and a major catalyst of similar financing from
other sources.
2) The International Development Association (IDA) founded in 1960, assists the poorest
countries by providing interest free credits with 35 to 40 years maturities.

3) The International Finance Corporation supports private enterprise in the developing

countries by providing interest free credits with 35 to 45 years maturities.
4) The Multilateral Investment Guarantee Agency (MIGA) offers investors insurance
against non-commercial risk and helps developing country governments to attract foreign
investment.
5)

The International Centre for the Settlement of International Disputes (ICSID)

encourages the flow of foreign investment to developing countries through arbitration
and conciliation facilities.
Over the years, the World Bank has made two significant departures in its policy of
lending; it changes its policy of lending to government and public sector and
concentrated on private sector, and it changed its approach from a project based lending
to sector-based lending.
Functions and Objectives:

World Bank performs the following functions:

(i) Granting reconstruction loans to war devastated countries.
(ii) Granting developmental loans to underdeveloped countries.
(iii) Providing loans to governments for agriculture, irrigation, power, transport, water supply,
educations, health, etc.
(iv) Providing loans to private concerns for specified projects.
(v) Promoting foreign investment by guaranteeing loans provided by other organizations.
(vi)Providing technical, economic and monetary advice to member countries for specific projects
(vii) Encouraging industrial development of underdeveloped countries by promoting economic
reforms.
Resources:
The World Bank had initially authorized capital of $10 billion subscribed by the member
countries in accordance with their economic strength. The United States of America is the largest
subscriber. The Bank collects funds from members as well as by issue of international bonds
Conceived in 1944 to reconstruct war-torn Europe, the World Bank Group has evolved into one
of the worlds largest sources of development assistance, with a mission of fighting poverty with
passion by helping people help themselves.

New World, New World Bank Group

Much of the news from the developing world is good:
During the past 40 years, life expectancy has risen by 20 yearsabout as much as was
achieved in all of human history before the mid-20th century.
During the past 30 years, adult illiteracy has been nearly halved to 25 percent.
During the past 20 years, the absolute number of people living on less than $1.25 a day has
begun to fall for the first time, even as the worlds population has grown by 1.6 billion
people.
During the past decade, growth in the developing world has outpaced that in developed
countries, helping to provide the jobs and boost revenues that poor countries governments
need to provide essential services.
Moreover, in our fast-evolving, multipolar world economy, some developing countries have
become economic powers, and others are rapidly becoming additional poles of growth. These
countries have increasingly provided the demand that is driving the global economy. As
important importers of capital goods and services, developing countries have accounted for more
than half the increase in world import demand since 2000. Millions of people in transition and
developing countries are joining the world economy as their incomes and living standards rise.
The developing world, however, confronts new and difficult challenges.
A devastating global economic crisis has interrupted growth and slowed the rate of poverty
reduction, and recovery remains uncertain and uneven; pandemics have threatened the lives of
millions; food insecurity has undermined the well-being of many; armed struggle has destroyed
lives and dimmed the future in conflict-affected regions; and the need to mitigate the effects of
climate changeparticularly in developing countriesis more urgent than ever before.

Role of the World Bank Group

The World Bank Group, also referred to as the Bank Group, is one of the worlds largest sources
of funding and knowledge for developing countries. Its main focus is on working with the
poorest people and the poorest countries. Through its five institutions the Bank Group uses
financial resources and its extensive experience to partner with developing countries to reduce
poverty, increase economic growth, and improve the quality of life.
The Bank Group is managed by its member countries, whose representatives maintain offices at
the Bank Groups headquarters in Washington, D.C. Many developing countries use Bank
Group assistance ranging from loans and grants to technical assistance and policy advice. The
Bank Group works in partnership with a wide range of actors, including government agencies,
civil society organizations, other aid agencies, and the private sector.

The Millennium Development Goals

Along with other development institutions, in 2000 the Bank endorsed the Millennium
Development Goals (MDGs), which commit the international community to promoting human

development as the key to sustaining social and economic progress in all countries. These goals,
which call for eliminating poverty and achieving sustained development (box 2), are used to set
the Bank Groups priorities and provide targets and yardsticks for measuring results. They are the
Bank Groups road map for development.
With the deadline for the MDGs fast approaching, a new cloud of uncertainty shadows
developing countries efforts. The world experienced a historic financial and economic crisis,
which began in the richest economies of the world and threatened to slow progress in the
poorest. Lessons from past crises show that the harm to human development during bad times
cuts far deeper than the gains during upswings. Under these conditions, protecting the gains to
date and pressing ahead with actions for further progress to achieve the MDGs are especially
important.
The World Bank Group has stepped up to the challenge posed by the crisis. It has taken
numerous initiatives to limit the slide in global economic growth and avert the collapse of the
banking and private sectors in many countries. The Bank Group has also provided financing to
governments and to the private sector, thereby softening the impact of the crisis on the poor.
Efforts to strengthen social safety nets have also been scaled up.

World Bank Reforms

Although its fundamental mission of reducing poverty and improving lives has not changed, the
Bank is adjusting its approaches and policies in response to the needs of developing countries in
the new economic context. Rising to the challenges of development now requires institutions that
are not only close to the people in developing countries but also able to mobilize key actors
whether governments, the private sector, or civil societyto address global threats together. It
requires institutions that are innovative, adaptable, and able to seize new opportunities. To step
up to the challenge, the Bank Group is sharpening its focus on strategic priorities, reforming its
business model, and improving its governance. These reforms, which promote inclusiveness,
innovation, efficiency, effectiveness, and accountability, fall into five areas:
Reforming the lending model.
Increasing voice and participation.
Promoting accountability and good governance.
Increasing transparency, accountability, and access to information
Modernizing the organization

Governance of the World Bank Group

Each of the five institutions of the World Bank Group has its own Articles of Agreement or an
equivalent founding document. These documents legally define the institutions purpose,
organization, and operations, including the mechanisms by which it is owned and governed. By

signing these documents and meeting the requirements set forth in them, a country can become a
member of the Bank Group institutions.

Ownership by Member Countries

Each Bank Group institution is owned by its member countries which are its shareholders. The
number of member countries varies by institution, from 187 in the International Bank for
Reconstruction and Development (IBRD) to 146 in the International Centre for Settlement of
Investment Disputes (ICSID), as of April 2011. In practice, member countries govern the Bank
Group through its institutions Boards of Governors and the Boards of Directors. These bodies
make all major policy decisions for the organization.

Boards of Governors
The World Bank Group operates under the authority of its Boards of Governors. Each of the
member countries of the Bank Group institutions appoints a governor and an alternate governor,
who are usually government officials at the ministerial level or the head of the countrys central
bank. If a member of IBRD is also a member of the International Development Association
(IDA) or International Finance Corporation (IFC), the appointed governor and alternate governor
serve ex officio on the IDA and IFC Boards of Governors. Their term of office is five years, and
it may be renewed.
Multilateral Investment Guarantee Agency (MIGA) governors are appointed separately to its
Council of Governors. ICSID has an Administrative Council rather than a Board of Governors.
Unless a government makes a contrary designation, its appointed governor for IBRD sits ex
officio on ICSIDs Administrative Council.
The governors admit or suspend members, review financial statements and budgets, make formal
arrangements to cooperate with other international organizations, and exercise other powers that
they have not delegated. Once a year, the Boards of Governors of the Bank Group the
International Monetary Fund (IMF) meet in a joint session known as the Annual Meetings.
Because the governors meet only annually, they delegate many specific duties to the executive
directors.

Boards of Directors
General operations of IBRD are delegated to a smaller group of representatives, the Board of
Executive Directors. These same individuals serve ex officio on IDAs Board of Executive
Directors and on IFCs Board of Directors under the Articles of Agreement for those two
institutions. Members of MIGAs Board of Directors are elected separately, but it is customary
for the directors of MIGA to be the same individuals as the executive directors of IBRD.
The president of the Bank Group serves as the chair of all four boards, but he or she has no
voting power. IBRD has 25 executive directors. The five largest shareholdersthe

United States, Japan, Germany, France, and the United Kingdomeach appoint one executive
director. The other countries are grouped into constituencies, each of which elects an executive
director as its representative.
The members themselves decide how they will be grouped. Some countriesChina, the Russian
Federation, and Saudi Arabiaform single country constituencies. The executive directors are
based at Bank Group headquarters in Washington, D.C. They are responsible for making policy
decisions affecting the Bank Groups operations and for approving all lending proposals made by
the president. The executive directors function in continuous session and meet as often as Bank
Group business requires, although their regular meetings occur twice a week. Each executive
director also serves on one or more standing committees: the Audit Committee, the Budget
Committee, the Committee on Development Effectiveness, Human Resources, and the
Committee on Governance and Executive Directors Administrative Matters.
World Bank Group President and Managing Directors
The World Bank Group president is selected by the executive directors. The president serves a
term of five years, which may be renewed. There is no mandatory retirement age. In addition to
chairing the meetings of the Boards of Directors, the president is responsible for the overall
management of the Bank.
The executive vice presidents of IFC and MIGA report directly to the World Bank Group
president, and as mentioned previously, the president serves as chair of ICSIDs Administrative
Council. Within IBRD and IDA, most organizational units report to the president and, through
the president, to the executive directors. The two exceptions are the Independent Evaluation
Group and the Inspection Panel, which report directly to the executive directors. In addition, the
president delegates some of his or her oversight responsibility to three managing directors, each
of whom oversees several organizational units.

The Five World Bank Group Institutions

Although the institutions that make up the World Bank Group specialize in different aspects of
development, they work collaboratively toward the overarching goal of poverty reduction. The
terms World Bank and Bank refer only to IBRD and IDA, whereas the terms World Bank Group
and Bank Group include all five institutions.

The World Bank: IBRD and IDA

Through its loans, risk management, and other financial services; policy advice; and technical
assistance, the World Bank supports a broad range of programs aimed at reducing poverty and
improving living standards in the developing world. It divides its work between IBRD, which
works with middle-income and creditworthy poorer countries, and IDA, which focuses
exclusively on the worlds poorest countries. Developing countries use IBRDs and IDAs
financial resources, skilled staff members, and extensive knowledge base to achieve stable,
sustainable, and equitable growth. IBRD and IDA share staff and headquarters, report to the

same senior management, and use the same standards when evaluating projects. Some countries
borrow from both institutions. For all its clients, the Bank emphasizes
Investing in people, particularly through basic health and education
Focusing on social development, inclusion, governance, and institution building as key
elements of poverty reduction
Strengthening governments ability to deliver quality services efficiently and transparently
Protecting the environment
Supporting and encouraging private business development; and
Promoting reforms to create a stable macroeconomic environment conducive to investment
and long-term planning.

Bank programswhich give high priority to sustainable social and human development and to
strengthened economic managementplace an emphasis on inclusion, governance, and
institution building. In addition, within the international community, the Bank has helped build
consensus around the idea that developing countries must take the lead in creating their own
strategies for poverty reduction. It also plays a key role in collaborating with countries to
implement the Millennium Development Goals (MDGs), which the United Nations (UN) and the
broader international community seek to achieve by 2015. In conjunction with the International
Finance Corporation, the Bank is also working with its member countries to strengthen and
sustain the fundamental conditions for attracting and retaining private investment. With Bank
support, both lending and advice, governments are reforming their overall economies and
strengthening their financial systems. Investments in human resources, infrastructure, and
environmental protection also help enhance the attractiveness and productivity of private
investment.

The International Bank for Reconstruction and Development

IBRD is the original institution of the World Bank Group. When it was established in 1944, its
first task was to help Europe recover from World War II. Today, IBRD plays an important role in
improving living standards by providing its borrowing member countriesmiddle-income and
creditworthy poorer countrieswith loans, guarantees, risk management, and other financial
services, as well as analytical and advisory services. It provides these client countries with risk
management tools and access to capital on favorable terms in larger volumes, with longer
maturities, and in a more sustainable manner than the market in several important ways:
By supporting long-term human and social development needs that private creditors do not
finance
By preserving borrowers financial strength through support during crisis periods, which is
when poor people are most adversely affected
By using the leverage of financing to promote key policy and institutional reforms (such as
safety net or anticorruption reforms)

By creating a favorable investment climate to catalyze the provision of private capital

By providing financial support (in the form of grants made available from IBRDs net
income) in areas critical to the well-being of poor people in all countries.
IBRD is structured like a cooperative that is owned and operated for the benefit of its 187
member countries. Shareholders of IBRD are sovereign governments, and its borrowing
members, through their representatives on the Board of Executive Directors, have a voice in
setting its policies and approving each project and loan. IBRD finances its activities primarily by
issuing AAA-rated bonds to institutional and retail investors in global capital markets. IBRDs
financial objective is not to maximize profit, but to earn adequate income to ensure its financial
strength and to sustain its development activities. Although IBRD earns a small margin on this
lending, the greater proportion of its income comes from investing its own capital. This capital
consists of reserves built up over the years and money paid in from the Banks 187 member
country shareholders. IBRDs income also pays for World Bank operating expenses and has
contributed to IDA, debt relief, and other development causes.

The International Development Association

After the rebuilding of Europe following World War II, the Bank turned its attention to the newly
independent developing countries. It became clear that the poorest developing countries could
not afford to borrow capital for development on the terms offered by the Bank; hence, a group of
Bank member countries decided to found IDA as an institution that could lend to very poor
developing nations on easier terms. To imbue IDA with the discipline of a bank, these countries
agreed that IDA should be part of the World Bank. IDA began operating in 1960.
IDA partners with the worlds poorest countries to reduce poverty by providing credits and
grants. Credits are loans at zero or low interest with a 10-year grace period before repayment of
principal begins and with maturities of 20 to 40 years. These credits are often referred to as
concessional lending. IDA credits help build the human capital, policies, institutions, and
physical infrastructure that these countries urgently need to achieve faster, environmentally
sustainable growth. IDA-financed operations address primary education, basic health services,
clean water and sanitation, environmental safeguards, business climate improvements,
infrastructure, and institutional reforms. These projects pave the way toward economic growth,
job creation, higher incomes, and better living conditions.
IDA is funded largely by contributions from the governments of its high-income member
countries. Representatives of donor countries meet every three years to replenish IDA funds.
Since 1960, IDA has lent $222 billion. Annual lending figures have increased steadily and have
averaged about $14 billion over the past two years. Additional funds come from World Bank
Group transfers and from borrowers repayments of earlier IDA credits, including voluntary and
contractual acceleration of credit repayments from eligible IDA graduates.

Donor contributions to the 16th replenishment of IDA, known as IDA16, amounted to $49.3
billion, an 18 percent increase over the previous replenishment.
These resources will finance IDAs commitments over the three year period ending June 30,
2014. This strong outcome was the result of a global coalition of traditional and new donors,
borrowing countries, and the World Bank Group, involving the continuing support of traditional
donors, IDA graduates agreeing to accelerate their credit repayments to IDA, economically more
advanced. IDA countries contributing through differentiated borrowing terms, a number of new
donors joining, and several existing donors increasing their contributions.
Fifty-two donor countries pledged to contribute to IDA16, including traditional donors and
emerging donors. IDAs largest direct contributions continue to come from the Group of Seven
and other Organization for Economic Co-operation and Development (OECD) countries.
However, emerging donors play an increasingly important role, with IDA graduates such as
China, the Arab Republic of Egypt, the Republic of Korea, the Philippines, and Turkey now
joining as donors.
IDA lends to countries that lack the financial ability to borrow from IBRD and that in fiscal year
2011 had an annual per capita income of less than $1,165. Together these countries are home to
around 2.5 billion people, half the total population of the developing world. An estimated 1.5
billion people there survive on incomes of $2 or less a day. Blend borrower countries, such as
India, Uzbekistan, and Vietnam, are eligible for IDA loans because of their low per capita
incomes while also being eligible for IBRD loans because they are financially creditworthy.
Seventy-nine countries are currently eligible to borrow from IDA.
IDA eligibility is a transitional arrangement that gives the poorest countries access to substantial
resources before they are capable of obtaining the financing they need from commercial markets.
As their economies grow, countries graduate from IDA eligibility. The repayments, or reflows,
that they make on IDA loans are used to help finance new IDA loans to the remaining poor
countries. Some 35 countries have graduated from IDA since its founding. Examples include, in
addition to the countries listed previously, Albania, Botswana, Chile, Costa Rica, Morocco, and
Thailand. Eight countries subsequently reverse graduated, however, and once again became
IDA eligible.

The International Finance Corporation

IFCs three businessesinvestment services, advisory services, and asset managementfoster
sustainable economic growth in developing countries by financing private sector investment,
mobilizing capital in the international financial markets, providing advisory services to
businesses and governments, and channeling finance to the poor. IFC helps companies and
financial institutions in emerging markets create jobs, generate tax revenues, improve corporate
governance and environmental performance, and contribute to their local communities. The goal
is to improve lives, especially for the people who most need the benefits of growth.

Since its founding in 1956, IFC has committed more than $100 billion of its own funds for
private sector investment in the developing world, and it has mobilized additional billions from
others. With funding support from donors, it has provided more than $1.7 billion in advisory
services since 2001.
Direct lending to businesses is the fundamental contrast between IFC and the World Bank: under
their Articles of Agreement, IBRD and IDA can lend only to the governments of member
countries. IFC was founded specifically to address this limitation of World Bank lending. IFC
provides equity finance, long-term loans, syndicated loans, loan guarantees, structured finance
and risk management products, and advisory services to its clients. It seeks to reach businesses in
regions and countries that otherwise would have limited access to capital. It provides financing
in markets deemed too risky by commercial investors in the absence of IFC participation.
IFC also supports the projects it finances by providing advice to businesses and governments on
access to finance, corporate governance, environmental and social sustainability, the investment
climate, and infrastructure. Much of the advisory work is funded by IFCs donor partners,
through trust funds, or through facilities with a regional or thematic focus.
To maximize its effect on development, IFC emphasizes five strategic priorities: strengthening
the focus on frontier markets; building long-term client relationships in emerging markets;
addressing climate change and ensuring environmental and social sustainability; addressing
constraints to private sector growth in infrastructure, health, education, and the food supply
chain; and developing domestic financial markets.

Project financing
IFC offers an array of financial products and services to companies in its developing member
countries:
Loans for IFCs account
Equity investments
Syndications
Structured and securitized finance
Trade finance
Quasi-equity finance
Equity and debt funds
Intermediary services
Risk management products
Local currency finance
Subnational finance
It can also combine its financial products and services with advice tailored to the needs of each
client. The bulk of the funding, as well as leadership and management responsibility, however,
lies with the private sector owners. IFC charges market rates for its products and does not accept
government guarantees. Therefore, it carefully reviews the likelihood of success for each
enterprise. To be eligible for IFC financing, projects must be profitable for investors, must

benefit the economy of the host country, and must comply with IFCs environmental and social
standards.
IFC finances projects in all types of industries and sectors, including manufacturing,
infrastructure, tourism, health, education, and financial services. Financial services projects are
the largest component of IFCs portfolio, and they cover the full range of financial institutions,
including banks, leasing companies, stock markets, credit-rating agencies, and venture capital
funds. IFC does not lend directly to microenterprises, to small and medium size enterprises, or to
individual entrepreneurs; however, many of its investment clients are financial intermediaries
that on-lend to smaller businesses.
Even though IFC is primarily a financier of private sector projects, it may provide financing for a
company with some government ownership, provided there is private sector participation and the
venture is run on a commercial basis.
To ensure participation by investors and lenders from the private sector,
IFC limits the total amount of own-account debt and equity financing it will provide for any
single project. For new projects, the maximum amount is 25 percent of the total estimated project
costs or, on an exceptional basis, up to 35 percent for small projects. For expansion projects, IFC
may provide up to 50 percent of the total project costs, provided that its investments do not
exceed 25 percent of the total capitalization of the project company. IFC investments typically
range from $1 million to $100 million.

Resource mobilization
Through its syndicated loan (or B-loan) program, IFC offers commercial banks and other
financial institutions the chance to lend to IFC-financed projects that they might not otherwise
consider. These loans are a key part of IFCs efforts to mobilize additional private sector
financing in developing countries and to broaden its development effects. Through this
mechanism, financial institutions share fully in the commercial credit risk of projects, whereas
IFC remains the lender of record. Participants in IFCs B-loans share the advantages that IFC
derives as a multilateral development institution, including preferred creditor access to foreign
exchange in the event of a foreign currency crisis in a particular country. Where applicable, these
participant banks are also exempted from the mandatory country-risk provisioning requirements
that regulatory authorities may impose if these banks lend directly to projects in developing
countries.

Advisory services
IFC supports private sector development both by investing and by providing advisory services
that build businesses. Its advisory services are organized into five business lines: access to
finance, corporate advice, environmental and social sustainability, investment climate, and
infrastructure. Much of IFCs advisory services work is conducted through facilities managed by
IFC but funded through partnerships with donor governments and other multilateral institutions.
Some facilities operate within specific regions, and others are concerned with such cross-cutting

themes as carbon finance, cleaner technologies, social responsibility, sustainable investing,

investment climate, and gender.

Asset management
A new line of business for IFC is asset management, part of a financial intermediation model in
development that allows long-term investors to take advantage of growth opportunities in Africa
and other less developed regions. The objective is to increase the supply of long-term equity
capital to developing and frontier markets in a way that enhances IFCs development goals and
generates profits for investors.

The Multilateral Investment Guarantee Agency

By providing political risk insurance (PRI), or guarantees, to investors and lenders against losses
caused by noncommercial risks, MIGA promotes foreign direct investment (FDI) in emerging
economies and thereby contributes to economic growth, poverty reduction, and the improvement
of living standards.
Projects financed by MIGA create jobs; provide water, electricity, and other basic infrastructure;
strengthen financial systems; generate tax revenues; transfer skills and technological know-how;
and allow countries to tap natural resources in an environmentally sustainable way. MIGA helps
investors and lenders by insuring projects against losses related to currency inconvertibility and
transfer restriction, expropriation, war and civil disturbance, breach of contract, and failure to
honor sovereign financial obligations.
MIGA insures cross-border investments made by investors from a MIGA member country into a
developing country that is also a member of MIGA. Its operational strategy, which is designed to
attract investors and private insurers into difficult operating environments, focuses on four
priorities where it can make the greatest difference:
Investments in IDA-eligible countries. These markets typically have the most need and stand
to benefit the most from foreign investment, but they are not well served by the private
insurance market.
Investments in conflict-affected countries. Although these countries tend to attract
considerable donor goodwill once conflict ends, aid flows eventually decline. With many
investors wary of potential risks, PRI is essential to bring in investment.
Investments in complex projects, mostly in infrastructure and the extractive industries. Given
that 1.6 billion people still do not have electricity and 2.3 billion depend on traditional
biomass fuels, investments in these sectors are critical for the worlds poorest nations.
Support for South-South investments. Investments between developing countries are
contributing an ever-increasing proportion of FDI flows. But private insurers or national
export credit agencies in these countries, if they exist at all, are often not sufficiently
developed and lack the ability and capacity to provide PRI.

Development effects and priorities

Since its creation in 1988, MIGA has provided more than $22 billion in guarantees (PRI) for
more than 600 projects in more than 100 developing countries. MIGA is committed to promoting
socially, economically, and environmentally sustainable projects that are, above all,
developmentally responsible. Projects that MIGA supports have widespread benefits, such as
generating jobs and taxes and transferring skills and know-how. In addition, local communities
often receive significant secondary benefits through improved infrastructure. Projects encourage
similar local investments and spur the growth of local businesses. MIGA ensures that projects are
aligned with World Bank Group Country Assistance Strategies and integrate the best
environmental, social, and governance practices.
MIGA helps countries define and implement strategies to promote investment through technical
assistance services managed by the Foreign Investment Advisory Services of the World Bank
Group. Through this vehicle, MIGAs technical assistance is facilitating new investments in some
of the most challenging business environments in the world. As part of its mandate to support
FDI in emerging markets, MIGA also shares knowledge on political risk and FDI through its
website and through the Political Risk Insurance Center, which is a free service providing indepth analysis on political risk environments and management issues affecting 160 countries.
The agency uses its legal services to protect the investments it supports and to remove possible
obstacles to future investment by working with governments and investors to resolve any
differences.

Added value
MIGA gives private investors the confidence they need to make sustainable investments in
developing countries. As part of the World Bank Group,
MIGA brings security and credibility to an investment, acting as a potent deterrent against
government actions that may adversely affect investments.
If disputes do arise, the agencys leverage with host governments frequently enables it to resolve
differences to the mutual satisfaction of all parties.
MIGA is a leader in assessing and managing political risks, developing new products and
services, and finding innovative ways to meet clients needs.
The agency can also enable complex transactions to go ahead by offering innovative coverage of
the nontraditional sub sovereign risks. MIGA complements the activities of other investment
insurers and works with partners through its coinsurance and reinsurance programs. By doing so,
it expands the capacity of the PRI industry and encourages private sector insurers to enter into
transactions they would not otherwise have undertaken. MIGAs guarantees can be used on a
stand-alone basis or in conjunction with other World Bank instruments, which offer an additional
set of benefits.

CHAPTER 3: IMF
2.1 ORGANIZATIONAL STRUCTURE
The IMF Articles provide for a three-tiered governance structure with a Board of Governors, an
Executive Board, and a Managing Director

A. LEADERSHIP
Board of Governors
The Board of Governors consists of one governor and one alternate governor for each member
country. Each member country appoints its two governors. The Board normally meets once a
year and is responsible for electing or appointing executive directors to the Executive Board.
While the Board of Governors is officially responsible for approving quota increases, special
drawing right allocations, the admittance of new members, compulsory withdrawal of members,
and amendments to the Articles of Agreement and By-Laws, in practice it has delegated most of
its powers to the IMF's Executive Board.

The Board of Governors is advised by the International Monetary and Financial Committee and
the Development Committee. The International Monetary and Financial Committee has 24
members and monitors developments in global liquidity and the transfer of resources to
developing countries. The Development Committee has 25 members and advises on critical
development issues and on financial resources required to promote economic development in
developing countries. They also advise on trade and global environmental issues.
Executive Board
24 Executive Directors make up Executive Board. The Executive Directors represent all 188
member-countries. Countries with large economies have their own Executive Director, but most
countries are grouped in constituencies representing four or more countries.
Following the 2008 Amendment on Voice and Participation, eight countries each appoint an
Executive Director: the United States, Japan, Germany, France, the United Kingdom, China, the
Russian Federation, and Saudi Arabia. The remaining 16 Directors represent constituencies
consisting of 4 to 22 countries. The Executive Director representing the largest constituency of
22 countries accounts for 1.55% of the vote.
Managing Director
The IMF is led by a managing director, who is head of the staff and serves as Chairman of the
Executive Board. The managing director is assisted by a First Deputy managing director and
three other Deputy Managing Directors. Historically the IMF's managing director has been
European and the president of the World Bank has been from the United States. However, this
standard is increasingly being questioned and competition for these two posts may soon open up
to include other qualified candidates from any part of the world.
In 2011 the world's largest developing countries, the BRIC nations, issued a statement declaring
that the tradition of appointing a European as managing director undermined the legitimacy of
the IMF and called for the appointment to be merit-based. The head of the IMF's European
department is Antnio Borges of Portugal, former deputy governor of the Bank of Portugal. He
was elected in October 2010.
Dates
6 May 1946 5 May 1951
3 August 1951 3 October 1956
21 November 1956 5 May 1963
1 September 1963 31 August 1973
1 September 1973 18 June 1978
18 June 1978 15 January 1987

Name
Camille Gutt
Ivar Rooth
Per Jacobsson
Pierre-Paul Schweitzer
Johan Witteveen
Jacques de Larosire

Nationality
Belgian
Swedish
Swedish
French
Dutch
French

16 January 1987 14 February 2000

1 May 2000 4 March 2004
7 June 2004 31 October 2007
1 November 2007 18 May 2011
5 July 2011

Michel Camdessus
Horst Khler
Rodrigo Rato
Dominique Strauss-Kahn
Christine Lagarde

French
German
Spanish
French
French

On 28 June 2011, Christine Lagarde was named managing director of the IMF, replacing
Dominique Strauss-Kahn. Previous managing director Dominique Strauss-Kahn was arrested in
connection with charges of sexually assaulting a New York room attendant. Strauss-Kahn
subsequently resigned his position on 18 May. On 28 June 2011 Christine Lagarde was
confirmed as managing director of the IMF for a five-year term starting on 5 July 2011.
Ministerial Committees
The IMF Board of Governors is advised by two ministerial committees, the International
Monetary and Financial Committee (IMFC) and the Development Committee.
The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors that of the
Executive Board and its 24 constituencies. As such, the IMFC represents all the member countries of the
Fund.

The IMFC meets twice a year, during the Spring and Annual Meetings. The Committee discusses
matters of common concern affecting the global economy and also advises the IMF on the
direction its work. At the end of the Meetings, the Committee issues a joint communiqu
summarizing its views. These communiqus provide guidance for the IMF's work program
during the six months leading up to the next Spring or Annual Meetings. There is no formal
voting at the IMFC, which operates by consensus.
The Development Committee is a joint committee, tasked with advising the Boards of Governors
of the IMF and the World Bank on issues related to economic development in emerging and
developing countries. The committee has 24 members (usually ministers of finance or
development). It represents the full membership of the IMF and the World Bank and mainly
serves as a forum for building intergovernmental consensus on critical development issues.

Governance Reform
To be effective, the IMF must be seen as representing the interests of all its 188 member
countries. For this reason, it is crucial that its governance structure reflect todays world
economy. In 2010, the IMF agreed wide-ranging governance reforms to reflect the increasing

importance of emerging market countries. The reforms also ensure that smaller developing
countries will retain their influence in the IMF.

B. MEMBER COUNTRIES
The 188 members of the IMF include 187 members of the UN and the Republic of Kosovo. All
members of the IMF are also International Bank for Reconstruction and Development (IBRD)
members and vice versa.
Former members are Cuba (which left in 1964) and the Republic of China, which was ejected
from the UN in 1980 after losing the support of then US President Jimmy Carter and was
replaced by the People's Republic of China. However, "Taiwan Province of China" is still listed
in the official IMF indices. Apart from Cuba, the other UN states that do not belong to the IMF
are Andorra, Liechtenstein, Monaco, Nauru and North Korea.
The former Czechoslovakia was expelled in 1954 for "failing to provide required data" and was
readmitted in 1990, after the Velvet Revolution. Poland withdrew in 1950allegedly pressured
by the Soviet Unionbut returned in 1986.
Qualifications
Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar period,
rules for IMF membership were left relatively loose. Members needed to make periodic
membership payments towards their quota, to refrain from currency restrictions unless granted
IMF permission, to abide by the Code of Conduct in the IMF Articles of Agreement, and to
provide national economic information. However, stricter rules were imposed on governments
that applied to the IMF for funding.
The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates
secured at rates that could be adjusted only to correct a "fundamental disequilibrium" in the
balance of payments, and only with the IMF's agreement. Some members have a very difficult
relationship with the IMF and even when they are still members they do not allow themselves to
be monitored. Argentina for example refuses to participate in an Article IV Consultation with the
IMF.
Benefits
Member countries of the IMF have access to information on the economic policies of all member
countries, the opportunity to influence other members economic policies, technical assistance in

banking, fiscal affairs, and exchange matters, financial support in times of payment difficulties,
and increased opportunities for trade and investment.

2.2 FUNCTIONS OF THE IMF

In practice, the IMFs mandate of promoting international monetary stability translates into three
main functions: (1) surveillance of financial and monetary conditions in its member countries
and
in the world economy; (2) financial assistance to help countries overcome major balanceofpayments
problems; and (3) technical assistance and advisory services to member countries.

A. SURVEILLANCE
When a country joins the IMF, it agrees to subject its economic and financial policies to the
scrutiny of the international community. It also makes a commitment to pursue policies that are
conducive to orderly economic growth and reasonable price stability, to avoid manipulating
exchange rates for unfair competitive advantage, and to provide the IMF with data about its
economy. The IMF's regular monitoring of economies and associated provision of policy advice
is intended to identify weaknesses that are causing or could lead to financial or economic
instability. This process is known as surveillance.
Country surveillance
Country surveillance is an ongoing process that culminates in regular (usually annual)
comprehensive consultations with individual member countries, with discussions in between as
needed. The consultations are known as "Article IV consultations" because they are required by
Article IV of the IMF's Articles of Agreement. During an Article IV consultation, an IMF team of
economists visits a country to assess economic and financial developments and discuss the
country's economic and financial policies with government and central bank officials. IMF staff
missions also often meet with parliamentarians and representatives of business, labor unions, and
civil society.
The team reports its findings to IMF management and then presents them for discussion to the
Executive Board, which represents all of the IMF's member countries. A summary of the Board's
views is subsequently transmitted to the country's government. In this way, the views of the
global community and the lessons of international experience are brought to bear on national
policies. Summaries of most discussions are released in Press Releases and are posted on the
IMF's web site, as are most of the country reports prepared by the staff.
Regional surveillance

Regional surveillance involves examination by the IMF of policies pursued under currency
unionsincluding the euro area, the West African Economic and Monetary Union, the Central
African Economic and Monetary Community, and the Eastern Caribbean Currency Union.
Regional economic outlook reports are also prepared to discuss economic developments and key
policy issues in Asia Pacific, Europe, Middle East and Central Asia, Sub-Saharan Africa, and the
Western Hemisphere.
Global surveillance
Global surveillance entails reviews by the IMF's Executive Board of global economic trends and
developments. The main reviews are based on the World Economic Outlook reports, the Global
Financial Stability Report, which covers developments, prospects, and policy issues in
international financial markets, and the Fiscal Monitor, which analyzes the latest developments
in public finance. All three reports are published twice a year, with updates being provided on a
quarterly basis. In addition, the Executive Board holds more frequent informal discussions on
world economic and market developments.

B. FINANCIAL ASSISTANCE
Notwithstanding its macroeconomic surveillance, the IMF is perceived as an institution that
primarily provides temporary financing to troubled economies. The IMFs financial structure can
best be characterized as that of a credit union (see box). IMF member countries deposit hard
currency and some of their own currency, from which they can draw the currencies of other
countries if they face significant problems in managing their balance of payments. As noted
above, supplemental resources are available from the NAB or GAB if quota resources are
insufficient.
In the past, there have been debates about whether the austerity conditions that are often the core
of IMF conditionality are productive in increasing economic growth. In 2000, one heavily cited
paper found that participating in IMF programs lowers growth rates during the program, as
would
be expected. In addition, however, the study found that once countries leave the program, they
grow faster than if they had remained, but not faster than they would have without participating
in
the IMF program in the first place.20
After heavy criticism of the conditions attached to IMF loans to East Asia in the late 1990s, the
IMF revamped its conditionality guidelines in 2002. Additional reforms, including new IMF
lending instruments based on economic prequalification (ex-ante conditionality) rather than
traditional structural adjustment (ex-post conditionality) also address these concerns.21

C. IMF LOAN PROGRAMS

The changing nature of lending

Lending to preserve financial stability

Conditions for lending

Main lending facilities

Helping low-income countries

Debt relief

A country in severe financial trouble, unable to pay its international bills, poses potential
problems for the stability of the international financial system, which the IMF was created to
protect. Any member country, whether rich, middle-income, or poor, can turn to the IMF for
financing if it has a balance of payments needthat is, if it cannot find sufficient financing on
affordable terms in the capital markets to make its international payments and maintain a safe
level of reserves.
IMF loans are meant to help member countries tackle balance of payments problems, stabilize
their economies, and restore sustainable economic growth. This crisis resolution role is at the
core of IMF lending. At the same time, the global financial crisis has highlighted the need for
effective global financial safety nets to help countries cope with adverse shocks. A key objective
of recent lending reforms has therefore been to complement the traditional crisis resolution role
of the IMF with more effective tools for crisis prevention.
The IMF is not a development bank and, unlike the World Bank and other development agencies,
it does not finance projects.
The changing nature of lending
About four out of five member countries have used IMF credit at least once. But the amount of
loans outstanding and the number of borrowers have fluctuated significantly over time.
In the first two decades of the IMF's existence, more than half of its lending went to industrial
countries. But since the late 1970s, these countries have been able to meet their financing needs
in the capital markets.

The oil shock of the 1970s and the debt crisis of the 1980s led many lower- and lower-middleincome countries to borrow from the IMF.
In the 1990s, the transition process in central and eastern Europe and the crises in emerging
market economies led to a further increase in the demand for IMF resources.
In 2004, benign economic conditions worldwide meant that many countries began to repay their
loans to the IMF. As a consequence, the demand for the Funds resources dropped off sharply .
But in 2008, the IMF began making loans to countries hit by the global financial crisis The IMF
currently has programs with more than 50 countries around the world and has committed more
than $325 billion in resources to its member countries since the start of the global financial crisis.
While the financial crisis has sparked renewed demand for IMF financing, the decline in lending
that preceded the financial crisis also reflected a need to adapt the IMF's lending instruments to
the changing needs of member countries. In response, the IMF conducted a wide-ranging review
of its lending facilities and terms on which it provides loans.
In March 2009, the Fund announced a major overhaul of its lending framework, including
modernizing conditionality, introducing a new flexible credit line, enhancing the flexibility of the
Funds regular stand-by lending arrangement, doubling access limits on loans, adapting its cost
structures for high-access and precautionary lending, and streamlining instruments that were
seldom used. It has also speeded up lending procedures and redesigned its Exogenous Shocks
Facility to make it easier to access for low-income countries. More reforms have since been
undertaken, most recently in November 2011.
Lending to preserve financial stability
Article I of the IMF's Articles of Agreement states that the purpose of lending by the IMF is "...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 practice, the purpose of the IMF's lending has changed dramatically since the organization
was created. Over time, the IMF's financial assistance has evolved from helping countries deal
with short-term trade fluctuations to supporting adjustment and addressing a wide range of
balance of payments problems resulting from terms of trade shocks, natural disasters, postconflict situations, broad economic transition, poverty reduction and economic development,
sovereign debt restructuring, and confidence-driven banking and currency crises.
Today, IMF lending serves three main purposes.

First, it can smooth adjustment to various shocks, helping a member country avoid disruptive
economic adjustment or sovereign default, something that would be extremely costly, both for
the country itself and possibly for other countries through economic and financial ripple effects
(known as contagion).
Second, IMF programs can help unlock other financing, acting as a catalyst for other lenders.
This is because the program can serve as a signal that the country has adopted sound policies,
reinforcing policy credibility and increasing investors' confidence.
Third, IMF lending can help prevent crisis. The experience is clear: capital account crises
typically inflict substantial costs on countries themselves and on other countries through
contagion. The best way to deal with capital account problems is to nip them in the bud before
they develop into a full-blown crisis.
Conditions for lending
When a member country approaches the IMF for financing, it may be in or near a state of
economic crisis, with its currency under attack in foreign exchange markets and its international
reserves depleted, economic activity stagnant or falling, and a large number of firms and
households going bankrupt. In difficult economic times, the IMF helps countries to protect the
most vulnerable in a crisis.
The IMF aims to ensure that conditions linked to IMF loan disbursements are focused and
adequately tailored to the varying strengths of members' policies and fundamentals. To this end,
the IMF discusses with the country the economic policies that may be expected to address the
problems most effectively. The IMF and the government agree on a program of policies aimed at
achieving specific, quantified goals in support of the overall objectives of the authorities'
economic program. For example, the country may commit to fiscal or foreign exchange reserve
targets.
The IMF discusses with the country the economic policies that may be expected to address the
problems most effectively. The IMF and the government agree on a program of policies aimed at
achieving specific, quantified goals in support of the overall objectives of the authorities'
economic program. For example, the country may commit to fiscal or foreign exchange reserve
targets.
Loans are typically disbursed in a number of installments over the life of the program, with each
installment conditional on targets being met. Programs typically last up to 3 years, depending on
the nature of the country's problems, but can be followed by another program if needed. The
government outlines the details of its economic program in a "letter of intent" to the Managing
Director of the IMF. Such letters may be revised if circumstances change.

For countries in crisis, IMF loans usually provide only a small portion of the resources needed to
finance their balance of payments. But IMF loans also signal that a country's economic policies
are on the right track, which reassures investors and the official community, helping countries
find additional financing from other sources.
Main lending facilities
In an economic crisis, countries often need financing to help them overcome their balance of
payments problems. Since its creation in June 1952, the IMFs Stand-By Arrangement (SBA) has
been used time and again by member countries, it is the IMFs workhorse lending instrument for
emerging market countries. Rates are non-concessional, although they are almost always lower
than what countries would pay to raise financing from private markets. The SBA was upgraded
in 2009 to be more flexible and responsive to member countries needs. Borrowing limits were
doubled with more funds available up front, and conditions were streamlined and simplified. The
new framework also enables broader high-access borrowing on a precautionary basis.
The Flexible Credit Line (FCL) is for countries with very strong fundamentals, policies, and
track records of policy implementation. It represents a significant shift in how the IMF delivers
Fund financial assistance, particularly with recent enhancements, as it has no ongoing (ex post)
conditions and no caps on the size of the credit line. The FCL is a renewable credit line, which at
the countrys discretion could be for either 1-2 years, with a review of eligibility after the first
year. There is the flexibility to either treat the credit line as precautionary or draw on it at any
time after the FCL is approved. Once a country qualifies (according to pre-set criteria), it can tap
all resources available under the credit line at any time, as disbursements would not be phased
and conditioned on particular policies as with traditional IMF-supported programs. This is
justified by the very strong track records of countries that qualify to the FCL, which give
confidence that their economic policies will remain strong or that corrective measures will be
taken in the face of shocks.
The Precautionary and Liquidity Line (PLL) builds on the strengths and broadens the scope of
the Precautionary Credit Line (PCL). The PLL provides financing to meet actual or potential
balance of payments needs of countries with sound policies, and is intended to serve as insurance
and help resolve crises. It combines a qualification process (similar to that for the FCL) with
focused ex-post conditionality aimed at addressing vulnerabilities identified during qualification.
Its qualification requirements signal the strength of qualifying countries fundamentals and
policies, thus contributing to consolidation of market confidence in the countrys policy plans.
The PLL is designed to provide liquidity to countries with sound policies under broad
circumstances, including countries affected by regional or global economic and financial stress.
The Rapid Financing Instrument (RFI) provides rapid and low-access financial assistance to
member countries facing an urgent balance of payments need, without the need for a full-fledged

program. It can provide support to meet a broad range of urgent needs, including those arising
from commodity price shocks, natural disasters, post-conflict situations and emergencies
resulting from fragility.
The Extended Fund Facility is used to help countries address balance of payments difficulties
related partly to structural problems that may take longer to correct than macroeconomic
imbalances. A program supported by an extended arrangement usually includes measures to
improve the way markets and institutions function, such as tax and financial sector reforms,
privatization of public enterprises.
The Trade Integration Mechanism allows the IMF to provide loans under one of its facilities to a
developing country whose balance of payments is suffering because of multilateral trade
liberalization, either because its export earnings decline when it loses preferential access to
certain markets or because prices for food imports go up when agricultural subsidies are
eliminated.
Lending to low-income countries
To help low-income countries weather the severe impact of the global financial crisis, the IMF
has revamped its concessional lending facilities to make them more flexible and meet increasing
demand for financial assistance from countries in need. These changes became effective in
January 2010. Once additional loan and subsidy resources are mobilized, these changes will
boost available resources for low-income countries to $17 billion through 2014. To ensure
resources are available for lending to low-income countries beyond 2014, the IMF approved an
additional $2.7 billion in remaining windfall profits from gold sales as part of a strategy to make
lending to low-income countries sustainable.
Three types of loans were created under the new Poverty Reduction and Growth Trust (PRGT) as
part of this broader reform: the Extended Credit Facility, the Rapid Credit Facility and the
Standby Credit Facility.
The Extended Credit Facility (ECF) provides financial assistance to countries with protracted
balance of payments problems. The ECF succeeds the Poverty Reduction and Growth Facility
(PRGF) as the Funds main tool for providing medium-term support LICs, with higher levels of
access, more concessional financing terms, more flexible program design features, as well as
streamlined and more focused conditionality.
The Rapid Credit Facility (RCF) provides rapid financial assistance with limited conditionality to
low-income countries (LICs) facing an urgent balance of payments need. The RCF streamlines
the Funds emergency assistance, provides significantly higher levels of concessionality, can be

used flexibly in a wide range of circumstances, and places greater emphasis on the countrys
poverty reduction and growth objectives.
The Standby Credit Facility (SCF) provides financial assistance to low-income countries (LICs)
with short-term balance of payments needs. It provides support under a wide range of
circumstances, allows for high access, carries a low interest rate, can be used on a precautionary
basis, and places emphasis on countries poverty reduction and growth objectives.
Several low-income countries have made significant progress in recent years toward economic
stability and no longer require IMF financial assistance. But many of these countries still seek
the IMF's advice, and the monitoring and endorsement of their economic policies that comes
with it. To help these countries, the IMF has created a program for policy support and signaling,
called the Policy Support Instrument.
Debt relief
In addition to concessional loans, some low-income countries are also eligible for debts to be
written off under two key initiatives.
The Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996 and enhanced in
1999, whereby creditors provide debt relief, in a coordinated manner, with a view to restoring
debt sustainability; and
The Multilateral Debt Relief Initiative (MDRI), under which the IMF, the International
Development Association (IDA) of the World Bank, and the African Development Fund (AfDF)
canceled 100 percent of their debt claims on certain countries to help them advance toward the
Millennium Development Goals.

D. TECHNICAL ASSISTANCE

Beneficiaries of Technical Assistance

Types of Technical Assistance

Working Closely with Donors

The IMF shares its expertise with member countries by providing technical assistance and
training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax
policy and administration, and official statistics. The objective is to help improve the design and
implementation of members' economic policies, including by strengthening skills in institutions

such as finance ministries, central banks, and statistical agencies. The IMF has also given advice
to countries that have had to reestablish government institutions following severe civil unrest or
war.
In 2008, the IMF embarked on an ambitious reform effort to enhance the impact of its technical
assistance. The reforms emphasize better prioritization, enhanced performance measurement,
more transparent costing and stronger partnerships with donors.
Beneficiaries of technical assistance
Technical assistance is one of the IMF's core activities. It is concentrated in critical areas of
macroeconomic policy where the Fund has the greatest comparative advantage. Thanks to its
near-universal membership, the IMF's technical assistance program is informed by experience
and knowledge gained across diverse regions and countries at different levels of development.
About 80 percent of the IMF's technical assistance goes to low- and lower-middle-income
countries, in particular in sub-Saharan Africa and Asia. Post-conflict countries are major
beneficiaries. The IMF is also providing technical assistance aimed at strengthening the
architecture of the international financial system, building capacity to design and implement
poverty-reducing and growth programs, and helping heavily indebted poor countries (HIPC) in
debt reduction and management.
Types of technical assistance
The IMF's technical assistance takes different forms, according to needs, ranging from long-term
hands-on capacity building to short-notice policy support in a financial crisis. Technical
assistance is delivered in a variety of ways. IMF staff may visit member countries to advise
government and central bank officials on specific issues, or the IMF may provide resident
specialists on a short- or a long-term basis. Technical assistance is integrated with country reform
agendas as well as the IMF's surveillance and lending operations.
The IMF is providing an increasing part of its technical assistance through regional centers
located in Cte d'Ivoire, Gabon, Mauritius, and Tanzania for Africa; in Barbados and Guatemala
for Central America and the Caribbean; in Lebanon for the Middle East; and in Fiji for the
Pacific Islands. The IMF also offers training courses for government and central bank officials of
member countries at its headquarters in Washington, D.C., and at regional training centers in
Austria, Brazil, China, Singapore, Tunisia, and the United Arab Emirates.
Partnership with donors
Bilateral and multilateral donors are playing an increasingly important role in enabling the IMF
to meet country needs in this area, with their contributions now financing about two thirds of the

IMF's field delivery of technical assistance. Strong partnerships between recipient countries and
donors enable IMF technical assistance to be developed on the basis of a more inclusive dialogue
and within the context of a coherent development framework. The benefits of donor
contributions thus go beyond the financial aspect.
The IMF is currently seeking to leverage the comparative advantages of its technical assistance
to expand donor financing to meet the needs of recipient countries. As part of this effort, the
Fund is strengthening its partnerships with donors by engaging them on a broader, longer-term
and more strategic basis.
The idea is to pool donor resources in multi-donor trust funds that would supplement the IMF's
own resources for technical assistance while leveraging the Fund's expertise and experience.
Expansion of the multi-donor trust fund model is envisaged on a regional and topical basis,
offering donors different entry points according to their priorities. To this end, the IMF is
establishing a series of topical trust funds, covering such topics as anti-money
laundering/combating the financing of terrorism; fragile states; public financial management;
management of natural resource wealth, public debt sustainability and management, statistics
and data provision; and financial sector stability and development.

Difference between World Bank and IMF:

S.No.

World Bank

International Monetary Fund

1.

Seeks to promote economic development and

structural reforms in developing countries.

Oversee the international monetary systems and promotes

international monetary cooperation.

2.

Assists developing countries by providing longterm financing of development projects and

programmes.

Promote exchange stability and orderly exchange

relations among its members.

3.

Provides special finance assistance to the poorest

developing countries through the IDA.

Assists members in temporary BOP difficulties by

providing them with the opportunity to correct
maladjustments in their BOP.

4.

Stimulates private enterprise in developing

countries through its affiliate, the International
Finance Corporation.

Supplements the reserves of its members by allocating

SDBs if there is a long-term global need.

5.

Acquires most of its financial resources by

borrowing on the international bond market.

Draw its financial resources principally from the quota

subscriptions of its members.

Chapter 4:- Conclusion

The system of Bretton Woods of 1944 with its fixed exchange rates does not exist anymore
today. Its institutions and procedures had to adjust to market forces to survive but still its goals
are as valid today as they have been in the past. The benefits of the Bretton Woods system were a
significant expansion of international trade and investment as well as a notable macroeconomic
performance: the rate of inflation was lower on average for every industrialised country except
Japan than during the period of floating exchange rates that followed, the real per capita income
growth was higher than in any monetary regime since 1879 and the interest rates were low and
stable.14 It has to be noted that leading economists nowadays argue whether macroeconomic
performance stability was responsible for the successes of Bretton Woods, or the controverse.15
Weaknesses of the system were capital movement restrictions throughout the Bretton Woods
years (governments needed to limit capital flows in order to have a certain extent of control) as
well as the fact that parities were only adjusted after speculative and financial crises. Another
negative aspect was the pressure Bretton Woods put on the United States, which was not willing
to supply the amount of gold the rest of the world demanded, because the gold reserves declined
and eroded the confidence in the dollar.
What are the implications of the Bretton Woods experience for future international monetary
relations? The most important implication is that simply stabilizing exchange rates is not
sufficient to automatically deliver the benefits trumpeted by the proponents of such an initiative.
It is crucial that national economic policies (i.e. budget deficits) and economic outcomes (i.e.
inflation) converge to a certain extent before countries decide to fix exchange rates. However, a
short term divergence of policies is not detrimental for the functioning of such a system, it is
rather a credible commitment to fixed exchange rates that ensures its stability. It can be
concluded that ambitious international monetary reforms like the system of Bretton Woods can
only work if they are integrated into wider economic and political convergence. With this fact in
mind it is easy to understand how far the world with its various countries and living standards,
policies, and economies is from a new system of Bretton Woods, that can overcome its
previous weaknesses.

Chapter 5:- Bibliography books

Bordo, Michael D. & Eichengreen, Barry (1993). A Retrospective on the Bretton Woods System.
Chicago and London: The University of Chicago Press
Kenen, Peter B. (1994). Managing the world economy: fifty years after Bretton Woods.
Washington DC.: Institute for International Economics
Keynes, John Maynard (1971). The collected writings of John Maynard Keynes. London:
Macmillan
Moggridge, Donald (1980). Activities 1941 - 1946 : shaping the post-war world, Bretton Woods
and reparations. London: Macmillan