2e031IEP Session 5

Amity Business School

MBA 2013, 3rd Semester
INTERNATIONAL ECONOMICS AND POLICY
Amanpreet Kang
International Organizations
IMF, World Bank and the WTO

IMF - ? www.imf.org WB Group www.worldbank.org GATT
WTO www.wto.org
IMF and Development Organisations

IMF Economic policies and programmes of countries are influenced by policies and conditions of assistance of these organisations IMF schemes for countries with BOP crisis, technical assistance, source of public investment in developing countries

International Monetary Fund (IMF) IMF established in 1945, was result of Bretton Woods Conference held in 1944 Central institution of international monetary system (international payments and exchange rates) Helps nations to adopt good economic policies Members can get fund at the time of crisis i.e. BOP problems Membership of IMF prerequisite to become member of WB.
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International Monetary Fund (IMF) Closely related WB, WTO and Bank for International Settlements Objectives of IMF Expansion and balanced growth of international trade International monetary co-operation by providing institution for consultation and collaboration Correction of BOP
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Objectives of IMF Stability of exchange rates (avoiding competitive currency devaluations) Establishment of multilateral system of payments Temporary funds to members to correct maladjustments To shorten period and decrease the degree of diequilibrium in international BOP

International Monetary Fund (IMF) Monitors economic and financial development and policies Lends to members with BOP issues, reform policies Provides governments & central banks technical assistance & training

Functions: Forum for discussion of economic policy and issues important for stability of international monetary and financial system Countries choice of exchange rate arrangements, avoiding destabilizing international capital flows, designing internationally recognized standards and codes for policies and institutions Checks macroeconomic performance spending, output, employment, inflation and countrys BOP
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Functions: Macroeconomic policies govt. budget, management of money and credit and exchange rate Financial sector- regulation and supervision of banks Structural policies Policies to allow effective pursuit of goals such as employment, low inflation, sustainable economic growth, etc.
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Vision: Non-inflationary economic growth Centre of competence for stability of international financial system Focus on core macroeconomic and financial areas to safeguard public interest Learning from experience and adaptation
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Organisation and Management: Board of governors all member countries are represented Decides on major policy issues Executive board manages day to day decision making 24 Executive Directors and MD (3 times a week) Headquarters Washington DC Largest shareholders: US, Japan, Germany, France and UK
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Organisation and Management: International Monetary and Finance Committee (IFMC) meets 2 times a year to discuss international monetary system Development Committee formed by BOG of IMF and WB to discuss development policy and other matters related to developing countries Has weighted voting system larger a countrys quota in IMF (depending on its economic size), more the votes Decisions primarily by consensus than voting
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Resources: Quotas and Subscriptions member to subscribe to IMF, amount equivalent to quota, quota expressed in SDRs (Statutory Drawing Rights), reflects economic size of the member in relation to the total membership of IMF, quotas reviewed in 5 years Borrowings - financial resource is through quotas and subscriptions, General Arrangements to Borrow and New Arrangements to Borrow
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Financing facilities and policies: Provides loans to countries experiencing BOP crisis, does not lend for specific projects Process of lending provides loan under an arrangement which spells the conditions the country must meet to get the loan, arrangement approved by EB, loans released in phased installments Volume of loans fluctuates
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Concessional and Non-concessional Lending: number of loan instruments (facilities) to address specific circumstances of the members Poverty Reduction and Growth Facility (PRGF) concessional
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Non-concessional (rate of charge, market related interest rate) Stand-By Arrangements (SBA) Extended Fund Facility (EFF) Supplemental Reserve Facility (SRF) Contingent Credit Lines (CCL) Compensatory Financing Facility (CFF)
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Members: 187 Upon joining, each member is assigned a quota - based on its relative size in the world economy. The IMF's membership agreed in May 2008 on a rebalancing of its quota system to reflect the changing global economic realities, especially the increased weight of major emerging markets in the global economy.
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The quota suggests basic aspects of members financial and organizational relationship with the IMF
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Quota also determines the following: 1) Subscriptions Amount of financial commitment of the member to IMF. A member must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own currency.
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Quota also determines the following: 2) SDR allocations. Allocations of SDRs, the IMF's unit of account, is used as an international reserve asset. A member's share of general SDR allocations is established in proportion to its quota.
3) Voting power - The quota also determines a member's voting power in IMF decisions. Each IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of quota.
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Quota also determines the following: 4) Access to financing - The amount of financing a member can obtain from the IMF (its access limit) is based on its quota. Eg. - Under StandBy and Extended Arrangements, which are types of loans, a member can borrow up to 200 percent of its quota annually and 600 percent cumulatively. However, access may be higher in exceptional circumstances.
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IMF lending serves three main purposes. 1) 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).
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IMF lending serves three main purposes. 2) 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. 3) Third, IMF lending can help prevent crisis on countries themselves and on other countries through contagion.
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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.
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.
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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.
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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. For countries in crisis, IMF loans usually provides only a small portion of the resources needed to finance their balance of payments.
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The IMF has developed various loan instruments, or facilities, that are tailored to address the specific circumstances of its diverse membership. (a) Low-income countries may borrow on concessional terms through the Extended Credit Facility (ECF), Stand by Credit Facility (SCF) and Rapid Credit Facility (RCF)
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(b) Non-concessional loans the non-concessional facilities are subject to the IMFs market-related interest rate, known as the rate of charge, and large loans carry a surcharge. Stand-By Arrangements (SBA), Flexible Credit Line (FCL), and Extended Fund Facility (for longer-term needs) (c) Emergency Assistance - to support recovery from natural disasters and conflicts.
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The amount that a country can borrow from the Fund, known as its access limit, varies depending on the type of loan, but is typically a multiple of the countrys IMF quota. This limit may be exceeded in exceptional circumstances.
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For Low Income Countries: under Poverty Reduction and Growth Trust (PRGT) access limits and norms have been approximately doubled compared to pre-crisis levels. Financing terms have been made more concessional, and the interest rate is reviewed every two years. The Extended Credit Facility (ECF) succeeds the Poverty Reduction and Growth Facility (PRGF) as the Funds main tool for providing medium-term support to LICs with extended balance of payments problems. Financing under the ECF currently carries a zero interest rate, with a grace period of 5 years, and a final maturity of 10 years. The Standby Credit Facility (SCF) provides financial assistance to LICs with short-term balance of payments needs and can be used in a wide range of circumstances, including on a precautionary basis. Financing under the SCF currently carries a zero interest rate, with a grace period of 4 years, and a final maturity of 8 years. 31

The Rapid Credit Facility (RCF) provides rapid financial assistance with limited conditionality to LICs facing an urgent balance of payments need. The RCF streamlines the Funds emergency assistance for LICs, and can be used flexibly in a wide range of circumstances. Financing under the RCF currently carries a zero interest rate, has a grace period of 5 years, and a final maturity of 10 years.
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Middle Income Countries: Stand-By Arrangements (SBA). The bulk of Fund assistance to middleincome countries is provided through SBAs. The SBA is designed to help countries address short-term balance of payments problems. Program targets are designed to address these problems and Fund disbursements are made conditional on achieving these targets (conditionality). The length of a SBA is typically 1224 months, and repayment is due within 3-5 years of disbursement. SBAs may be provided on a precautionary basiswhere countries choose not to draw upon approved amounts but retain the option to do so if conditions deteriorateboth within the normal access limits and in cases of exceptional access. The SBA provides for flexibility with respect to phasing, with front-loaded access where appropriate.
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Middle Income Countries: Flexible Credit Line (FCL). The FCL is for countries with very strong fundamentals, policies, and track records of policy implementation and is particularly useful for crisis prevention purposes. FCL arrangements are approved for countries meeting pre-set qualification criteria. The length of the FCL is one or two year (with an interim review of continued qualification after one year) and the repayment period the same as for the SBA. Access is determined on a case-by-case basis, is not subject to the normal access limits, and is available in a single up-front disbursement rather than phased. Disbursements under the FCL are not conditioned on implementation of specific policy understandings as is the case under the SBA. There is flexibility to either draw on the credit line at the time it is approved or treat it as precautionary.
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Middle Income Countries: Precautionary Credit Line (PCL). The PCL is for countries with sound fundamentals and policies, and a track record of implementing such policies. While they may face moderate vulnerabilities that may not meet the FCL qualification standards, they do not require the same large-scale policy adjustments normally associated with traditional SBAs. The PCL combines qualification (similar to the FCL) with focused ex-post conditions that aim at addressing the identified vulnerabilities in the context of semiannual monitoring. It can have the length of between one and two years. Access can be front-loaded, with up to 500 percent of quota made available on approval and up to a total of 1000 percent of quota after 12 months subject to satisfactory progress in reducing vulnerabilities. While there may be no actual balance of payments need should at the time of approval, the PCL can be drawn upon should such a need arise unexpectedly. 35

Middle Income Countries: Extended Fund Facility (EFF). This facility was established in 1974 to help countries address longer-term balance of payments problems requiring fundamental economic reforms. Arrangements under the EFF are thus longer than SBAsusually 3 years. Repayment is due within 410 years from the date of disbursement.
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Emergency assistance. The IMF provides emergency assistance to countries that have experienced a natural disaster or are emerging from conflict. Emergency loans are subject to the basic rate of charge, although interest subsidies are available for some countries, subject to availability. Loans must be repaid within 35 years
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Conditionality explicit commitment. To ensure: Members achieve viable BoP over time Members repay the loan General commitments, quantified plans for financial policies Economic variables that should be effected include domestic credit, public sector deficit, international reserves, external debt Exchange rate, interest rate, wage rate, commodity prices
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Criticisms: Conditionalities endanger sovereignty Organs of capitalist imperialism Dominated by developed countries and do not pay adequate attention to the demands of the developing At the time these institutions were formed, most of the countries were colonies. Hence their interests not represented at Bretton Woods Concern was problems of main participants i.e. the developed countries
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Criticisms: Dominance of the developed countries because of the voting system, which gives clear control to developed countries. During the post war period focus on financing reconstruction of war-devastated Europe and Japan BoP crisis not just deficit, but surplus also should be corrected. US is reluctant to increase its contribution and also let others increase their share as it would lead to reduced voting power of US
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BoP deficit of the developing countries, limited access to credit due to poor creditworthiness, because of poor credit ratings they had to pay high rate of interest (i.e. about 4 times) Unconditional borrowing rights based on quota discriminate against the developing countries SDR allocation is also on the basis of economic size and quota Debt and debt servicing by developing countries IMF failed in its mission to provide funds to countries facing economic downturn.
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Premature capital market liberalization, leading to instability No control over rich countries WB has not been able to boost investment in developing countries Credit by WB is commercial, leading to debt servicing issues Size of funds of the bank depend on contribution by the rich nations
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Suggestions:
Decreasing the dominance of developed countries Reviewing SDR policy and allocation of SDRs Development is about inclusive growth, improving the lives of the poor and enabling everyone. Few countries should not dictate their terms
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World Bank
The World Bank is a vital source of: financial and technical assistance to developing countries around the world. WB is made up of two unique development institutions owned by 187 member countries: the International Bank for Reconstruction and Development (IBRD) - aims to reduce poverty in middle-income and creditworthy poorer countries the International Development Association (IDA) - focuses on the world's poorest countries.
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World Bank
Established in 1944, Headquarters in Washington, D.C. WB provides low-interest loans, interest-free credits grants to developing countries
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World Bank
For a wide array of purposes including
investments in education, health, public administration, infrastructure, financial and private sector development, agriculture and environmental and natural resource management.
Do not operate for profit
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World Bank
Fund Generation
IBRD sells AAA-rated bonds in the world's financial markets. Earns a small margin on this lending. The greater proportion of its income comes from lending out its own capital. This capital consists of reserves built up over the years and money from member country shareholders. IBRDs income also pays for World Bank operating expenses and has contributed to IDA and debt relief.
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World Bank
Fund Generation
IDA - world's largest source of interest-free loans and grant assistance to the poorest countries. Funds replenished every three years by 40 donor countries. Additional funds are regenerated through repayments of loan principal. IDA accounts for more than 40% World Bank lending.
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World Bank
New focus apart from reconstruction: Poverty reduction and the sustainable growth in poor countries, especially in Africa; Development and reconstruction challenges in postconflict countries and fragile states; development as well as finance for middle-income countries; regional and global issues that cross national borders-climate change, infectious diseases, and trade; development in the Arab world; pulling together the best global knowledge to support development.
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GATT
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GATT
International Trade Organisation (ITO) Formed in 1948 8 rounds Last one referred to as Uruguay Round No conclusion, Arthur Dunkel, Dunkel draft 1995 Formation of the WTO Negotiations on tariff reduction Represents trade in goods Tariffs reduced in successive rounds from 40% to 3 to 4% in certain cases
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GATT
Does not mention about trade in services, intellectual property and international settlements Dispute Settlement was also a concern Plurilateral Agreements Multilateral Agreements
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WTO
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World Trade Organisation

The World Trade Organization (WTO) is: international organization dealing with the global rules of trade between nations.
Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
Decisions in the WTO are usually taken by consensus among all member countries and they are implemented by members parliaments.
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Trade friction/ disputes are channeled into the WTOs dispute settlement process where the focus is on interpreting agreements and commitments, and to ensure that countries trade policies conform with them. The multilateral trading system refers to WTOs agreements, negotiated and signed by a large majority of the worlds trading nations, and implemented by their parliaments. These agreements are the legal ground-rules for international commerce.
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The agreements essentially are contracts, guaranteeing member countries important trade rights. They also bind governments to keep their trade policies within agreed limits to everybodys benefit. The agreements were negotiated and signed by governments. But their purpose is to help producers of goods and services, exporters, and importers conduct their business.
The goal is to improve the welfare of the people of the member countries
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WTO is the successor to GATT, which was established after the Second World War. The World Trade Organization came into being in 1995. MTS was set up under GATT around 1947/1948
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The system was developed through a series of trade negotiations, or rounds, held under GATT. The first rounds dealt mainly with tariff reductions but later negotiations included other areas such as anti-dumping and non-tariff measures. The last round the 1986-94 Uruguay Round led to the WTOs creation. The latest issue after the Doha round involves implementation of WTO rules by the developing countries.
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WTO Agreements
Objective To make trade as fair and as free as possible. How By negotiating rules and abiding by them. The WTOs rules the agreements are the result of negotiations between the members. The current set were the outcome of the 198694 Uruguay Round negotiations which included a major revision of the original General Agreement on Tariffs and Trade (GATT).
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WTO Agreements
Through these agreements: WTO members operate a non-discriminatory trading system that spells out their rights and their obligations. Each country receives guarantees that its exports will be treated fairly and consistently in other countries markets. Each promises to do the same for imports into its own market. The system also gives developing countries some flexibility in implementing their commitments.
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WTO Agreements
Goods: From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers; the text of the General Agreement spelt out important rules, particularly non-discrimination. It deals with specific sectors and with specific issues such as state trading, product standards, subsidies and actions taken against dumping.
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WTO Agreements
Services: The principles appear in the new General Agreement on Trade in Services (GATS). WTO members have also made individual commitments under GATS stating which of their services sectors they are willing to open to foreign competition, and how open those markets are.
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WTO Agreements
Intellectual Property: The rules state how copyrights, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuit layout-designs and undisclosed information such as trade secrets intellectual property should be protected when trade is involved.
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WTO Agreements
Dispute Settlement: Countries bring disputes to the WTO if they think their rights under the agreements are being infringed. Judgements by specially-appointed independent experts are based on interpretations of the agreements and individual countries commitments.
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WTO Agreements
Trade Policy Review: The Trade Policy Review Mechanisms purpose is to improve transparency, to create a greater understanding of the policies that countries are adopting, and to assess their impact.
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WTO - Organisation
Functions: Administering trade agreements Acting as a forum for trade negotiations Settling trade disputes Reviewing national trade policies Assisting developing countries in trade policy issues, through technical assistance and training programmes Cooperating with other international organizations
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WTO - Organisation
Structure: Number of members Number of Agreements Covers 97% of world trade
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WTO - Organisation
Structure: Ministerial Council General Council Trade Policy Review Body Dispute Settlement Body Goods Council Services Council IP Council Specialized committees, working groups, working parties
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WTO - Organisation
Secretariat: Geneva Director General The Secretariats main duties are: to supply technical support for the various councils and committees and the ministerial conferences, to provide technical assistance for developing countries, to analyze world trade, and to explain WTO affairs to the public and media. The Secretariat also provides some forms of legal assistance in the dispute settlement process and advises governments wishing to become members of the WTO.
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WTO Questions??? Write notes on: GATT Discussion Rounds prior to WTO Principles of trading system of WTO Trade without discrimination Freer trade Predictable trade Fair competition
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Case Questions 1. Discuss the role of international institutions like IMF, World Bank and WTO in promoting global economic integration. 2. IMF and World Bank serve the interests of industrialized nations rather than those of developing countries. Comment in the light of views presented in the case above. 3. Comment on unequal participation of countries in the world economic order. Have these international institutions promoted unequal development of economies?
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Thanks
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2e031IEP Session 5

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Amity Business School

Amity Business School

Amity Business School

Amity Business School

IMF, World Bank and the WTO

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

Amity Business School

IMF and Development Organisations

Amity Business School

IMF and Development Organisations

Amity Business School

IMF and Development Organisations

Amity Business School

IMF and Development Organisations

Amity Business School

IMF and Development Organisations

Amity Business School

IMF and Development Organisations

Amity Business School

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

IMF and Development Organisations

For a wide array of purposes including

Amity Business School

Amity Business School

World Trade Organisation

World Trade Organisation

World Trade Organisation

World Trade Organisation

World Trade Organisation

Structure: Number of members Number of Agreements Covers 97% of world trade

Amity Business School

Amity Business School