Brief Analysis on WTO, IMF & WB

Nilesh A. Mashru Roll no. 28, PGDBS01 BKC, Mumbai

WTO World Trade Organization

What is WTO?: Basically, the world trade organization is an international organization that governs & implements rules of trade between nations. Its primary goal is to help exporters/ sellers & importers/ buyers to conduct desired business and ensure that trade flow is smooth, predictable& freer. Facts: WTO was established on January 1, 1995 during the Uruguay Round Negotiations which lasted from 1986 to 1994 the last & largest GATT round of negotiations in its history. WTO is headquartered at Geneva, Switzerland and is currently headed by Pascal Lamy, Director-General. It currently has 153 member countries as of February 10, 2011. Mission: Mr. Pascal Lamy says: The WTO is the international organisation whose primary purpose is to open trade for the benefit of all. Functions: While WTOs main function is to liberalize international trade, it has varied other functions viz Administering WTO trade agreements, Forum for trade negotiations, Handling trade disputes, Monitoring national trade policies, Technical assistance and training for developing countries, & Cooperation with other international organizations . Modus Operandi: WTO was born out of negotiations & everything that WTO does is the result of negotiations. Its a negotiating forum for the member countries to talk about their trade issues & find effective resolutions through negotiations. WTO operates as a multilateral trading system wherein most (not all) trading nations are its members. It aims at Trade without discrimination, alike treatment to nationals & foreigners, Freer trade, predictability of trade through transparency & binding, promoting fair competition, encouraging development & economic reform.

WTO World Trade Organization

How did it come into existence?: The WTOs creation on 1 January 1995 marked the biggest reform of international trade since the Second World War. It also brought to reality in an updated form the failed attempt in 1948 to create an International Trade Organization. Evolution Path of WTO: Phase 1: Existence of GATT & a need for ITO: From 1948 to 1994, the General Agreement on Tariffs and Trade (GATT) provided the rules for much of world trade and presided over periods that saw some of the highest growth rates in international commerce. It seemed well-established, but throughout those 47 years, it was a provisional agreement and organization. The original intention was to create a third institution to handle the trade side of international economic cooperation, joining the two Bretton Woods institutions, the World Bank and the International Monetary Fund. The aim was to create the ITO at a UN Conference on Trade and Employment in Havana, Cuba in 1947. Although the ITO charter was agreed in the Havana Charter in March 1948, US congress happened to be the biggest opposition to the ratification of the Havana Charter & hence formation of an ITO was effectively dead as initially US was the major driving force in formation of an ITO. Hence GATT became the only multilateral instrument governing International Trade. Phase 2: Changing landscape of World Economy: GATTs success over 47 years from 1948 to 1994 in promoting & securing the liberalization of much of world trade is incontestable. Continual reductions in tariffs alone helped spur very high rates of world trade growth during the 1950s and 1960s around 8% a year on average. However with the time passing by, new problems rose. While GATT was successful in reducing the trade barriers to a very low level, the economic recession in the 1970s and early 1980s lead to huge changes in the world economy. Govts facing increase foreign competition due to low entry barriers started devising other forms of protection. High rates of unemployment and constant factory closures led governments in Western Europe and North America to seek bilateral market-sharing arrangements with competitors and to embark on a subsidies race to maintain their holds on agricultural trade. Both these changes undermined GATTs credibility and effectiveness. Phase 3: Reinforcement of a fresh Effort & creation of WTO: With changing times, the world trade had become more complex and important than it was 40 years before. World economy was moving towards globalization, trading in services was gaining importance and the international investment had expanded. Since GATT covered rules for trading of Goods only, it was clearly evident it was no longer relevant. Further the institutional structure of GATT & its dispute settlement system were causing concerns as well. These and other factors convinced GATT members that a new effort to reinforce and extend the multilateral system should be attempted. That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO.

WTO World Trade Organization

Performance so Far: WTO has evolved out of a need of having a better system governing trade rules and is has always been a negotiations based operation. The experience of world trade & economic growth since the second world war supports its very existence. Tariffs on industrial products have fallen steeply and now average less than 5% in industrial countries. During the first 25 years after the war, world economic growth averaged about 5% per year, a high rate that was partly the result of lower trade barriers. World trade grew even faster, averaging about 8% during the period. WTO has been effective in maintaining its core principles of treating all nations equally, promoting freer trade, lowering tariffs, anti-dumping policy, increase binding on its members leading to higher degree of market security, support fair competition, encourage development & economic reform. More recently, developed countries have started to allow duty-free and quota-free imports for almost all products from leastdeveloped countries. On all of this, the WTO and its members are still going through a learning process. The current Doha Development Agenda includes developing countries concerns about the difficulties they face in implementing the Uruguay Round agreements. Promotion of World Trade has not only benefited the nations involved but the global consumers as well who have more access to world class products at a relatively lesser cost. It has also help the world economy by creating new business avenues & helping employment. It has also helped Governments to stay shielded against lobbying. Lastly, improving trade across nations also helps to maintain World Peace which has its own significance. My Views: In view of the changing global market, WTO could focus more on below issues they face today: It works on the requirement of Consensus for taking decisions. This always does not support what may be required by a member country. Reconsider giving substantial powers to its director general. Divergence of interests between members contributing majority of World trade (close to 80%) & the other members. Provide more technical assistance to poor countries for better participation. Flexibility in negotiations to ensure active participation of developing countries. Focus on more localized needs of poor & developing countries than to be more broad-based liberalized.

IMF International Monetary Fund

What is the IMF?: The IMF is an organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Facts: Established on on December 27, 1945, IMF is headquartered at Washington D.C., USA. It has 187 member countries and is currently headed by its MD Christine Lagarde since July 2011. Mission: While the original aim of IMF at the time of foundation was economic cooperation in the world economy to avoid a repetition of the disastrous economic policies that had contributed the Great Distribution of 1930s and the subsequent global conflict, the primary mission of the IMF is to provide financial assistance to countries that experience serious financial and economic difficulties using funds deposited with the IMF from the institutions 187 member countries. Functions: Key activities of IMF are policy advice to governments & central banks, research & analysis of global economies & trends, loans to help countries overcome economic difficulties, concessional loans to developing countries to reduce poverty & technical assistance to help countries improve the management of their economies. Modus Operandi: IMF operates on a 3-tool system of Surveillance, Technical assistance & training and Lending. It studies, monitors & discusses the countries economic & financial policies through Surveillance, provides technical assistance & training to help member countries strengthen their capacity to design & implement effective policies and facilitates recovery to countries facing difficulties on their balance of payments by lending. IMF also indulges into extensive research & publishes critical statistics of world economies. This aims at implementing good practices & strengthening of financial sectors.

IMF International Monetary Fund

How did it come into Existence?: International monetary fund came into existence in December 1945. Its evolution was not a very thoughtful or planned over years like the establishment of WTO.

Evolution of IMF: The most prominent contributor to the evolution of IMF is a widely known phenomenon which the world economy faced in 1930s THE GREAT DEPRESSION. It was a severe worldwide economic recession in the decade preceding the World War II. It originated in the US in 1929 starting with the fall in stock prices that began around September 4, 1929 and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday). From there, it quickly spread to almost every country in the world. The Great Depression had devastating effects in virtually every country, rich and poor. Personal income, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. This lead to countries raising barriers to foreign trade, devaluing their currencies against each other to boost their exports & also curtailing their citizens to hold foreign currency. These measures however fall back on the countries leading to decline in the World trade from $3200 MI to $900 MI from 1929 to 1933. This breakdown in the trade & the non cooperation amongst the countries led the evolution of IMF. The plan was to form an institution that would oversee the international monetary system, ensure exchange rate stability & encourage members to eliminate exchange restrictions to promote World Trade.

IMF International Monetary Fund

Performance so far: IMF lended to industrial sectors in first 2 decades of its existence, to lower & lower middle income countries in 1980s during the oil shocks, to central & eastern Europe in 1990s and to countries hit by global financial crisis since 2008. It has been able to commit $325 Billion in resources to its member countries since the start of global financial crisis. IMF as brought in various reforms on lending policies to the countries over past years. In addition they have come with debt reliefs for the heavily indebted poor countries. With that, IMF has helped the cause of their own aim of lending & stabilising the global monetary system & thereby boosting the World Trade. My Views:
While on a macro scale IMF has achieved its goals from time to time and contributed largely to the world economy by its operations there are certain improvements that are required. While IMF continues to lend for short term monetary stabilization but has become a development lender to rival the World bank. IMF pressurizes countries applying for IMF loan to open their markets for Foreign Investment. Argentina, Brazil, Indonesia and Russia are among the countries that have followed the IMF's advice to open up to foreign investment in exchange for hundreds of billions of dollars in loans. As soon as there was even a whiff of economic trouble, foreign speculators pulled their capital out, plunging the countries into recession. IMF today operates with the ideology that markets should be left to operate on their own, and that no (or very little) direction or intervention is needed. This is against the very basic idea of intervention to global economies during crisis based on which IMF was formed. IMF policies forcing trade liberalization on a developing country where industries are not strong enough can actually cause more harm. Local industries may not be able to compete. Liberalization hence may or may not promise growth for the countries. Control of IMF is accomplished through a complicated set of voting arrangements based on economically strong countries. Also the US has effective Veto Power over IMF decisions. There is less democratic accountability and IMF is largely influences by the rich countries & is dominated by them. IMF uses funds by taxpayers however it is not held accountable to the interests of these taxpayers. IMFs leadership also is elected in closed doors and representative are often not from the nation it serves. IMF does not have seem to be contributing greatly to the exchange rate stability & stabilizing balance of payments of countries experiencing the deficit. IMF today would need to focus more on budget deficits, monetary policy, Inflation & reducing poverty in poor countries. It needs to align its goals to meet the requirements of developing countries.

WB The World Bank

What is the WB?: The World Bank is an international financial institution that provides loans to developing countries for capital programmes. Facts: Established in 1944 at the Bretton Woods conference and is headquartered at Washington D.C., USA. It is headed by its president Robert B. Zoellick since July 2007. It has 187 member countries, the same ones who are members of IMF. It comprises of 5 organizations vis IBRD, IDA, IIFC, MIGA & ICSID. Mission: Help reduce poverty. This is the simple mission of World bank. Functions: The WB is supposed to a vital source of financial & technical assistance to developing countries around the world. Its prime function is hence to reduce poverty & support development. Each of the organizations of the WB are committed to the respective basic functions: IBRD-Lends to Govt of Middle income & credit worthy low income countries. IDA-provides interest-free loans called credits and grants to governments of the poorest countries. IIFC-provides loans, equity and technical assistance to stimulate private sector investment in developing countries. MIGA-provides guarantees against losses caused by non-commercial risks to investors in developing countries. ICSIDprovides international facilities for conciliation and arbitration of investment disputes. Modus Operandi: The WB operates with its 187 members and its decisions are governed by the voting of the member countries. The countries with most voting power are now the United States (15.85%), Japan (6.84%), China (4.42%), Germany (4.00%), the United Kingdom (3.75%), France (3.75%), India (2.91%), Russia (2.77%), Saudi Arabia (2.77%) and Italy (2.64%). WB operates around the Six strategies themes which focus on the poorest countries, post-conflict & fragile states, Middle-income countries, Global public goods, The Arab World & Knowledge & Learning.

WB The World Bank

How did it Come into Existence & Performance so far:The World Bank is one of five institutions created at the Bretton Woods Conference in 1944. The International Monetary Fund, a related institution, is the second. Delegates from many countries attended the Bretton Woods Conference. The most powerful countries in attendance were the United States and United Kingdom, which dominated negotiations. It is hence concluded that formation of world bank also originated from the Great Depression as explained in the evolution of the IMF. Since its inception, World bank has expanded from a single institution to a closely linked group of 5 associations. It has helped world economy as a facilitator of post-war reconstruction & development. However although initially separate from IMF, it is now acting as a junior partner of the IMF. My Views: World Bank advocates the free market reform policies but if the same are implemented badly or quickly can often by harmful to economic development. It assumes that poor countries cannot develop without money or advice from abroad. . However in doing so, World bank ignores the concept of localization completely. Based out of the USA, the institution would not always have a deep insight into the roots of a poor or underdeveloped nation & its requirements. While World bank represents 186 countries, it is run by a smaller number of economically powerful countries. For instance the US has over 15% voting power in the world bank. Top 12 voting power countries command close to 50% voting power in the World Bank. Analysis shows that World bank had increased poverty and has been detrimental to growth. It has always imposed policies on developing countries. President of the bank is always a US citizen. High levels of corruption is well know to the world. Further the bank has also not been ethical enough to publish certain important findings. For instance the report which stated that biofuels has lead to increase in food prices by 75% was not published in 2008. I also have a personal viewpoint that World Bank has a limited control on projects it is funding. For instance, a critical road construction project in Mumbai city funded by the WB which connects eastern suburbs to the western, was delayed for almost 4 years due to political conflicts. World bank never supposedly intervened and issued any deadlines to the constructing authorities or the Govt. World bank indeed is driven by the western countries and lacks equal treatment to its member countries. World bank needs to focus on ethical operations, dilute power of decision making from developed to developing nations, put audit procedures in place & promote transparency in publishing data. World bank also needs to focus on issues like labour market, government expenditure & trade policies.