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Unit II – Module 3

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


and members’ interests are represented by a Board of Governors from various member countries. In addition. 2 . of the International Monetary Fund. clean water and sanitation. policy advice. road building. basic health services. STRUCTURE OF THE WORLD BANK The World Bank is owned by its 184 shareholder member countries. lengthy grace periods before repayment commences and extended payback periods.e. as well as human capital investments such as health and education programmes. Such loans usually target developmental projects that address basic needs such as: primary education. the IDA has lent $135 billion for development projects. Member’s shareholdings in the bank are dependent on the economic size of the member country. and technical assistance and training in both the private and public sectors. Membership in the World Bank can only be gained if a country is already a member. Since 1960. the IFC directly participates as an investor in various capital markets and facilitates the privatization of inefficient public sector enterprises.Unit II – Module 3 Development Association (IDA). The World Bank also assists transitional countries (i. It may do so by directly providing finances for private sector project in Least Developed Countries (LDCs) or it may assist private companies in LDCs to raise finance in international financial markets. which is the United States (US). improvements to water supply. to achieve sustainable development by macroeconomic reform and by financing infrastructural projects such as power stations. THE INTERNATIONAL FINANCE CORPORATION The International Finance Corporation (IFC) is the private sector division of the World Bank that promotes private sector investments. In the current context. The president of the Bank comes from the largest shareholder. The ultimate aim of the World Bank is to promote long term economic growth and development across developing countries. countries that are in the process of moving from developing country status to developed country status). This was established in 1944 to promote post World War II reconstruction in Europe. THE INTERNATIONAL DEVELOPMENT ASSOCIATION The International Development Association (IDA) is the arm of the World Bank that offers loans to LDCs on lenient lending conditions such as exceptionally low interest. It also offers standardized financial market information through its publications and also provides advisory services to investors and businesses. the Bank functions as an international organization that aims to eliminate poverty and to provide assistance to poor countries by offering loans.

The fundamental economic problems of the economy would continue and more funds would have to be borrowed from the World Bank to deal with the structural weaknesses of the country. Although World Bank developmental loans may be accompanied by such economic restructuring which may be painful in the short term. If policy makers in developing countries tackle the macroeconomic problems when it borrows from the World Bank. privatization of inefficient state enterprises. This often requires Government spending cutbacks. then improvements in the macroeconomy over the long term would facilitate debt repayments and may even eliminate the need to borrow. World Bank Conditionality World Bank developmental programmes are usually accompanied by conditionality known as structural adjustment programmes (SAPs). The IFC raises most of its funds from issuing bonds on various capital markets throughout the world. receive financing from different sources. These programmes encompass the promotion of macroeconomic stability as well as initiatives undertaken to endorse increased competitiveness and trade openness in the economy. then long term sustainable growth would be hampered. The burden of structural adjustment therefore falls disproportionately on the most vulnerable within the economy.Unit II – Module 3 The hierarchical structure is such that larger. Three of the main criticisms raises by such associates are: 1. CRITICISMS OF THE WORLD BANK While the World Bank strives to create a poverty free world and sustainable development among poorer countries. in many parts of the world poverty is still widespread and many critics have voiced concern against the conduct of this international institution. These measures sometimes result in increased unemployment and declining living standards among the middle and lower classes in society. more influential economies have relatively greater representation than the smaller economies. The IDA is funded largely by contributions from the Governments of wealthier or industrialized member countries. This is because if developing countries borrow and accumulate debt without addressing the underlying macroeconomic problems of the economy. advocates argue that long term economic prosperity is promoted. Each of the two subsidiaries of the World Bank (IFC and IDA). increases in taxation and policies aimed at lowering the external value of the country’s currency. 3 .

. This is because the World Bank typically administers the same structural adjustment policy solutions to all developing countries irrespective of the unique challenges the individual economies may face. the implementation of these policies may actually worsen the problems plaguing developing countries. especially to the world’s poorest countries. 3. In such a highly integrated world. Furthermore. This high degree of global inter-linkage means financial crises erupting in one country may spreads rapidly among several countries. This can result in policies that are not necessarily the best for the developing country in question. Opponents argue that grants. education. The IMF was conceived out of the general proposal amongst delegates from Governments throughout the world. In particular. policies are usually formulated by World Bank officials from developed countries who may not be thoroughly familiar with the root problems faced in developing countries. it is governed by its almost global membership of 184 countries. It proposed a framework for economic cooperation partly designed to avoid a repetition of the disastrous nationalistic economic policies that had contributed to the Great Depression of the late 1930s. These changes include the rapid advances in technology and communications which have fostered an increased degree of international integration of markets and national economies. Inappropriate One Size Fits All Policy Recommendations Another criticism of World Bank is that its policy recommendations aimed at promoting development in third world countries may not be appropriate. and other social programmes may have to be sacrificed. THE ORIGINS OF THE INTERNATIONAL MONETARY FUND (IMF) The International Monetary Fund was established by international treaty in 1945 to help promote the health of the world economy. as they do not take into account the individual challenges faced by specific countries. Debt Repayment World Bank loans to developing countries increases their indebtedness and debt burdens which may put a strain on the limited resources possessed by such countries. any country’s prosperity depends more than ever on both the economic performance of other countries and the existence of an open 4 . Major changes in the world economic environment since the establishment of the IMF have reiterated the role and the underlying purpose served by the IMF.Unit II – Module 3 2. as Government revenues are diverted towards debt repayment. spending on health. and the endorsement of stability in exchange rates. an effect which is known as the ‘contagion effect’.C. The statutory purpose enshrined in its Articles of Agreement was to oversee the international monetary system and to promote both the elimination of exchange restrictions relating to trade in goods and services. Headquartered in Washington. rather than loans to developing countries may be more effective in promoting sustainable development. D. In some cases.

Faced with an external crisis to meet foreign debt obligation. 5 . b) Decreasing the size of the public sector workforce by 15 percent. to help stabilize exchange rates and deal with a short term balance of payments problem. STABILIZATION POLICIES As the name suggests. Globalization thus calls for greater international cooperation. These reforms are commonly referred to as IMF conditionalities and are essentially similar to World Bank structural adjustments programmes. the Government of Trinidad and Tobago sought assistance from the IMF in November 1988 for a 14 month Standby Arrangement totalling US$547 million. the IMF funds member countries in need of temporary financing to address balance of payments problems. Its primary role is to promote international financial stability and prevent crises by assisting countries experiencing balance of payments difficulties. the Central Bank of Trinidad and Tobago announced the exhaustion of its international reserves which had previously stood at US$3. For example.3 billion in 1981. The different lending facilities offered by the IMF include:  Stand-By Arrangements – This forms the core of the IMF’s lending policies which provides assurance to a member country experiencing external crises that it can borrow over short term periods of 12 to 18 months. FUNCTIONS OF THE IMF The International Monetary Fund (IMF) is the central institution of the international monetary system which oversees international payments and exchange rates among national currencies. These measures are geared towards the removal of structural weaknesses in an economy so as to ensure long run balance of payments and exchange rate stability. Lending to such countries is not only for financing the deficit but also for the implementation of adjustment and reform policies aimed at addressing the fundamental problems of the economy. for example. In exchange for assistance. These policies are usually referred to as IMF stabilization policies which include the following: 1. Lending to member countries which face balance of payments crises. the Government pledged its commitment to undertake a host of stabilization policies which included: a) Reducing public spending from 7 percent to 4 percent of GDP. in July 1988. which in turn increases the responsibilities of international institutions such as the IMF. This usually encompasses economic reforms so as to maximize foreign earnings and minimize Government expenditure.Unit II – Module 3 and stable global economic environment.

The IMF gives macroeconomic policy and financial sector advice to its members based on over fifty years of experience.  Poverty Reduction and Growth Facility: This is a low interest lending facility aimed at helping the poorest member countries which face prolonged balance of payments problems. employment. it was amended to include assistance needed to restore disrupted institutional and administrative services in member countries which have emerged from military conflicts. inflation.  Supplemental Reserve Facility: This provides additional short term financing to member countries experiencing exceptional balance of payments problems as a result of capital outflow due to a financial pull out on the part of foreign investors. In determining sound economic policies.  Extended Fund Facility: This provides support where assurance is given to member countries that loans would be given up to a predetermined limit for over the medium term of about three to four years.  Emergency Assistance: This type of lending was introduced in 1962 to help members cope with balance of payments problems arising from sudden and unforeseeable natural disasters. Monitoring macroeconomic and financial developments and policies. The WTO came into being on 1 January 1995 as 6 . THE WORLD TRADE ORGANIZATION (WTO) The World Trade Organization (WTO) is the sole international organization governing the global rules of trade between nations. output. Focus is also given to a country’s macroeconomic policies such as its fiscal directive as outlined in the national budget. These loans would deal with structural economic problems responsible for the weak external position. The interest rates on such loans. This includes analysis of: aggregate spending (and its major components like consumer spending and business investment). 2. e) Elimination of price controls. In 1995. however. and the country’s balance of payments. d) Enactment of a total liberalization of imports. the IMF looks mainly at the macroeconomic performance of an economy as a whole. are usually higher than that on other IMF loans. including the regulation and supervision of commercial banks and other financial institutions.Unit II – Module 3 c) Suspension of the Cost of Living allowances to public sector workers. in member countries and at the global level. its exchange rate policy and its financial sector policies. the management of interest rates.

This is an independent dispute settlement 7 . GATT which was established in 1948 was an international agreement among the major economic nations aimed at stabilizing world trade. In September 1986.  Acting as a forum for trade negotiations. predictably and freely as possible. Essentially. Trade negotiations which were carried out among Governmental representatives from member countries were done through meetings from time to time which were called ‘rounds of discussions’.Unit II – Module 3 the successor organization to the General Agreement on Terms and Tariff (GATT) negotiations which had governed international trade up to that time. while at the same time it promises to do the same for imported goods and services. the final round of discussion had begun which ended in April 1994 with the transformation of the GATT into the World Trade Organization (WTO). WTO members operate via a multilateral trading system which enforces a non-discriminatory trading structure that spells out their rights and obligations as set out by WTO agreements. These countries account for over 97 percent of world trade. Free trade can be beneficial to some countries but at the same time some countries may stand to lose. This final round is known as The Uruguay Round as it was launched in Punta del Este in Uruguay. It is responsible for:  Administration of trade agreements.  Cooperating with other international organizations. each country receives the guarantee that its exports will be treated fairly and consistently in other countries’ markets. The WTO has nearly 150 members which includes the great majority of countries across the world. The WTO’s main function is to ensure that trade flows as smoothly.  Reviewing national trade policies. Particularly. Any trade dispute that arises is settled by the WTO’s dispute resolution process. Membership involves signing up to a package of free trade agreements covering everything from farm goods and textiles to banking and intellectual property. The World Trade Organization helps to promote free trade by persuading countries to abolish import tariffs and other trade barriers that restrict free trade.  Assisting developing countries with trade policy issues.  Settling trade disputes. The losers are more likely to be the developing countries which have relatively low international competitiveness and thus trade liberalization exposes these countries to fierce foreign competition which may have negative impacts on their balance of payments. Virtually all decisions in the WTO are taken by consensus among all member countries and they are ratified by members’ parliaments. These agreements are the legal ground rules negotiated and signed by Governments which bind them to keep their international trade policies within these agreed limits.

Producers and exporters also have the assurance that foreign markets will remain accessible and open to them. Moreover. The end result is increased inequality among nations where the poor seem to have become relatively poorer as a result of free trade. Consumers have the assurance that they can obtain secure supplies and greater choice in terms of access to: finished products. raw materials and services that they use. In addition. In this way. Critics of the WTO claim that poorer countries do not have the type of manufacturing infrastructure and economies of scale to enjoy the benefits of free trade.Unit II – Module 3 process which examines conformity to trade agreements and commitments on the part of the parties involved. diplomatic and accountable economic world. The result is a more prosperous. 8 . components. the disparity between economic and political power means that small countries would be at the mercy of the larger trading powers in such bilateral trading agreements. The alternative to such a multilateral trading system are bilateral commercial relations. Furthermore. the WTO also contributes to the improvement of the welfare of the people within member countries. they may also argue that many rich countries have managed to override WTO mandates of removing trade impediments and continue to maintain protectionist policies. the possibility of disputes deteriorating into political or military conflict is moderated. Such a system would lack a concrete independent dispute settlement process.