Role of Imf and World Bank

Introduction

The world's major international financial institutions represent paradoxical ideals in their quest to satisfy the needs of both developed and developing nations. These institutions are chartered with helping poor nations but are criticized for their neo-colonial policies. Member nations are all considered equal, but contributions make some more equal than others. Mostly, these organizations are managed by rich nations that usurp the autonomy of developing nations in the pursuit of free markets and economic reform.

This paper will examine the roles of the International Monetary Fund and World Bank with parallels to the Asian Development Bank and African Development Bank Group. It will include descriptions of these institutions, an explanation of how they are used in global financing operations and their importance in managing global risk.

What is the Difference Between the IMF and World Bank?

One source describes the differences between the two primary world financial organizations this way: "The IMF keeps account of trade balances between member states, basically who owes whom how much, as an independent auditor. The World Bank on the other hand, gives more long term loans for more general purposes."

The World Bank is an investment bank mediating between lenders and borrowers. It sells bonds and lends that money to borrowing governments. The IMF was originally founded to oversee the currency exchange market and help stabilize countries' currencies. The IMF has a pool of funds from which member countries can borrow for up to five years when they need to quickly stabilize their currencies, much like bank overdraft protection.

Interestingly, an unwritten rule dictates that the IMF's managing director must be European and the president of the World Bank from United States. Because voting rights are largely determined by contributions to both organizations, developed countries primarily control the World Bank and the International Monetary Fund while "clients" almost exclusively consist of developing nations. As of November 1, 2004 the United States held 16.4% of total votes, Japan 7.9%, Germany 4.5% and UK and France each held 4.3%. Since major decisions require an 85% super-majority, the U.S. can block any reform in either organization.

What is the International Monetary Fund?

The International Monetary Fund (IMF) is "an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty." Only seven UN member states are not IMF members including communist holdouts North Korea and Cuba.

The IMF was first conceptualized in 1944 at the UN-sponsored Monetary and Financial Conference in Bretton Woods, New Hampshire. Renowned economist John Maynard Keynes and Assistant Secretary to the U.S. Treasury, Harry Dexter White, are credited as "principal architects" of the organization that began financial operations in 1947. Along with the Bank for International Settlements (BIS) and the World Bank, these institutions define the monetary policy shared by almost all countries with market economies.

Countries apply for membership in the IMF, then once approved, receives a quota to determine their voting weight, access to IMF financing and other provisions. Today, a primary mission of the IMF is to provide financial assistance to countries experiencing serious economic difficulties. Member states request assistance in the form of loans or management support in return for agreeing to enact economic reforms within their country.

The role of the three Bretton Woods institutions became controversial during the Cold War as policy makers allegedly supported unsavory governments that favored U.S. and European corporations. Additionally, IMF critics say the organization is apathetic to abuses in human rights abuses, labor rights and democracy, sparking the modern anti-globalization movement.

The IMF has distinct a distinct economic bias toward a Keynesian approach and against supply-side economics. For example, the IMF recommends currency devaluation to the governments of poor nations with struggling economies while supply-side economists claim these Keynesian IMF policies are destructive to economic prosperity.

The IMF's recent handling of economic crises in countries like Argentina, Kenya and Jamaica has hurt the organization's reputation and politicians often blame the IMF for poor national economic policies, adding to the organization's PR woes. Though the IMF's original charter was to help stabilize the global economy, it tends to respond to crises rather than prevent them, so many economists are calling for reform.

Surprisingly, according to research by the Pew Research Center, people in Western countries are much more critical of the IMF than those in Asian and African nations of which have a generally favorable view.

What is the World Bank?

The World Bank also traces its origins to the Bretton Woods Conference in 1944 where its original mission was to finance the reconstruction of nations devastated by WWII. Today, its mission is focused on fighting poverty by providing economic financing to developing countries for education, agriculture and industry. The organization's operation is financed by member states who provide loans at preferential rates to other member countries who are in difficulty.

Many non-governmental organizations (NGOs) are critical of the World Bank for allegedly supporting policies to further Western interests. Although the World Bank is technically part of the United Nations, its governance structure is owned by its member governments in proportion to their basic share capital. Each member has voting rights, but there are additional votes based on financial contributions to the organization by each country.

As post-war World Bank rebuilding efforts completed large-scale infrastructure projects such as highways, airports and power plants in Europe and Japan, the organization's focus shifted fostering economic growth in developing nations of Africa, Asia and Latin America. Since the early 1990s, the World Bank has also provided financing to the Eastern Europe and the former Soviet States.

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