International Organizations Chapter 7: Development, World Bank Group & International Monetary Fund (IMF) © Parsons & Pease 2019 Discussion Topics • What is development? • What are some of the characteristics of developing states? • How do economic liberalists view development? • How do economic nationalists view development? • How do structuralists view development? Common Characteristics of Developing Countries: • • • • • • • • • • • • High instance of poverty Income inequality and lack of a middle class Lack of education Inadequate healthcare Hunger High instance of infant mortality Lack of infrastructure Weak governments High debt Dependency on foreign aid & humanitarian assistance Socio-economic legacy of Tribalism or Feudalism Unfavorable terms of trade & Capital flight What is development? Security Economic Social Development Political • Defined as sustained transformation from a traditional, low income agrarian nation into a modern, high income industrial or service nation • Requires multi-dimensional political, economic, social and security development to achieve stable development Multi-dimensional Aspects of Development • Political Development Instability • Economic Development Agriculture Industry • Social Development Masses • Security Unsecure Stability Service Middle Class Secure What is Capital Flight? The systematic movement of financial capital out of a developing country to avoid economic, political and social risks • A major obstacle to development is external debt • Chronic instability within the state creates unacceptable risk to holding financial capital, investment, and profits inside the state • Citizens keep their money in overseas banks that are much safer • Consequently, developing states depend upon outside sources to provide the needed capital to fund development • External debt is expensive • Foreign aid comes with strings attached (e.g. must buy products from donor state or must implement contractionary economic policies) Major Sources of Development Investment The World Bank: • International Bank for Reconstruction and Development (IBRD): Responsible for multilateral lending • Envisioned as the development “pillar” under thee Bretton Woods Accord • Lends to governments for projects that provide infrastructure and contribute to state productive capacities and earnings • International Development Association (IDA): Provides “soft loans” with extended repayment periods or interest free to the poorest states • International Finance Corporation (IFC): Provides “seed money” to firms in developing states to encourage private investment in developing states by domestic and foreign banks • International Center for Settlement of Investments Disputes (ISCSID): Assists states and individuals to settle disputes regarding foreign investments by Transnational Enterprises or Multinationals through mediation and arbitration Major Sources of Development Investment • World Bank (continued): • Multilateral Investment Guarantee Agency (MIGA): Insures private investments in developing countries against losses that result from political risks, such as war, civil strife or expropriation Major Sources of Development Investment • International Monetary Fund (IMF): Manages the global financial system to ensure monetary stability, liquidity, adjustment & confidence; acts as the “lender of last resort” by providing reserve currency loans to state governments to meet short-term balance of payments deficits • Increasingly involved with developing countries and former East bloc states transitioning to market economies • Responded to the recent series of global debt and currency crises by providing debt restructuring, replacement & forgiveness • Structural adjustment loans come with strings attached, normally conditioned on implementing conservative, national economic reforms & austerity measures Major Sources of Development Investment • United Nations Development Program (UNDP): Promotes “human development” through technology transfers and technical development assistance; seeks to meet basic human needs, such as clean water, sanitation, adequate housing & foodstuffs, rather than increase GDP • Advocates a multidimensional approach to development • Launched the Human Development Report (HDR) which links development to human security and puts people first in the development process • Total contributions are approximately $5 Billion annually Major Sources of Development Investment • United Nations Conference on Trade & Development (UNCTAD): Advocates a multidimensional approach to development and serves as a forum for developing states demands • Holds plenary meetings every 4 years • Competes with UNDP for voluntary member contributions • Dominated initially by the Group of 77 (G-77) now G-125 • Advocated the establishment of a New International Economic Order (NIEO), the Charter of Economic Rights & Duties of States (UNGA Resolution 3281), and a Generalized System of Preferences to redress the disadvantages that developing states face in trade • End of the Cold War also meant the end of developing states playing West against the East • Latest efforts focus on minimizing the adverse effects of globalization • Total contributions are approximately $35 Million annually Major Sources of Development Investment • Official Development Assistance (ODA): Alternative external sources of development capital from governments; certainly comes with strings attached • Largest Donors: http://en.wikipedia.org/wiki/List_of_governments_by_developme nt_aid • By Aggregate Totals & By Percent of GDP (2013) • Nongovernmental Organizations: Mobilize private donors to provide direct aid resources in a variety of health, humanitarian & social activities (e.g. Red Cross, Doctors without Borders, Samaratans Purse) • See a List: http://theglobaljournal.net/top100NGOs/ United Nations Millennium Development Goals & Results Established at the 2005 World Summit as targets for 2015 1. Halve extreme poverty and hunger (Reduced by 70% from 1 Billion to 300 Million by 2010) 2. Provide universal primary education (Partially Achieved: Enrollment increased to 91%) 3. Promote gender equality for women (Women reached 41% of paid workers) 4. Reduce by 2/3 child mortality rate (Declined by half to 43 deaths per thousand) 5. Improve access to maternal health care (Reduced by half) 6. Combat AIDS, malaria & tuberculosis (New infections fell by 40%) 7. Promote environmental sustainability (CO2 Emissions increased by 50%) 8. Build a global partnership for development (Official Development Assistance increased by 66%) United Nations Sustainable Development Goals for 2030 • End poverty in all its forms • Zero hunger • Good health & well-being for all • 100% of children enrolled in primary education • Gender equality & laws to protect women in 49 remaining countries • Clean water & sanitation for 3 out of 10 people who lack • Clean energy • (#13) Climate Change – Limit rise in global temperature to below 2% 15 Alternative Perspectives of Underdevelopment • Classical Liberalism: Liberals see obstacles to development as internal and advocate free trade & market-oriented prescriptions • Economic Nationalism: Realists also see obstacles to development as internal and advocate promoting state interests through protecting key industries and creating comparative advantage in new industries • Structuralism: Structuralists see obstacles to development as external and exploitative; they advocate shielding the state from market influences, seeking equitable distribution of incomes & granting preferential treatment to poorer developing nations Conclusions • Requires multi-dimensional political, economic, social and security development to achieve stable development • Developing states are plagued by unfavorable terms of trade for their exports and capital flight • Developing states rely on external sources of capital investment which usually come with strings attached • Alternative perspectives of underdevelopment yield different policy prescriptions for achieving sustainable development • International organizations are viewed as useful sources of development resources; however, they are sometimes viewed as dominated by the rich & disruptive of growth when they enforce contractionary policy measures World Bank © Parsons & Pease World Bank Purpose: To provide development & reconstruction capital & technical expertise to member nation states Missions To end extreme poverty within a generation: To boost shared prosperity: • More than 1 billion people in the world still live in deep poverty • Bank's goal is to decrease the percentage of people living with less than $1.90 a day to no more than 3 percent by 2030 (At 10% as of 2016) • Rising inequality and social exclusion seems to accompany rising prosperity in many countries • Bank’s goal is to promote sustainable income growth of the bottom 40 percent of the population in each country. Environment History & Geography: • Created at the Bretton Woods Conference (NH) in 1944, initially to reconstruct Europe & other war-torn nations • International Bank of Reconstruction and Development (IBRD), along with US Marshall Plan, rebuilt Europe after WWII • Transitioned to providing development aid to allied developing countries during decolonization in 1960s & during the Cold War • 187 member countries • HQ In Washington DC • Member states contribute to the bank’s capital resources • Uses a weighted system of voting proportional to the capital contribution World Bank Group • Vital source of financial and technical assistance to developing countries • World Bank consists of only the IBRD & IDA • 5 bodies provide low interest loans, interest free credits & grants, advice & technical assistance in the areas of infrastructure, education, health, public administration, finance, agriculture, environment, corruption & resource management • Total of $64.2 Billion in loans & grants worldwide (2016) World Bank Group Intl Bank of Reconstruction Development (IBRD) Intl Development Association (IDA) Multilateral Investment Guarantee Agency (MIGA) Intl Centre for Settlement of Investment Disputes (ICSID) Major Sources of Development Investment The World Bank Group: • International Bank for Reconstruction and Development (IBRD): Responsible for multilateral lending • Envisioned as the development “pillar” under the Bretton Woods Accord • Lends to governments for projects that provide infrastructure and contribute to state productive capacities and earnings • International Development Association (IDA): Provides “soft loans” with extended repayment periods or interest free to the poorest states • International Finance Corporation (IFC): Provides “seed money” to firms in developing states to encourage private investment in developing states by domestic and foreign banks • International Center for Settlement of Investments Disputes (ISCSID): Assists states and individuals to settle disputes regarding foreign investments by Transnational Enterprises or Multinationals through mediation and arbitration Major Sources of Development Investment • World Bank (continued): • Multilateral Investment Guarantee Agency (MIGA): Insures private investments in developing countries against losses that result from political risks, such as war, civil strife or expropriation • World Bank Group provided a total of $64.2 Billion in loans & grants worldwide in 2016 World Bank Unifying Principles • • • • • • • • • • • Promote sustainable growth Ending poverty Economic & political neutrality Shared prosperity & Inclusive growth Richer members provide much needed capital to poorer members Structural adjustment: Bank can impose conditional “strings” in exchange for capital lending Sovereign immunity: Waives the holder from all legal liability for their actions Food security: In partnership with the Bill and Melinda Gates Foundation Open Data: Members agree to share economic data Open Learning Open Knowledge & Innovation: Knowledge & technology sharing through repositories Leadership: Jim Yong Kim President of the World Bank Group South Korean-American Served 2-year term: 2017-2019 Stepped down on February 1, 2019 Kristalina Georgieva, World Bank CEO, assumed the role of interim President effective February 1 Kim Speech in India 2015: https://www.youtube.com/watch?v= y_L3FZCKIzc World Bank Decision-Making • Uses a weighted system of voting: • Voting quotas are assigned according to GDP output and share of bank’s capital stock contributed • Richest countries dominate the voting (e.g. US, Japan, China, Germany, France, Saudi Arabia) • 20 largest countries ranked by voting power: https://en.wikipedia.org/wiki/World_Bank • Ostensibly, the World Bank and its affiliates are supposed to make loan determinations on sound financial principles, not a state’s political or economic orientation • Bank’s Articles of Agreement commit the bank to economic and political neutrality • Reality is it serves the political interests of its donors because of the weighted voting system • New members are allotted 250 votes plus one additional vote for each share of bank’s capital stock paid in • 5 Executive Directors appointed by the US, Japan Germany France & UK; 3 Executive Directors appointed by China, Russia & Saudi Arabia; additional Executive Directors appointed by the general membership World Bank Group Inputs: Outputs: • U.S. traditionally nominates bank Presidential candidates • Executive Directors are appointed by largest contributors • Weighted voting based upon contributions concentrates power with richest contributors • Non-governmental Organizations (NGOs) provide expertise & lobbying • Policies are dominated by the rich industrial countries; often referred to as part of the “Washington Consensus” • Liberalism perspective dominates • Structural adjustments to interest rates and fiscal spending required to “facilitate” growth • Strong anti-corruption measures World Bank Group Inputs: Outputs: • Organizational Ideology: • Major Programs in 2016: • Mix of strong Liberalism & mild Structuralism • “Washington Consensus” – Western economic policy orientation; promotes balanced budgets, Free Trade & higher interest rates through loan conditions • Organizational Interests: • Promote sustainable growth • Equitable income distribution • IBRD Loans: $29.7 Billion • IDA Loans: $16.2 Billion • IFC Private Corporate Loans: $11.1 Billion • MIGA Insurance: $4.3 Billion Feedback Mechanisms • Feedback provided through intergovernmental discussions & member votes • Adjustments to policy are made during periodic Summit Conferences • One nation – one vote does NOT apply! • Weighted voting within bank organizations concentrates power among richest members • Structuralists (Marxists) see this weighted voting as a modern impediment to growth among the poorer nations & a modern extension of Western colonial exploitation World Bank Issues • Financing infrastructure projects • Financing productive advantages • Providing human capital (healthcare & education) • Providing Technical Assistance • Combating Corruption in the development countries History of the Global Monetary System © Parsons & Pease 2018 History of the Modern International Monetary System • Established under Bretton Woods Accord of 1944 • Qualified Gold Standard (1944-1971): • Currency values pegged or fixed to price of gold (e.g. gold price set at $35 per ounce) • Governments pledge to intervene in markets to keep the currency rate at +/1% of official fixed rate by buying or selling currency using gold (called the “keep the snake in the fence policy”) • U.S. tolerated leakage of $$ overseas as additional reserves • System broke down when President Nixon suspended the convertibility of the dollar to gold in 1971 History of the Modern International Monetary System • Managed or Pegged Float Exchange Rate System (1971-1989): • Currency values were pegged to the value of a basket of currencies called Special Drawing Rights within the IMF • Currency values were flexible with the market within +/- 2 ½ percent band • States were obligated to intervene in currency markets to support the official rate (known as the snake inside the fence policy – with a wider fence) • Collective management of the dollar through coordinated intervention to realign the value of the dollar in 1980s • Highly susceptible to currency speculation at the fences • Abandoned by major currencies after a series of currency exchange crises History of the Modern International Monetary System • Flexible Exchange Rate System (1989-Present): • Value of most major currencies are determined by the currency markets (Except Chinese Yuan) • Market forces determine the exchange rate • Allows automatic adjustments to key currency values • Isolates economic ailments & insulates other countries • International Monetary Fund (IMF): Created in 1944 under the Bretton Woods Accords: • Acts as a global central reserve bank to oversee and manage the international financial system • Acts as the “Lender of Last Resort” to countries unable to meet their financial obligations • Seeks stable currency prices & guaranteed liquidity • Buys, sells & loans reserve currencies on behalf of its member nations International Monetary Fund (IMF) © Parsons & Pease 2018 Environment History & Geography: • 1944: International Monetary Fund (IMF) was created as part of the Bretton Woods Accords to: • Ensure stable currency values • Act as global central bank to guarantee currency liquidity through adequate reserves deposits • Act as the “Lender of Last Resort” for member states in economic crisis • Has 187 member states • Headquarters is in Washington DC (Part of the “Washington Consensus”) Environment History & Geography: • Has intervened in periodic currency & debt crises by loaning emergency reserves to member nations to overcome currency devaluations or debt default crises: • 1982 & 1995: Mexico Debt Crises – Provided reserves to replace the Peso and to issue new government debt securities to prevent default • 1997 - 1999: Thailand Currency Crisis – Provided reserves to stop devaluation of the Baht currency • 1998: Russian Currency Crisis – Provided 23 Billion in reserves to stabilize the Ruble currency and to secure government debts in default • 2007 – 2012: Global Credit Crisis – Provided reserves to replace some mortgage backed securities held by governments in default • 2008 – 2012: European Debt Crisis – Provided reserves to issue new securities to prevent default of national government securities and the devaluation of the Euro (€) currency by Greece, Ireland, Italy & others International Monetary Fund (IMF) • Acts as global central bank • Promotes international monetary cooperation and exchange rate stability, facilitates the balanced growth of international trade & provides resources to help members in balance of payments difficulties or to assist with poverty reduction (acts as lender of last resort) • Functional Departments include Policy, Finance, Fiscal Affairs, Monetary & Capital, Legal, Research & Statistics • Regional Departments include Africa, Asia, Europe, Middle East & East Asia, Western Hemisphere • 187 member countries International Monetary Fund Executive Board 8 Functional Departments 5 Regional Departments IMF Institute for Training IMF Decision-Making • Board of Governors sets IMF Policy • Executive Board is chaired by the Managing Director & is empowered by Governors to oversee day to day activities & review decisions • Staff informs, advises & reports to Managing Director • Member Country Authorities appoint Representatives to all governing bodies, provide financial Surveillance reports, policy advice & technical assistance to the IMF staff & Executive Board IMF Decision-Making • Uses weighted system of voting: • Total Bank’s quotas and assets: $340 Billion (2011) • Additional pledged resources: $600 Billion (2011) • Voting quotas assigned according to GDP output and share of bank’s capital stock contributed • Richest countries dominate (e.g. US, Japan, China, Germany, France, Saudi Arabia) • Countries pay 25 percent of their quota subscriptions to the IMF in SDRs or major currencies, such as U.S. dollars, Euros, pounds sterling, or Japanese yen • Countries pay the remaining 75 percent in their own currencies to the IMF International Monetary Fund • Unifying principle is a desire for stable currencies and financial markets • Members are stockholders • Quotas & Votes are determined by size of the member economy, percent of global trade & foreign exchange holdings • Basket of 4 currencies form Special Drawing Rights (SDRs) as international reserves • Votes = 250 + one additional vote for each 100,000 SDRs contributed Special Drawing Right Dollar 42% Euro 38% Pound 11% Yen 9% International Monetary Fund • Uses a weighted system of voting: • Total Bank’s quotas and assets: 238 Billion SDRs (2013), additional 370 Billion Supplemental assets available (2013) • Quotas and Votes are assigned according to GDP output and share of bank’s capital stock contributed • Richest countries dominate (e.g. US, Japan, Germany, Saudi Arabia) • Current contributions: LINK • Countries pay 25 percent of their quota subscriptions in Special Drawing Rights (SDRs) or major currencies, such as U.S. dollars, Euros, pounds sterling, or Japanese yen • Countries pay the remaining 75 percent in their own currencies IMF Contribution Quotas & Votes by Country 2016 • Country quotas and votes list: https://www.imf.org/external/np/sec/memdir/members.aspx Source: IMF Inputs • Executive Board of Governors receives policy recommendations from member states’ • Collects surveillance data on member states’ economies (e.g. inflation, trade balance & sovereign debt) • Monitors members monetary policy • Monitors major currency markets worldwide • Receives reserve loan requests from member states International Monetary Fund Executive Board 8 Functional Departments 5 Regional Departments IMF Institute for Training Outputs • Reserve loans to member states and central banks • Sovereign debt relief • Currency market interventions to buy or sell • Monetary & fiscal policy recommendations to member states • Technical financial training to member states International Monetary Fund Executive Board 8 Functional Departments 5 Regional Departments IMF Institute for Training Outputs • Conditions attached to Members Borrowings from the fund: • 1st tranche (Loan) = 25% of total quota – minimal conditions (repayment required within 3-5 years) • 2nd tranche = 50% of total quota – conditional • 3rd tranche = 75% of total quota – more conditional • 4th tranche = 100% of total quota – even stronger conditions apply • Loan Conditions include the application of contractionary fiscal and monetary policies (higher interest rates & reduced spending) to ensure a currency devaluation, a reduction in imports, an increase in exports, and a balance of payments surplus; contractionary policies often result in a Recession which costs jobs Feedback • Surveillance monitors economic conditions within loan recipient states and currency markets • Loan conditions become more constraining with repetitive borrowing International Monetary Fund Executive Board 8 Functional Departments 5 Regional Departments IMF Institute for Training Criticisms of the IMF • The IMF has created an immoral system of modern day colonialism that SAPs the poor • The IMF serves wealthy countries and Wall Street • The IMF is imposing a fundamentally flawed development model • The IMF is a secretive institution with no accountability • IMF policies promote corporate welfare • IMF hurts women, the environment, and workers (lowering labor laws) • IMF bailouts deepen, rather than solve, economic crises IMF Issues • • • • • Fiscal Crises reduce growth & adversely impact development Sovereign debt of member nations is too high Chinese currency value manipulations (too low) create trade imbalance Banking reforms needed (e.g. higher reserves, regulation) New Banking investment restrictions (like the reinstatement of Glass Steagall Act provisions in the US, which limit risky investments by banks) • Climate change • Gender equality in labor markets • UN Sustainable Development Goals: Supported by the IMF Conclusions • International Monetary System has evolved from a fixed rate to a flexible rate foreign exchange system (Except China) • Over-the-counter foreign exchange markets around the world support $4 Trillion in transactions per day • Currency values are determined by a number of factors affecting demand, to include trade, capital flows, interest rates, inflation rates, government and speculator manipulation • IMF acts as the “lender of last resort” and the watchdog to ensure stable currency values and monetary systems • Contractionary policy conditions imposed by the IMF can cause recessions in the borrowing country which can hinder economic growth; it amounts to tough “love” for member states with problems Copy and paste the link below into your browser. 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