2e031iep~session 5

7/27/2019 2e031IEP~Session 5

1/72

Amity Business School

1


MBA 2013, 3rd Semester

INTERNATIONAL ECONOMICS AND POLICY

Amanpreet Kang

7/27/2019 2e031IEP~Session 5

2/72


2

International Organizations

7/27/2019 2e031IEP~Session 5

3/72


3

IMF, World Bank and the WTO

IMF - ?

www.imf.org

WB Group

www.worldbank.org

GATT

WTOwww.wto.org
http://www.imf.org/http://www.worldbank.org/http://www.wto.org/http://www.wto.org/http://www.worldbank.org/http://www.imf.org/

7/27/2019 2e031IEP~Session 5

4/72


4

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

7/27/2019 2e031IEP~Session 5

5/72


5


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 exchangerates)

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.

7/27/2019 2e031IEP~Session 5

6/72


6



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 andcollaboration

Correction of BOP

7/27/2019 2e031IEP~Session 5

7/72


7


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

7/27/2019 2e031IEP~Session 5

8/72


8



Monitors economic and financial

development and policies

Lends to members with BOP issues, reform

policies Provides governments & central banks

technical assistance & training

7/27/2019 2e031IEP~Session 5

9/72


9


Functions:

Forum for discussion of economic policy and

issues important for stability of international

monetary and financial system

Countries choice of exchange ratearrangements, 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

7/27/2019 2e031IEP~Session 5

10/72


10


Functions:

Macroeconomic policies govt. budget,

management of money and credit and

exchange rate

Financial sector- regulation and supervision ofbanks

Structural policies

Policies to allow effective pursuit of goals such

as employment, low inflation, sustainable

economic growth, etc.

7/27/2019 2e031IEP~Session 5

11/72


11


Vision:

Non-inflationary economic growth

Centre of competence for stability of

international financial system

Focus on core macroeconomic and financialareas to safeguard public interest

Learning from experience and adaptation

7/27/2019 2e031IEP~Session 5

12/72


12


Organisation and Management:

Board of governors all member countries are

represented

Decides on major policy issues

Executive board manages day to daydecision making 24 Executive Directors and

MD (3 times a week)

Headquarters Washington DC

Largest shareholders: US, Japan, Germany,

France and UK

7/27/2019 2e031IEP~Session 5

13/72


13


Organisation and Management:

International Monetary and Finance

Committee (IFMC) meets 2 times a year to

discuss international monetary system

Development Committee formed by BOG ofIMF and WB to discuss development policy

and other matters related to developing

countries

Has weighted voting system larger acountrys quota in IMF (depending on its

economic size), more the votes

Decisions primarily by consensus than voting

7/27/2019 2e031IEP~Session 5

14/72


14


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 memberin relation to the total membership of IMF,

quotas reviewed in 5 years

Borrowings - financial resource is through

quotas and subscriptions, GeneralArrangements to Borrow and New

Arrangements to Borrow

7/27/2019 2e031IEP~Session 5

15/72


15


Financing facilities and policies:

Provides loans to countries experiencing BOP

crisis, does not lend for specific projects

Process of lending provides loan under anarrangement 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

7/27/2019 2e031IEP~Session 5

16/72


16


Concessional and Non-concessional Lending:

number of loan instruments (facilities) to

address specific circumstances of the

members

Poverty Reduction and Growth Facility (PRGF)

concessional

7/27/2019 2e031IEP~Session 5

17/72


17


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)

7/27/2019 2e031IEP~Session 5

18/72


18


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.

IMF d D l O i i

7/27/2019 2e031IEP~Session 5

19/72


19


The quota suggests basic aspects of members

financial and organizational relationship withthe IMF

IMF d D l t O i ti

7/27/2019 2e031IEP~Session 5

20/72


20


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 poundsterling), while the rest is paid in the member's

own currency.

IMF d D l t O i ti

7/27/2019 2e031IEP~Session 5

21/72


21



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 amember's voting power in IMF decisions. Each

IMF member has 250 basic votes plus one

additional vote for each SDR 100,000 of quota.

IMF d D l t O i ti

7/27/2019 2e031IEP~Session 5

22/72


22



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 Stand-By 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 behigher in exceptional circumstances.

IMF d D l t O i ti

7/27/2019 2e031IEP~Session 5

23/72


23


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).

IMF d D l t O i ti

7/27/2019 2e031IEP~Session 5

24/72


24


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.

IMF d D l t O i ti

7/27/2019 2e031IEP~Session 5

25/72


25


The IMF aims to ensure that conditions linked to

IMF loan disbursements are focused and adequatelytailored 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, thecountry may commit to fiscal or foreign exchange

reserve targets.

IMF d D l t O i ti

7/27/2019 2e031IEP~Session 5

26/72


26


The IMF discusses with the country the economic

policies that may be expected to address theproblems 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.


7/27/2019 2e031IEP~Session 5

27/72


27


Loans are typically disbursed in a number of

installments over the life of the program, with eachinstallment 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.


7/27/2019 2e031IEP~Session 5

28/72


28


The IMF has developed various loan instruments, or

facilities, that are tailored to address the specificcircumstances 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)


7/27/2019 2e031IEP~Session 5

29/72


29


(b) Non-concessional loans the non-concessional

facilities are subject to the IMFs market-relatedinterest 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 fromnatural disasters and conflicts.


7/27/2019 2e031IEP~Session 5

30/72


30


The amount that a country can borrow from the

Fund, known as its access limit, varies depending onthe type of loan, but is typically a multiple of the

countrys IMF quota. This limit may be exceeded in

exceptional circumstances.

7/27/2019 2e031IEP~Session 5

31/72


31


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 andGrowth 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.

7/27/2019 2e031IEP~Session 5

32/72


32


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.

7/27/2019 2e031IEP~Session 5

33/72


33


Middle Income Countries:

Stand-By Arrangements (SBA). The bulk of Fund assistance to middle-

income 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 normalaccess limits and in cases of exceptional access. The SBA provides for

flexibility with respect to phasing, with front-loaded access where

appropriate.

7/27/2019 2e031IEP~Session 5

34/72


34



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 onimplementation 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.

7/27/2019 2e031IEP~Session 5

35/72


35



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 semi-

annual monitoring. It can have the length of between one and two years.

Access can be front-loaded, with up to 500 percent of quota madeavailable 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.

7/27/2019 2e031IEP~Session 5

36/72


36



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.

7/27/2019 2e031IEP~Session 5

37/72


37


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 subsidiesare available for some countries, subject to availability. Loans must be

repaid within 35 years


7/27/2019 2e031IEP~Session 5

38/72


38


Conditionality explicit commitment. To ensure:

Members achieve viable BoP over time

Members repay the loan

General commitments, quantified plans for financialpolicies

Economic variables that should be effected include

domestic credit, public sector deficit, internationalreserves, external debt

Exchange rate, interest rate, wage rate,

commodity prices


7/27/2019 2e031IEP~Session 5

39/72


39


Criticisms:

Conditionalities endanger sovereignty Organs of capitalist imperialism

Dominated by developed countries and do not

pay adequate attention to the demands of thedeveloping

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


7/27/2019 2e031IEP~Session 5

40/72


40


Criticisms:

Dominance of the developed countries becauseof 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


7/27/2019 2e031IEP~Session 5

41/72


41


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.


7/27/2019 2e031IEP~Session 5

42/72


42


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


7/27/2019 2e031IEP~Session 5

43/72


43


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

World Bank

7/27/2019 2e031IEP~Session 5

44/72


44

World Bank

The World Bank is a vital source of:

financial and technical assistance to developingcountries around the world.

WB is made up of two unique developmentinstitutions owned by 187 member countries:

the International Bank for Reconstruction and

Development (IBRD) - aims to reduce poverty in

middle-income and creditworthy poorercountries

the International Development Association (IDA)

- focuses on the world's poorest countries.

World Bank

7/27/2019 2e031IEP~Session 5

45/72


45

World Bank

Established in 1944, Headquarters in

Washington, D.C.

WB provides

low-interest loans, interest-free credits

grants to developing countries

World Bank

7/27/2019 2e031IEP~Session 5

46/72


46

World Bank

For a wide array of purposes including

investments in education, health, public

administration, infrastructure, financial and

private sector development, agriculture andenvironmental and natural resource

management.

Do not operate for profit

World Bank

7/27/2019 2e031IEP~Session 5

47/72


47

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 forWorld Bank operating expenses and has

contributed to IDA and debt relief.

World Bank

7/27/2019 2e031IEP~Session 5

48/72


48

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.

World Bank

7/27/2019 2e031IEP~Session 5

49/72


49

New focus apart from reconstruction:

Poverty reduction and the sustainable growth in poor

countries, especially in Africa;

Development and reconstruction challenges in post-

conflict 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.

7/27/2019 2e031IEP~Session 5

50/72


50

GATT

GATT

7/27/2019 2e031IEP~Session 5

51/72


51

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

GATT

7/27/2019 2e031IEP~Session 5

52/72


52

Does not mention about trade in services,

intellectual property and internationalsettlements

Dispute Settlement was also a concern

Plurilateral Agreements

Multilateral Agreements

7/27/2019 2e031IEP~Session 5

53/72


53

WTO

World Trade Organisation

7/27/2019 2e031IEP~Session 5

54/72


54

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 flowsas smoothly, predictably and freely aspossible.

Decisions in the WTO are usually taken byconsensus among all member countries andthey are implemented by membersparliaments.

g


7/27/2019 2e031IEP~Session 5

55/72


55

Trade friction/ disputes are channeled into the

WTOs dispute settlement process where thefocus is on interpreting agreements andcommitments, and to ensure that countriestrade policies conform with them.

The multilateral trading system refers toWTOs agreements, negotiated and signed bya large majority of the worlds trading nations,and implemented by their parliaments.

These agreements are the legal ground-rulesfor international commerce.

g


7/27/2019 2e031IEP~Session 5

56/72


56

The agreements essentially are contracts,

guaranteeing member countries importanttrade rights.

They also bind governments to keep theirtrade policies within agreed limits toeverybodys benefit.

The agreements were negotiated and signedby 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

g


7/27/2019 2e031IEP~Session 5

57/72


57

WTO is the successor to GATT, which was

established after the Second World War.

The World Trade Organization came into beingin 1995.

MTS was set up under GATT around1947/1948

g


7/27/2019 2e031IEP~Session 5

58/72


58

The system was developed through a series of

trade negotiations, or rounds, held underGATT. The first rounds dealt mainly with tariffreductions but later negotiations included otherareas such as anti-dumping and non-tariffmeasures. The last round the 1986-94

Uruguay Roundled to the WTOs creation.The latest issue after the Doha round involvesimplementation of WTO rules by thedeveloping countries.

WTO Agreements

7/27/2019 2e031IEP~Session 5

59/72


59

Objective To make trade as fair and as freeas possible.

How By negotiating rules and abiding bythem.

The WTOs rules the agreements are theresult of negotiations between the members.The current set were the outcome of the 1986-94 Uruguay Round negotiations which

included a major revision of the originalGeneral Agreement on Tariffs and Trade(GATT).

WTO Agreements

7/27/2019 2e031IEP~Session 5

60/72


60

Through these agreements:

WTO members operate a non-discriminatorytrading system that spells out their rightsand their obligations.

Each country receives guarantees that itsexports 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 theircommitments.

WTO Agreements

7/27/2019 2e031IEP~Session 5

61/72


61

Goods:

From 1947 to 1994, GATT was the forum fornegotiating lower customs duty rates and othertrade barriers; the text of the General

Agreement spelt out important rules,particularly non-discrimination.

It deals with specific sectors and with specificissues such as state trading, productstandards, subsidies and actions taken against

dumping.

WTO Agreements

7/27/2019 2e031IEP~Session 5

62/72


62

Services:

The principles appear in the new GeneralAgreement on Trade in Services (GATS).WTO members have also made individualcommitments under GATS stating which oftheir services sectors they are willing to opento foreign competition, and how open thosemarkets are.

WTO Agreements

7/27/2019 2e031IEP~Session 5

63/72


63

Intellectual Property:

The rules state how copyrights, patents,trademarks, geographical names used toidentify products, industrial designs, integratedcircuit layout-designs and undisclosedinformation such as trade secretsintellectual property should be protectedwhen trade is involved.

WTO Agreements

7/27/2019 2e031IEP~Session 5

64/72


64

Dispute Settlement:

Countries bring disputes to the WTO if theythink their rights under the agreements arebeing infringed.

Judgements by specially-appointedindependent experts are based oninterpretations of the agreements andindividual countries commitments.

WTO Agreements

7/27/2019 2e031IEP~Session 5

65/72


65

Trade Policy Review:

The Trade Policy Review Mechanismspurpose is to improve transparency, to createa greater understanding of the policies thatcountries are adopting, and to assess theirimpact.

WTO - Organisation

7/27/2019 2e031IEP~Session 5

66/72


66

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 andtraining programmes

Cooperating with other internationalorganizations

WTO - Organisation

7/27/2019 2e031IEP~Session 5

67/72


67

Structure:

Number of members Number of Agreements

Covers 97% of world trade

WTO - Organisation

7/27/2019 2e031IEP~Session 5

68/72


68

Structure:

Ministerial Council

General Council

Trade Policy Review Body

Dispute Settlement Body Goods Council

Services Council

IP Council

Specialized committees, working groups,working parties

WTO - Organisation

7/27/2019 2e031IEP~Session 5

69/72


69

Secretariat:

Geneva Director General

The Secretariats main duties are:

to supply technical support for the variouscouncils 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 settlementprocess and advises governments wishing tobecome members of the WTO.

7/27/2019 2e031IEP~Session 5

70/72


70

Write notes on:

GATT

Discussion Rounds prior to WTO

Principles of trading system of WTO Trade without discrimination

Freer trade

Predictable trade

Fair competition

WTO Questions???

7/27/2019 2e031IEP~Session 5

71/72


71

1. Discuss the role of international institutions likeIMF, World Bank and WTO in promoting globaleconomic integration.

2. IMF and World Bank serve the interests ofindustrialized nations rather than those ofdeveloping countries. Comment in the light ofviews presented in the case above.

3. Comment on unequal participation of countriesin the world economic order. Have theseinternational institutions promoted unequaldevelopment of economies?

Case Questions

7/27/2019 2e031IEP~Session 5

72/72


Thanks

2e031iep~session 5

Documents