Question

What is the relevance of IMF, World bank and General agreement on Tariffs and Trade (GATT) to the global economy?

Answer 1

INTERNATIONAL MONETARY FUND

Established at the Bretton Woods Agreement in 1944 and led by the industrialized countries of the world, the IMF – a multilateral financial institution – was entrusted mainly with the short-run BOP adjustments of the member countries. At the time of its establishment, its membership was restricted to 44 countries, but the count has increased overtime and it stands to 189 countries today.

The Purpose and Objectives of IMF listed on the Article 1 of its Articles of Agreement are stated below:

•   Promotion of International Monetary Cooperation through a permanent institution

•   Facilitating the expansion and balanced growth of international trade along with the contribution of promotion and maintenance of high level of employment of member countries.

•   Promotion of exchange rate stability, for maintaining orderly exchange agreements among members and avoiding competitive exchange rate depreciation.

•   Assisting in the establishments of multilateral system of payments with respect to the current transactions b/w member nations and in elimination of foreign exchange restrictions.

•   Provide confidence to members by making funds resources available to them under safeguards and also providing them the opportunity for balance of payment disequilibrium correction.

Basis the above objectives below are the roles and responsibilities of IMF:

1.  Provision of mechanism for improving short-terms balance of payment situation – This involves allowing short-term flows of its resources (on conditional terms) to the member countries suffering from balance of payment crises.

2.  Behaving as a Short-term credit institution – The Fund acts a second line of defense to fight against an emergency situation i.e. if any of the member country is in temporary difficulty in liquidating an advance balance of payment situation, then the IMF comes to its rescue by providing short-term credit supplies for which the borrowing country is liable to pay a specific interest amount.

3.  Maintaining Exchange Rate Stability – The fund was responsible for maintaining the overall exchange rate under the adjustable-peg system i.e. any significant change in the exchange rate by the member countries was not possible without the prior provision of IMF. This was applicable at-least till 1970 (until the fall of Bretton woods system).

4. Reservoir of Currencies – The fund make ample provision of a reservoir of currencies by enabling members to borrow any other member country’s currency.

5. Acts as a machinery of institutional consultation - The IMF also holds the responsibility of bringing together the representatives of the principle countries of the world in order to provide the opportunity for reconciling their conflicting claims. This way it provides a platform for international cooperation wherein the principle nations can discuss matters of mutual interest regarding the international monetary system.

WORLD BANK

With the aim to provide aid and support to rebuild the war-devastated Europe, the International Bank of Reconstruction and Development (IBRD) also known as the World Bank was established in 1944. With its headquarters located in Washington DC, USA holds the maximum number of shares of the bank. Initially the bank’s main objective was to support the European nations to re-build their economies, however later when the reconstruction activities was being controlled by the US Marshall Plan, the bank shifted its focus towards the long-term development of the countries that become independent of the colonial rule after the second world war – by providing long-term development loans.

During the first 20 years of its establishment, two-thirds of the bank’s loan to developing countries was mainly directed towards the building of large-scale infrastructural project that included electricity and transport in order to promote economic growth and indirectly reduce poverty rate. However, during the chairmanship of McNamara, the bank changed its policy direction and emphasized more on direct poverty reduction measures – that included granting loans for rural development, poverty eradication and agricultural enhancements along with prioritization of growth of education, health and birth control. Once the Structural Adjustment Programme (SAP) was introduced, the bank loans were disbursed in exchange of policy reforms such as liberalization, privatization, financial sector and lbor market reforms. Recently the bank has started focusing on NGOs and development of less developed areas of the 3^rd world countries.

Various functions of the bank can be listed below:

1. Provision of financial & technical assistance to developing countries for implementing development projects.

2. Promotion of international flows of private investment from capital surplus countries to capital deficit countries.

3. Sustaining balanced growth of international trade in order to improve international welfare

4. Serving as a guarantor that helps in attracting private foreign investments towards the developing countries for development process.

GATT

The rationale for establishing General Agreement on Trade and Tariff was to provide a rule-based trading system i.e. a system that was more certain and encouraged investment and growth of export industries.

GATT’s basic principles are:

- Most Favoured Nations (MFN) – If a country gives concession to another country, the concession has to be extended to all other countries with whom it has an MFN agreement, thus implying that all foreign suppliers are treated equally.

- National Treatment (NT) – Once an imported good has crossed the boundary after paying the border charges, it is given the same treatment as the domestically produced goods., thus regulating the competition between imported and the domestic goods.

The above to principles, provided certainty to foreign exporters about the completion they would face in the domestic market.

- Principle of Reciprocity – Here a country involved in the negotiation is expected to give concessions on imports which equalize the concessions it receives on its exports. The principle provides certainty that there would be no future increase in the tariff rates, stating that tariff rates could be below the binding rate but not above it.

During its establishment, a series of multilateral trade negotiations (MTN’s) were undertaken to reduce trade restrictions. The negotiations were restricted to manufactures and even agriculture was kept out of the negotiations on US insistence. Textile industry trade was governed by multi-fibre agreement (MFA) , under which each developed country established quotas for the import of different textile items from each developing country.