Despite Lord Keynes's profession of confusion, the IMF is not a bank and does not intermediate between investors and recipients. These resources come from quota subscriptions, or membership fees, paid in by the IMF's member countries. Each member contributes to this pool of resources a certain amount of money proportionate to its economic size and strength richer countries pay more, poorer less. While the Bank borrows and lends, the IMF is more like a credit union whose members have access to a common pool of resources the sum total of their individual contributions to assist them in times of need.
Although under special and highly restrictive circumstances the IMF borrows from official entities but not from private markets , it relies principally on its quota subscriptions to finance its operations. The adequacy of these resources is reviewed every five years.
Recipients of Funding Neither wealthy countries nor private individuals borrow from the World Bank, which lends only to creditworthy governments of developing nations. The poorer the country, the more favorable the conditions under which it can borrow from the Bank. Per capita GNP, a less formidable term than it sounds, is a measure of wealth, obtained by dividing the value of goods and services produced in a country during one year by the number of people in that country.
These loans carry an interest rate slightly above the market rate at which the Bank itself borrows and must generally be repaid within years. IDA loans are interest free and have a maturity of 35 or 40 years. In contrast, all member nations, both wealthy and poor, have the right to financial assistance from the IMF. Maintaining an orderly and stable international monetary system requires all participants in that system to fulfill their financial obligations to other participants.
Membership in the IMF gives to each country that experiences a shortage of foreign exchange--preventing it from fulfilling these obligations--temporary access to the IMF's pool of currencies to resolve this difficulty, usually referred to as a balance of payments problem.
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These problems are no respecter of economic size or level of per capita GNP, with the result that over the years almost all members of the IMF, from the smallest developing country to the largest industrial country, have at one time or other had recourse to the IMF and received from it financial assistance to tide them over difficult periods. Money received from the IMF must normally be repaid within three to five years, and in no case later than ten years. Interest rates are slightly below market rates, but are not so concessional as those assigned to the World Bank's IDA loans.
Through the use of IMF resources, countries have been able to buy time to rectify economic policies and to restore growth without having to resort to actions damaging to other members' economies. World Bank Operations The World Bank exists to encourage poor countries to develop by providing them with technical assistance and funding for projects and policies that will realize the countries' economic potential. The Bank views development as a long-term, integrated endeavor. During the first two decades of its existence, two thirds of the assistance provided by the Bank went to electric power and transportation projects.
Although these so-called infrastructure projects remain important, the Bank has diversified its activities in recent years as it has gained experience with and acquired new insights into the development process. The Bank gives particular attention to projects that can directly benefit the poorest people in developing countries.
The direct involvement of the poorest in economic activity is being promoted through lending for agriculture and rural development, small-scale enterprises, and urban development. The Bank is helping the poor to be more productive and to gain access to such necessities as safe water and waste-disposal facilities, health care, family-planning assistance, nutrition, education, and housing. Within infrastructure projects there have also been changes. In transportation projects, greater attention is given to constructing farm-to-market roads. Rather than concentrating exclusively on cities, power projects increasingly provide lighting and power for villages and small farms.
Industrial projects place greater emphasis on creating jobs in small enterprises. Labor-intensive construction is used where practical.
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In addition to electric power, the Bank is supporting development of oil, gas, coal, fuelwood, and biomass as alternative sources of energy. The Bank provides most of its financial and technical assistance to developing countries by supporting specific projects. Although IBRD loans and IDA credits are made on different financial terms, the two institutions use the same standards in assessing the soundness of projects. The decision whether a project will receive IBRD or IDA financing depends on the economic condition of the country and not on the characteristics of the project. Its borrowing member countries also look to the Bank as a source of technical assistance.
But the amount of Bank-financed technical assistance for free-standing loans and to prepare projects has also increased. The Bank serves as executing agency for technical assistance projects financed by the United Nations Development Program in agriculture and rural development, energy, and economic planning. In response to the economic climate in many of its member countries, the Bank is now emphasizing technical assistance for institutional development and macroeconomic policy formulation. Every project supported by the Bank is designed in close collaboration with national governments and local agencies, and often in cooperation with other multilateral assistance organizations.
Indeed, about half of all Bank-assisted projects also receive cofinancing from official sources, that is, governments, multilateral financial institutions, and export-credit agencies that directly finance the procurement of goods and services, and from private sources, such as commercial banks. In making loans to developing countries, the Bank does not compete with other sources of finance.
It assists only those projects for which the required capital is not available from other sources on reasonable terms. Through its work, the Bank seeks to strengthen the economies of borrowing nations so that they can graduate from reliance on Bank resources and meet their financial needs, on terms they can afford directly from conventional sources of capital.
The range of the Bank's activities is far broader than its lending operations. Since the Bank's lending decisions depend heavily on the economic condition of the borrowing country, the Bank carefully studies its economy and the needs of the sectors for which lending is contemplated. These analyses help in formulating an appropriate long-term development assistance strategy for the economy.
Of the 34 very poor countries that borrowed money from IDA during the earliest years, more than two dozen have made enough progress for them no longer to need IDA money, leaving that money available to other countries that joined the Bank more recently.
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Similarly, about 20 countries that formerly borrowed money from the IBRD no longer have to do so. An outstanding example is Japan. For a period of 14 years, it borrowed from the IBRD. During the first phase, ending in , the IMF oversaw the adoption of general convertibility among the major currencies, supervised a system of fixed exchange rates tied to the value of gold, and provided short-term financing to countries in need of a quick infusion of foreign exchange to keep their currencies at par value or to adjust to changing economic circumstances. Difficulties encountered in maintaining a system of fixed exchange rates gave rise to unstable monetary and financial conditions throughout the world and led the international community to reconsider how the IMF could most effectively function in a regime of flexible exchange rates.
After five years of analysis and negotiation , the IMF's second phase began with the amendment of its constitution in , broadening its functions to enable it to grapple with the challenges that have arisen since the collapse of the par value system.
These functions are three. First, the IMF continues to urge its members to allow their national currencies to be exchanged without restriction for the currencies of other member countries. As of May , members had agreed to full convertibility of their national currencies.
Second, in place of monitoring members' compliance with their obligations in a fixed exchange system, the IMF supervises economic policies that influence their balance of payments in the presently legalized flexible exchange rate environment. This supervision provides opportunities for an early warning of any exchange rate or balance of payments problem.
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On the basis of all these facts it is obvious that the development of the international monetary system is an extraordinary historical process. Also the current monetary policy is affected by former monetary decisions. Neither the current world economic status nor future prospects of this constantly changing order can be examined without understanding its history. The gold standard was based on the ancient use of gold coins as an instrument of trading and storage of value.
Thus the exchange rate of that currency was determined by gold. In this type of international monetary system became a legal institution. The therefore necessary process was conducted by the British Parliament as it cancelled the long-standing restrictions on the export of gold, called the Resumption Act. In the late 19th century other countries such as Germany and Japan also introduced the gold standard. Back then Britain was the leading economic power in the world and other countries hoped to improve their own economy by imitating the British system.
In the United States joined the gold standard when they linked their paper dollar bills which were issued during the civil war, to gold. As prices of currencies were fixed in terms of gold, the gold standard attempted to ensure stability in world price levels. In fact price levels did not rise as much as during the gold standard as after World War II. However there was much fluctuation in national price levels over short periods.
This was due to a change in the relative prices of gold and other commodities. During World War I governments more or less suspended the gold standard and printed money in order to finance their substantial military expenditures. Therefore many countries experienced runaway inflation and as a result money supplies and price levels of many countries increased considerably.
However, particularly Britain, the former international center of the gold standard system, had problems to reintroduce it. The pound price of gold was too high and the Bank of England was therefore forced to follow a contractionary monetary policy in order to devalue it to the level before World War I. Unfortunately these measures led to a heavy increase of unemployed people. These events led to a decline of London as the world financial center.
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Furthermore it proved to be a problem for the stability of the gold standard. In the Great Depression began with many bank failures all over the world. Therefore many of them started exchanging their pounds into gold what forced the British representatives to quit the gold standard as they were unable to provide such a huge amount of gold. The United States left the gold standard in but returned to it in , other countries did not and suffered most during the Great Depression.
Restrictions on international trade and payments imposed by individual countries harmed world economy additionally and the world therefore developed into increasingly self-sufficient national entities in the early s. Due to the Great Depression, many countries had reduced their international trade activities which resulted in lower gains from trade and contributed to a slow recovery from the economic slump. Krugman, Obstfeld, ; Eichengreen. In the end this conclusion was the basis for the postwar international monetary system, the Bretton Woods agreement.
In remembrance of the disastrous aftermath of the years between the two world wars, the aim of the participants was to design a new international monetary system that would encourage full employment and price stability under condition that each country could obtain external balance without having trade restrictions.
This should be conducted with support of the IMF if necessary. Additionally a second institution, the World Bank was founded. It should support nations in war to rebuild their destroyed economies and furthermore it should help former colonies to develop and modernize their own economies. The participants of the system preserved their financial reserves mainly in the form of gold or dollar deposits and they had the guarantee that their dollar assets would be bought by the U.
Federal Reserve Bank at the official price in return for gold. Hence, the system was a gold exchange standard in which the dollar represented the main reserve currency.