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International Financial Institutions

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International Financial Institutions
Hi everyone. Welcome to the class. So, in the last lecture, we were you know we startedwith the International Economic Institutions, right.So, it is a very important time, and I am standing here you must all be aware of thecorona virus which is now spreading up like wildfire. It has affected the you know notonly China, but some of the other countries also slowly getting into it and when suchkind of an epidemic happens, right, we think only you know that lives are lost, but alongwith lives you know the impact it makes on international trade and business is quiteimmense. For example, you see most many of the products from China, now have beenstopped by many countries because of the fear, right. And the human resource movementis now stopped for the same reason, right.The importance of trade and business and how trade and businesses are linked withhuman beings. It is very important to understand, and when such kind of naturalcalamities or epidemics happen as in this case this corona virus we can see, that howmuch it impacts the entire economy for that particular country, right, the economiccondition, rightSo, in the last class we talked about the Bretton Wood’s agreement, in which you know44 nations started the international monetary system in which they wanted to make atrade easier and simpler, right.So, this was during the World War, II World War time. And then this Bretton Wood’sagreement from this Bretton Wood system. But in 1970s around it was demolished, itwas stopped, it was closed and in because the simple reason was that it was using a fixedrate system the Bretton Wood’s agreement was following a fixed rate system. But whenNixon was the president of America Richard Nixon he wanted through his advisors hewanted that it should be more of a floating rate system.And during the Bretton Wood’s system, it was you know in such a way it was done thatthe US dollar was you know pegged against the gold, right and the other countriescurrencies were pegged against the us currency. But then, after the death of the BrettonWood system you can say then came up two institutions and one of them being the IMFthe International Monetary Fund, which we were discussing and then the World Bank,right.So, the international monetary fund has plays a very vital role in the economic, inmanaging the economies of the world. For example, what it does is basically it workslike a facilitator; it works like a savior, help or somebody to help. So, it runs understandsthe economy of every nations at least its member countries and tries to understand itbetter.So, whenever some economy is not doing well, so the IMF plays a very vital role theIMF tries to understand what is the problem and then it also provides a solution. Thesolution can be in terms of like for example, first identifying the problem then it could belike providing support, lending support to the consent country and then also followedwith policy making and advice, right.So, this helps and we have seen some examples in the last class we discussed forexample, the case of Vietnam, the case of Ireland, where these economies came up froma very bad situation. And they, Vietnam became one of the most open economies anddeveloped countries among the Asian economies at least, right. So, we will continuefrom there.So, the IMF’s two roles we had discussed, one of them was the surveillance role and thesecond role was the role of lending, right. And, the IMF we discussed that it lends youknow to the countries on basis of the quota, right. And the quota is decided on basis ofthe voting power of the country, that means how much it impacts the global economy,accordingly it has a voting power, right. So, and on basis of that it decides the quota,right.(Refer Slide Time: 04:43)So, a third point which we will discuss today is capacity development. So, the thirdfunction of the IMF is the capacity development. So, what it says? The IMF providestechnical assistance and training to help member countries build better economicinstitutions and strengthen related human capacity.So, for example, you see designing and implementing more effective policies fortaxation and administration, ok. Expenditure management. So, as you saw if you recall incase of you know many of the you know 2008 crisis that happened many of thecountries, the at least the countries in the European most of the countries were affectedlargely the European countries as USA and all.So, what happened was there was a very ah very bad management, I would say very pooror bad management of funds, right. Credits were given without any proper checkup,checking and everything. So, this all resulted in a condition where the economy crashed,ok.So, expenditure management, monetary and exchange rate policies, right. So, what is themonetary policy? What is kind of monetary policy should a government have, the centralbank have? What is the exchange rate policy? Right. So, banking and financial systemsupervisions or structural reforms we are talking about in the last lecture.So, the structural reforms what should how should banks be working. In some casesbanks ah need to be merged, right, in order to reduce the number of unnecessaryworkforce and unnecessary cost of the bank to make it more lean and operational. So,legislative frameworks and economic statistics.So, the capacity development is that part where the you know IMF helps the countries totrain their people, to understand the economic you know to build better economicinstitutions, right. This also includes to reduce inequality, gender equality, and climateaction, because you see the IMF although is the financially it has a large influence on thefinance, but it is it looks at a holistic or overall growth of the of any nation, right. So, ityou know through not only from the economic for the economic development, it alsolooks at stability of a country also, right and the policies.So, we will talk about a case of Mongolia today. So, how what happened in Mongolia?Improving tax collection. So, tax revenue in Mongolia is highly concentrated, right.Some 400 large enterprises account for about 50 to 60 percent of the total domesticrevenue. This is what has happened.Among these large enterprises, about 100 large mining companies account for 40 percentof the tax revenue. So, there are total 400 let us say large once which account for 50 to60 percent of the total domestic revenue. Among these 400, 100 contribute about 40percent. So, reflecting the importance of the mining sector.Many of these large businesses, also the country’s largest investors it was in this contextthat in 2010 the Mongolian authorities requested IMF’s assistance in helping thegovernment design a strategy to improve the performance of its tax administration. Now,what happened? What was the impact? So, the IMF intervened due to the request ofMongolia.The IMF supported reforms helped improve large taxpayer administration. So, largenumber of people were brought under the tax bracket. The largest portion of tax revenuewas brought under effective control. A high rate of on time tax return filing was achievednearly 100 percent that is exemplary, right the very great with all tax returns filedelectronically, right. Tax and when you do it electronically you need to have train peoplefor that also, right. Tax arrears were sharply reduced. Taxpayers expressed a high degreeof satisfaction with the reforms. So, all these led to a very effective condition or a goodpositive condition for Mongolian tax structure, right, and finance for them.(Refer Slide Time: 10:29)The IMF is accountable to its member country governments, right, at the top of itsorganizational structure. So, now, we will talk about the governance. What is thestructure of the IMF? Right. So, when you talk about the IMF structure at the top is theBoard of Governors, right, consisting of one governor and one alternate governor fromeach member country. Usually they are the top officials from the central bank or financeministry, ok.At the present the current Managing Director and Chairwoman of IMF is the BulgarianEconomist Kristalina Georgieva, right, who has held this post since October 2019 just afew months now. And Gita Gopinath happens to be the chief economist of the IMF sinceOctober 2018, right. And if you remember the you know recently Gita Gopinathstatement regarding the credit rating and you know economic condition of India was alsoa largely discussed very recently.The Board of Governor meets once a year at the IMF World Bank annual meetings thereare 24 governors, right, in the Board of Governors there are 24. So, 24 of the governorsare on the international monetary and financial committee which advises the IMF’sexecutive board on the supervision and management of the IMF system, right.The day-to-day work of the IMF is seen by its 24 member executive board whichrepresents the entire membership and supported by the IMF staff, right. This is how itlooks like. So, there are this managing director is the head of the IMF and chair of theexecutive board and is assisted by 4 deputy managing directors. So, this is how it lookslike, right.(Refer Slide Time: 12:10)Just I can tell you can go through it, right. So, these are the different member countries.So, they advise the Board of Governors IMFC, right. The executive board, managingdirector, staff, so they are interconnected and the countries, authorities, they also haverepresentation. While the Board of Governors has delegated most of its powers to theIMF executive board, now the board of governor has given most of its power to the tothe IMF’s executive board now.So, the executive board looks into the day to day operations. But it retains the right toapprove the quota increases. So, the quota is to be increased or not that is still kept thisfunction is by the Board of Governors. The special drawing right allocations andadmittance of new members, compulsory withdrawal of members and amendments to thearticles of the agreement and by laws. So, these some of these activities are still managedby the Board of Governors. But otherwise the other operations are completely delegatedto the IMF’s executive board, right.The next important institution which was which was an outcome from the world theBretton Wood system was the World Bank, right. So, one was the IMF, the other was theWorld Bank.(Refer Slide Time: 13:32)So, what is this World Bank? So, like a bank we can understand, it is like a bank, right.So, it must be giving some funding some loan. The international organization dedicatedto provide finance, advice and research to developing nations to aid their economicadvancement is the function or the role of the World Bank, right. It is an internationalorganization which provides finance, advice and research.The World Bank is an international financial institution that provides financial andtechnical assistance true, right to the developing countries. So, you must have hearddeveloped several World Bank programs, for let us say cleanliness, for you knowimproving hygiene, for reducing let us say pollution for cleaning rivers, so manydifferent kind of activities.The World Bank was created at the end of the World War II as I have mentioned as aresult of the from it was an outcome of the Bretton Wood’s conference. We have alreadysystem, we have discussed. The bank is successful in providing financing for thisdevastated or destroyed countries.The first goal of the World Bank is to end extreme poverty. It wants no more than 3percent of people to live on 1.9 dollars a day or less by 2030. So, that is the you know thegoal or vision. Its second goal is to promote shared prosperity, not a skewed prosperitythat is only a few countries are very rich and others are very poor or a few people like forexample, in India, a few families hold almost you know a large portion of the GDP,right, the wealth. It wants to improve the incomes of the bottom 40 percent of thepopulation in each country. Since 1947, the World Bank has funded more than 12,000projects, ok. Let us say a be it you know infrastructural projects it be anything as I said.(Refer Slide Time: 15:30)So, the World Bank group under it there are several organizations we can see. Itcomprises two institutions, the World Bank itself consists of two institutions theinternational bank for reconstruction and development IBRD this one, and theinternational development association, this one, right. So, the IBRD was founded in 46,1946, IDA was founded in 1960.In contrast, the World Bank Group comprises 3 more institutes for example, theInternational Finance Corporation, this one, 1956; Multilateral Investment GuaranteeAgency, MIGA, 1988, and International Centre for Settlement of Investment Disputes,right 1966. So, the entire World Bank group has 5 major institutions, right within it.(Refer Slide Time: 16:21)So, let us see the IBRD first one. The international bank for reconstruction anddevelopment lends to the governments of middle income and creditworthy, low incomecountries, right. It is the original World Bank institution. It works closely with the rest ofthe World Bank group to help developing countries, reduce poverty, promote economicgrowth and build prosperity. So, as the name itself says bank for reconstruction anddevelopment. So, it is largely funds you know tries to help those countries which havewhich are going through some difficult times.Now, second is the IDA, which provides interest free loans called credits and grants tothe governments of the poorest countries, right. So, this bank provides loans to thosepoor countries. IDA complements the World Banks original lending arm, the IBRD. TheIBRD and IDA together share the same staff and headquarters and evaluate projects withthe same rigorous standards, ok. But only the interest area slightly varies, right inbetween them. So, this is more on the providing the loans.Third is the IFC. This is the largest global development institution focused exclusivelyon the private sector. So, what it says? The international finance corporation is thelargest global development institution focused exclusively on the private sector. It helpsdeveloping countries to achieve sustainable growth by financing investment, mobilizingcapital in international financial markets, and providing advisory services to business andgovernments, right. So, this these are the first 3.Then the 4th and 5th. The 4th large ah the 4th institution under the World Bank group isthe MIGA. So, the multilateral investment guarantee agency, it created in ‘88 was doneto promote FDI investment into the developing countries, right. To support economicgrowth, because every country might not have a large amount of reserve with it todevelop infrastructure everything, right. So, many a times we need FDI investments fromoutside.So, if for example, poor countries would like to keep their you know reserves for betterutilization like school, medical, road, everything. So, in order to provide a let us sayplant or a factory or something you need foreign investment some direct investment.So, this MIGA helps in promoting the FDI into the developing countries to support theeconomic growth, reduce poverty and improve people’s lives. It fulfills the mandate byoffering political risk insurance, right and credit enhancement products to investors andlenders, right. So, the MIGA helps in offering political risk insurance, right.The last one is the international centre for settlement of investment disputes, soinvestment related disputes, right. So, this provides international facilities forconciliation and arbitration of investment disputes. So, this body helps in try to settledown settle any kind of investment related disputes among the member nations, right orthe parties, the different parties, right.(Refer Slide Time: 19:43)So, this is a fact file of the World Bank, so July 44 it came into existence. So, that theseare different things headquartered in Washington DC. So, these are the membership,members official language used is here. The president at the moment is David Malpassand parent organization is obviously, this.The first president was Eugene Meyer. To become a member of the bank under theIBRD articles of agreement a country must first join the IMF. This is important. So, inorder to become a member of the bank you must first join the IMF. Membership in IDA,IFC and MIGA are conditional on membership in the IBRD. So, these are the some ofthe facts related to the World Bank, right.(Refer Slide Time: 20:31)What are its functions? Now, let us talk more about functions in detail. So, the majorfunctions are first it grant granting reconstruction loans to war devastated countries. So,IBRD for example, with the name itself says reconstruction, right. So, when it helps inproviding loans to war devastated countries for example, some of the African nations,some of the nations like Afghanistan, Pakistan, Syria, so all these.Granting developmental loans to underdeveloped countries. Providing loans togovernments for agriculture, irrigation, power, transport, water supply, education, healthetcetera. It provides loan to private concerns for specified projects. So, for some specificspecified projects also they provide loans to private concerns also. Foreign investment,they promote by guaranteeing loans provided by other organizations.So, they what they do basically? So, they promote foreign investment by guaranteeingloans, right. They act as a guarantor, right. Then, provide technical, economic andmonetary advice to the member countries. Encourage industrial development ofunderdeveloped countries by promoting economic reforms. So, this is some of the majorfunctions of the World Bank, are these, ok.(Refer Slide Time: 21:47)The bank stated purpose is to bridge the economic divide between the poor and the richcountries. So, the major objective of the World Bank is to bridge the gap. So, there is ahuge gap between some of the African countries and let us say some of the Europeancountries. So, now to bridge this gap is a major purpose.It does this by turning rich country resources into poor country growth, right. It is a longterm vision to achieve sustainable poverty reduction. So, the bank focuses on 6 areaslargely to achieve these goals.Overcome poverty by spurring growth, especially in Africa. Help reconstruct countriesemerging from war, the biggest cause of extreme poverty, right. So, we have seen after awar what happens, right people do not get food, there is malnutrition, children’s dying ofhunger. So, to help this reconstruct such countries. So, provide a customized solution tohelp middle-income countries remain out of poverty. So, to help some solution, so thatthe middle income countries they would not come into this poverty problem.Spur the governments to prevent climate change. So, yes, one of the major job that theWorld Bank is helping in is to prevent climate change, right, which is today we have seetalk we are talking a lot about global warming, climate change. So, it is working a lot onit. It helps them control communicable diseases. So, today only I stopped, when I startedthe lecture I started with the corona virus, right. So, it helps, the World Bank helpscomes into it plays a major role. So, helps in controlling the communicable diseasesespecially HIV, AIDS, malaria. So, there are lot of programs on malaria, lot of fundingbe done for you know scientific fund research and development. It also managesinternational financial crisis and promotes free tradeWork with the Arab league on 3 goals, they are to improve education, build infra andprovide micro loans to small businesses. And share its expertise with the developingcountries, publicizes its knowledge via reports and its interactive online database.(Refer Slide Time: 23:55)Let us talk about one such example. So, one case which was from Kenya. So, this is theLED-Kenya project, right. So, what is the, what was the role of World Bank let us see.So, the objective of the Kenya local economic development project LED, local economicdevelopment, is to strengthen local business and the business enabling environment incommunities impacted by oil, gas, mining and infrastructure investments in Kenya.The project will cover 3 components, right. Component 1, local content development.So, what is local content development? Enhance opportunities for local businesses toparticipate in the supply chain of multinational firms by improving access to informationalong with improving local firm capacity to meet standards and internationalrequirements. So, basically we have seen because of lack of information or lack of datamany a times people are not able to take advantage. So, it helps in giving access toinformation, right.Second local economic development. Support the creation of diverse marketopportunities and improve the competitiveness of the local business to access newmarkets such as agricultural, livestock value chains or renewable energy. This willinclude a focus on supporting women and youth entrepreneurship, capacity building andfacilitating the access to finance with local financial institutions, right.The third component of this is the institutional capacity building. So, first one content,economic development, third one capacity building. Work to promote a sustainable andconducive environment for private sector development. So, a country cannot are alwaysbe run by the government, right.So, the private sector also has to develop the country. So, this will include among othersupport, support with the development of strategies for Biashara Centers, training oftrainers to localize the training capacity, enhancement of corporate governance of localBoards and Advisory Councils.The project will focus on empowering gender balanced participation in the structure andactivities of the governance of these communities, right.(Refer Slide Time: 26:09)So, this is another program of the World Bank empowering women and girls totransform the Sahel, right. So, you can go through this. This was one more program.(Refer Slide Time: 26:20)And there is one more I have given an example. You can read providing on the job skillsfor urban youth in Papua, New Guinea. So, the World Bank helped, how they helped inimproving the condition of the people out there.(Refer Slide Time: 26:32)And this was a project in Rajasthan. In 2004, in India the 41 billion Prime Minister youknow Grameen Yojana, Sadak Yojana program has benefited 3,23,000 habitantshabitations across India by building new roads and upgrading old ones. The World Banksupported the program with a total loan of 1800 million dollars and another 500 millionhas been approved, right. So far 36,000 kilometers of road have been completed underthe World Bank finance rural project scheme, right. And have opened for traffic. Theseroads these roads almost connect 50,000 habitations.So, these are some of the very inspiring and very good works done by the World Bankacross the world. So, largely in those countries where they the need is very high.So, this is I think it is this is the most recent one. So, January 11, 2020 the organizationalchart how it looks like, right. So, the Board of Governors, Executive Directors, thePresident David Malpass, and then you have you know different organizations and theirdifferent members. So, you can if you go, if you look at it you will get a better idea anddetail. So, this is the most recent one, right.(Refer Slide Time: 29:34)Now, let us talk about a few of the agencies and what is their importance, now what havethey you know how they have contributed. For example, the IBRD, right which we haveone of the World Bank groups.The IBRD top country borrowers have been largely countries like India, Indonesia,Jordan, Egypt, and Argentina, right, so followed by China, Morocco. So, these are thecommitments 3024, 1950 until Columbia. How much disbursement they have done byfrom 2015 to 19 fiscal in millions of dollars.So, you can see Africa 816, 874, 427 it is up to 69 And East Asia and pacific, this is thevalue. So, it has been. So, this are something. In total if you see, in 15, they 19,012billion dollars; in 16, 22,532 million dollars, then it goes on. So, these are some of thedisbursements done by the IBRD for the you know reconstruction and developmentpurpose, right.(Refer Slide Time: 30:42)Some of the sectors in which they have they have committed are basically agriculture,fishing, forestry, education, energy, financial sector, health industry, services informationand telecommunications, public administration, social protection, transportation, watersanitation and waste management.So, these are some of the areas and each the values are accordingly in each sector, it alsoit has been given. This table might be very helpful to you. So, you can go through it andunderstand where the focus has been largely there, and in which year which sector theyhave largely focused that you can see it, right.(Refer Slide Time: 31:19)IDA on the other hand the IDA stop country borrowers have been again Ethiopia,Bangladesh, Pakistan, right. So, this one provides loan, right, we have seen credits.Mozambique, Mali, and in terms of value it is 15 was 12,905 millions of dollars and in19 it was 17,549 million of dollars, right.(Refer Slide Time: 31:46)And the commitments by the sector in fiscal 2015 to 19, it has been in different againyou can see this fishing same thing. So, how it has differed you can see. So, this is all thecommitments in terms of revenue, the this different organizations under the World Bankgroup they have done, right.So, lastly today we have understood that the World Bank and the IMF, they the majorpurpose is to look at not only the financial and economic health. But also to look into thesocial health of a country, right, to bring the country into stability to and to ensure thateach that the member countries, they do not you know they are not they do not fall intotrap of financial debt or you know economic debt you know a kind of a trap or kind of aproblem or if there is a structural issue which comes up.So, in any kind of condition they help in capacity development they give loans, theyprovide assistance, you know they provide they try to serve do you know kind of asurveillance and try to understand which countries are going through what kind ofconditions.So, they also talk about that the ratings of countries. For example, the IMF talks aboutthe rating. So, recently the India for example, India’s rating was brought down and thatcreated not a very good thing for India because when the IMF cuts down the rating or thesuppose the rating comes down. So, maybe investors would look at it in a with adifferent view, right, not a very positive view.So, all these things are a very important and today we have discussed with it. So, I thinkthis is all we have for the day and we will wind up here, right. So, thank you very much.I hope you have understood the role of economic institutions, international economicinstitutions and how they shape the world, right.So, thank you very much.