The Bretton Woods Institutions
Role and Meaning of the IMF and WB in the New Global Society
Apr 26, 2009
In order to understand how the World Bank and the International Monetary Fund function it is necessary to understand the reasons why they were set up and their mission and objectives.
Historical Background- Bretton Woods Institutions
The World Bank and the International Monetary Fund were created after the end of the Second World War, in 1944. They were set up according to the ideas of three key experts: the US Treasury Secretary Henry Morganthau, his chief economic advisor Harry Dexter White, and the British economist John Maynard Keynes. Their plan was to establish a postwar economic framework based on mutual decision-making and cooperation in the field of trade and economic relations.
The principle of government responsibility for the economic outcomes in market economies, implicitly the rejection of the laissez-faire state, was set up immediately after the World War II in the UK by the implementation of the Beveridge Plan, in France by the establishment of Commissariat du Plan, in West Germany by the Social Market Economy of Ludwig Erhard and in the US by the Employment Act in 1946.
The birth of the World Bank and the IMF managed to institutionalize this principle of government responsibility at a global level. The vision of the ones who designed the Bretton Woods institutions was that within a short period of time governments should fix the exchange rates and remove the restrictions on current account transactions.
The role of the IMF was to ensure the temporary financing and the timely adjustment of the balance-of-payments deficits, which would arise from the account imbalances. The World Bank was established to ensure the long term financing of the reconstruction that followed the destruction caused by the war in Europe, Japan and China. Furthermore, it would ensure development in non-industrial countries.
The World Bank and Its Agencies
The WB is comprised of five agencies that make loans or guarantee credit to its 177 member countries.These agencies are:
- The International Bank for Reconstruction and Development (IBRD), whose aim is to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development through loans, guarantees, and analytical and advisory services.
- The International Finance Corporation (IFC) was created to further economic development in the least developed countries by dealing with private investors acting without government guarantors. IFC promotes economic development through the private sector. It provides equity, long-term loans, structured finance and risk management products, and advisory services to its clients that have limited access to capital in markets deemed too risky by commercial investors in the absence of IFC participation.
- The International Development Association (IDA) provides concessional financing to the developing countries, where most of the people live with less than $2 a day. IDA’s resources aim at supporting country-led poverty reduction strategies in key policy areas, including raising productivity, providing accountable governance, improving the private investment climate, and improving access to education and health care.
- The Multilateral Investment Guarantee Agency (MIGA) helps promoting foreign direct investment in developing countries by providing guarantees to investors against non-commercial risks, such as expropriation, currency inconvertibility and transfer restrictions, war and civil disturbance, and breach of contract. MIGA provides technical assistance and advisory services to help countries attract and retain foreign investment, and to disseminate information on investment opportunities to the international business community.
- The International Centre for Settlement of Investment Disputes (ICSID) helps encourage foreign investment by providing international facilities for conciliation and arbitration of investment disputes, thereby helping foster an atmosphere of mutual confidence between states and foreign investors. ICSID also issues publications on dispute settlement and foreign investment law.
The International Monetary Fund
The IMF oversees the global financial system by observing exchange rates and the balance of payments, and offers financial and technical assistance when requested. The work of the IMF is of three main types:
- Surveillance, which is basically the monitoring of economic and financial developments and the policy advice, which is aimed in particular at crisis-prevention.
- Lending is also a core activity of the IMF. The Fund lends to countries with balance of payments difficulties in order to provide temporary financing and to support policies that might help in correcting the existing problems; there are also loans for the low-income, which are aimed in particular at poverty reduction.
- The IMF also provides technical assistance and training for the countries with which it works.
In time, the Bretton Woods institutions have become more powerful than the UN, whose authority and influence in the social and economic areas have been reduced in recent years. The type of globalization that has been promoted by the World Bank and the International Monetary Fund has predominated, while the one put forward by the United Nations was somewhat marginalized.
References:
Peter B. Kenen, Jeffrey R. Shafer, Nigel L. Wicks and Charles Wyplosz. International Economic and Financial Cooperation: New Issues, New Actors, New Responses. International Centre for Monetary and Banking Studies, Geneva, 2004, p. 1-20.
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