International Monetary Fund
The International Monetary Fund is an international organization headquartered in Washington, D. C. consisting of "189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, reduce poverty around the world." Formed in 1944 at the Bretton Woods Conference by the ideas of Harry Dexter White and John Maynard Keynes, it came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system. It now plays a central role in the management of balance of payments difficulties and international financial crises. Countries contribute funds to a pool through a quota system from which countries experiencing balance of payments problems can borrow money; as of 2016, the fund had SDR477 billion. Through the fund, other activities such as the gathering of statistics and analysis, surveillance of its members' economies and the demand for particular policies, the IMF works to improve the economies of its member countries.
The organisation's objectives stated in the Articles of Agreement are: to promote international monetary co-operation, international trade, high employment, exchange-rate stability, sustainable economic growth, making resources available to member countries in financial difficulty. IMF funds come from two major sources:quotas and loans. Quotas, which are pooled funds of member nations, generate most IMF funds; the size of a member's quota depends on its financial importance in the world. Nations with larger economic importance have larger quotas; the quotas are increased periodically as a means of boosting the IMF's resources. The current Managing Director and Chairwoman of the International Monetary Fund is French lawyer and former politician, Christine Lagarde, who has held the post since 5 July 2011. Gita Gopinath was appointed as Chief Economist of IMF from October 1, 2018, she received her Ph. D. in economics from Princeton University. According to the IMF itself, it works to foster global growth and economic stability by providing policy advice and financing the members by working with developing nations to help them achieve macroeconomic stability and reduce poverty.
The rationale for this is that private international capital markets function imperfectly and many countries have limited access to financial markets. Such market imperfections, together with balance-of-payments financing, provide the justification for official financing, without which many countries could only correct large external payment imbalances through measures with adverse economic consequences; the IMF provides alternate sources of financing. Upon the founding of the IMF, its three primary functions were: to oversee the fixed exchange rate arrangements between countries, thus helping national governments manage their exchange rates and allowing these governments to prioritize economic growth, to provide short-term capital to aid the balance of payments; this assistance was meant to prevent the spread of international economic crises. The IMF was intended to help mend the pieces of the international economy after the Great Depression and World War II; as well, to provide capital investments for economic growth and projects such as infrastructure.
The IMF's role was fundamentally altered by the floating exchange rates post-1971. It shifted to examining the economic policies of countries with IMF loan agreements to determine if a shortage of capital was due to economic fluctuations or economic policy; the IMF researched what types of government policy would ensure economic recovery. A particular concern of the IMF was to prevent financial crisis, such as those in Mexico 1982, Brazil in 1987, East Asia in 1997–98 and Russia in 1998, from spreading and threatening the entire global financial and currency system; the challenge was to promote and implement policy that reduced the frequency of crises among the emerging market countries the middle-income countries which are vulnerable to massive capital outflows. Rather than maintaining a position of oversight of only exchange rates, their function became one of surveillance of the overall macroeconomic performance of member countries, their role became a lot more active because the IMF now manages economic policy rather than just exchange rates.
In addition, the IMF negotiates conditions on lending and loans under their policy of conditionality, established in the 1950s. Low-income countries can borrow on concessional terms, which means there is a period of time with no interest rates, through the Extended Credit Facility, the Standby Credit Facility and the Rapid Credit Facility. Nonconcessional loans, which include interest rates, are provided through Stand-By Arrangements, the Flexible Credit Line, the Precautionary and Liquidity Line, the Extended Fund Facility; the IMF provides emergency assistance via the Rapid Financing Instrument to members facing urgent balance-of-payments needs. The IMF is mandated to oversee the international monetary and financial system and monitor the economic and financial policies of its member countries; this activity facilitates international co-operation. Since the demise of the Bretton Woods system of fixed exchange rates in the early 1970s, surveillance has evolved by way of changes in procedures rather than through the adoption of new obligations.
The responsibilities changed from those of guardian to those of overseer of members' policies. The Fund analyses the appropriateness of each member country's economic and financial policies for achieving orderly economic growth, assesses the consequences of these policies for other countries and for the global e
International Finance Corporation
The International Finance Corporation is an international financial institution that offers investment and asset-management services to encourage private-sector development in less developed countries. The IFC is a member of the World Bank Group and is headquartered in Washington, D. C.. It was established in 1956, as the private-sector arm of the World Bank Group, to advance economic development by investing in for-profit and commercial projects for poverty reduction and promoting development; the IFC's stated aim is to create opportunities for people to escape poverty and achieve better living standards by mobilizing financial resources for private enterprise, promoting accessible and competitive markets, supporting businesses and other private-sector entities, creating jobs and delivering necessary services to those who are poverty stricken or otherwise vulnerable. Since 2009, the IFC has focused on a set of development goals that its projects are expected to target, its goals are to increase sustainable agriculture opportunities, improve healthcare and education, increase access to financing for microfinance and business clients, advance infrastructure, help small businesses grow revenues, invest in climate health.
The IFC is owned and governed by its member countries but has its own executive leadership and staff that conduct its normal business operations. It is a corporation whose shareholders are member governments that provide paid-in capital and have the right to vote on its matters, it was more financially integrated with the World Bank Group, but the IFC was established separately and became authorized to operate as a financially-autonomous entity and make independent investment decisions. It offers an array of debt and equity financing services and helps companies face their risk exposures while refraining from participating in a management capacity; the corporation offers advice to companies on making decisions, evaluating their impact on the environment and society, being responsible. It advises governments on building infrastructure and partnerships to further support private sector development; the corporation is assessed by an independent evaluator each year. In 2011, its evaluation report recognized that its investments performed well and reduced poverty, but recommended that the corporation define poverty and expected outcomes more explicitly to better-understand its effectiveness and approach poverty reduction more strategically.
The corporation's total investments in 2011 amounted to $18.66 billion. It committed $820 million to advisory services for 642 projects in 2011, held $24.5 billion worth of liquid assets. The IFC is in good financial standing and received the highest ratings from two independent credit rating agencies in 2018. IFC comes under frequent criticism from NGOs that it is not able to track its money because of its use of financial intermediaries. For example, a report by Oxfam International and other NGOs in 2015, "The Suffering of Others," found the IFC was not performing enough due diligence and managing risk in many of its investments in third-party lenders. Other criticism focuses on IFC working excessively with large companies or wealthy individuals able to finance their investments without help from public institutions such as IFC, such investments do not have an adequate positive development impact. An example cited by NGOs and critical journalists is IFC granting financing to a Saudi prince for a five-star hotel in Ghana.
The World Bank and International Monetary Fund were designed by delegates at the Bretton Woods conference in 1944. The World Bank consisting of only the International Bank for Reconstruction and Development, became operational in 1946. Robert L. Garner joined the World Bank in 1947 as a senior executive and expressed his view that private business could play an important role in international development. In 1950, Garner and his colleagues proposed establishing a new institution for the purpose of making private investments in the less developed countries served by the Bank; the U. S. government encouraged the idea of an international corporation working in tandem with the World Bank to invest in private enterprises without accepting guarantees from governments, without managing those enterprises, by collaborating with third party investors. When describing the IFC in 1955, World Bank President Eugene R. Black said that the IFC would only invest in private firms, rather than make loans to governments, it would not manage the projects in which it invests.
In 1956 the International Finance Corporation became operational under the leadership of Garner. It had 12 staff members and $100 million in capital; the corporation made its inaugural investment in 1957 by making a $2 million loan to a Brazil-based affiliate of Siemens & Halske. In 2007, IFC bought 18 % stake in Angel Broking. In December 2015 IFC supported Greek banks with 150 million euros by buying shares in four of them: Alpha Bank, Piraeus Bank and National Bank of Greece; the IFC is governed by its Board of Governors which meets annually and consists of one governor per member country. Each member appoints one governor and one alternate. Although corporate authority rests with the Board of Governors, the governors delegate most of their corporate powers and their authority over daily matters such as lending and business operations to the Board of Directors; the IFC's Board of Directors consists of 25 executive directors who meet and work at the IFC's headquarters, is chaired by the President of the World
Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measures may be sector-specific, or industry specific, they may differentiate by type or duration of the flow. Types of capital control include exchange controls that prevent or limit the buying and selling of a national currency at the market rate, caps on the allowed volume for the international sale or purchase of various financial assets, transaction taxes such as the proposed Tobin tax on currency exchanges, minimum stay requirements, requirements for mandatory approval, or limits on the amount of money a private citizen is allowed to remove from the country. There have been several shifts of opinion on whether capital controls are beneficial and in what circumstances they should be used. Capital controls were an integral part of the Bretton Woods system which emerged after World War II and lasted until the early 1970s.
This period was the first time. In the 1970s free market economists became successful in persuading their colleagues that capital controls were in the main harmful; the USA, other western governments, multilateral financial institutions such as the International Monetary Fund and World Bank began to take a critical view of capital controls and persuaded many countries to abandon them to facilitate financial globalization. The Latin American debt crisis of the early 1980s, the East Asian financial crisis of the late 1990s, the Russian ruble crisis of 1998–99, the global financial crisis of 2008, highlighted the risks associated with the volatility of capital flows, led many countries — those with open capital accounts — to make use of capital controls alongside macroeconomic and prudential policies as means to dampen the effects of volatile flows on their economies. In the aftermath of the global financial crisis, as capital inflows surged to emerging market economies, a group of economists at the IMF outlined the elements of a policy toolkit to manage the macroeconomic and financial – stability risks associated with capital flow volatility.
The proposed toolkit allowed a role for capital controls. The study, as well as a successor study focusing on financial-stability concerns stemming from capital flow volatility, while not representing an IMF official view, were influential in generating debate among policy makers and the international community, in bringing about a shift in the institutional position of the IMF. With the increased use of capital controls in recent years, the IMF has moved to destigmatize the use of capital controls alongside macroeconomic and prudential policies to deal with capital flow volatility. More widespread use of capital controls, raises a host of multilateral coordination issues, as enunciated for example by the G-20, echoing the concerns voiced by John Maynard Keynes and Harry Dexter White more than six decades ago. Prior to the 19th century there was little need for capital controls due to low levels of international trade and financial integration. In the first age of globalisation, dated from 1870–1914, capital controls remained absent.
Restrictive capital controls were introduced with the outbreak of World War I. In the 1920s they were relaxed, only to be strengthened again in the wake of the 1929 Great Crash; this was more an ad hoc response to damaging flows rather than based on a change in normative economic theory. Economic historian Barry Eichengreen has implied that the use of capital controls peaked during World War II, but the more general view is that the most wide ranging implementation occurred after Bretton Woods. An example of capital control in the interwar period was the Reich Flight Tax, introduced in 1931 by Chancellor Heinrich Brüning; the tax was needed to limit the removal of capital from the country by wealthy residents. At the time Germany was suffering economic hardship due to the Great Depression and the harsh war reparations imposed after World War I. Following the ascension of the Nazis to power in 1933, the tax was repurposed to confiscate money and property from Jews fleeing the state-sponsored anti-Semitism.
At the end of World War II, international capital was "caged" by the imposition of strong and wide ranging capital controls as part of the newly created Bretton Woods system—it was perceived that this would help protect the interests of ordinary people and the wider economy. These measures were popular as at this time the western public's view of international bankers was very low, blaming them for the Great Depression. Keynes, one of the principal architects of the Bretton Woods system, envisaged capital controls as a permanent feature of the international monetary system, though he had agreed current account convertibility should be adopted once international conditions had stabilised sufficiently; this meant that currencies were to be convertible for the purposes of international trade in goods and services, but not for capital account transactions. Most industrial economies relaxed their controls around 1958 to allow this to happen.. The other leading architect of Bretton Woods, the American Harry Dexter White, his boss Henry Morgenthau, were somewhat less radical than Keynes, but still agreed on the need for permanent capital controls.
In his closing address to the Bretton Woods conference, Morgenthau spoke of how the measures ad
A central bank, reserve bank, or monetary authority is the institution that manages the currency, money supply, interest rates of a state or formal monetary union, oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, generally controls the printing/coining of the national currency, which serves as the state's legal tender. A central bank acts as a lender of last resort to the banking sector during times of financial crisis. Most central banks have supervisory and regulatory powers to ensure the solvency of member institutions, to prevent bank runs, to discourage reckless or fraudulent behavior by member banks. Central banks in most developed nations are institutionally independent from political interference. Still, limited control by the executive and legislative bodies exists. Functions of a central bank may include: implementing monetary policies. Setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms controlling the nation's entire money supply the Government's banker and the bankers' bank managing the country's foreign exchange and gold reserves and the Government bonds regulating and supervising the banking industry Central banks implement a country's chosen monetary policy.
At the most basic level, monetary policy involves establishing what form of currency the country may have, whether a fiat currency, gold-backed currency, currency board or a currency union. When a country has its own national currency, this involves the issue of some form of standardized currency, a form of promissory note: a promise to exchange the note for "money" under certain circumstances; this was a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the "promise to pay" consists of the promise to accept that currency to pay for taxes. A central bank may use another country's currency either directly in a currency union, or indirectly on a currency board. In the latter case, exemplified by the Bulgarian National Bank, Hong Kong and Latvia, the local currency is backed at a fixed rate by the central bank's holdings of a foreign currency. Similar to commercial banks, central banks incur liabilities. Central banks create money by issuing interest-free currency notes and selling them to the public in exchange for interest-bearing assets such as government bonds.
When a central bank wishes to purchase more bonds than their respective national governments make available, they may purchase private bonds or assets denominated in foreign currencies. The European Central Bank remits its interest income to the central banks of the member countries of the European Union; the US Federal Reserve remits all its profits to the U. S. Treasury; this income, derived from the power to issue currency, is referred to as seigniorage, belongs to the national government. The state-sanctioned power to create currency is called the Right of Issuance. Throughout history there have been disagreements over this power, since whoever controls the creation of currency controls the seigniorage income; the expression "monetary policy" may refer more narrowly to the interest-rate targets and other active measures undertaken by the monetary authority. Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. Unemployment beyond frictional unemployment is classified as unintended unemployment.
For example, structural unemployment is a form of unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment. Macroeconomic policy aims to reduce unintended unemployment. Keynes labeled any jobs that would be created by a rise in wage-goods as involuntary unemployment: Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.—John Maynard Keynes, The General Theory of Employment and Money p11 Inflation is defined either as the devaluation of a currency or equivalently the rise of prices relative to a currency. Since inflation lowers real wages, Keynesians view inflation as the solution to involuntary unemployment. However, "unanticipated" inflation leads to lender losses as the real interest rate will be lower than expected.
Thus, Keynesian monetary policy aims for a steady rate of inflation. A publication from the Austrian School, The Case Against the Fed, argues that the efforts of the central banks to control inflation have been counterproductive. Economic growth can be enhanced by investment such as more or better machinery. A low interest rate implies that firms can borrow money to invest in their capital stock and pay less interest for it. Lowering the interest is therefore considered to encourage economic growth and is used to alleviate times of low economic growth. On the other hand, raising the interest rate is used in times of high economic growth as a contra-cyclical device to keep the economy from overheating and avoid market bubbles. Further goals of monetary policy are stability of interest rates, of the financial market, of the foreign exchange market. Goals cannot be separated fr
Bank for International Settlements
The Bank for International Settlements is an international financial institution owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through its meetings and through the Basel Process – hosting international groups pursuing global financial stability and facilitating their interaction, it provides banking services, but only to central banks and other international organizations. It is based in Basel, with representative offices in Hong Kong and Mexico City; the BIS was established in 1930 by an intergovernmental agreement between Germany, France, the United Kingdom, Japan, the United States, Switzerland. It opened its doors in Basel, Switzerland, on 17 May 1930; the BIS was intended to facilitate reparations imposed on Germany by the Treaty of Versailles after World War I, to act as the trustee for the German Government International Loan, floated in 1930. The need to establish a dedicated institution for this purpose was suggested in 1929 by the Young Committee, was agreed to in August of that year at a conference at The Hague.
The charter for the bank was drafted at the International Bankers Conference at Baden-Baden in November, adopted at a second Hague Conference on January 20, 1930. According to the charter, shares in the bank could be held by individuals and non-governmental entities. However, the rights of voting and representation at the Bank's General Meeting were to be exercised by the central banks of the countries in which shares had been issued. By agreement with Switzerland, the BIS had its corporate headquarters there, it enjoyed certain immunities in the contracting states. The BIS’s original task of facilitating World War I reparation payments became obsolete. Reparation payments were first suspended and abolished altogether. Instead, the BIS focused on its second statutory task, i.e. fostering the cooperation between its member central banks. It provided banking facilities to them. For instance, in the late 1930s, the BIS was instrumental in helping continental European central banks shipping out part of their gold reserves to London and New York.
At the same time, the BIS fell under the spell of the appeasement illusion. The most notorious incident in this context was the transfer of 23 tons of gold held by the BIS in London on behalf of the Czechoslovakian national bank to the German Reichsbank after Nazi Germany occupied Czechoslovakia in March 1939. At the outbreak of World War II in September 1939, the BIS Board of Directors – on which the main European central banks were represented – decided that the Bank should remain open, but that, for the duration of hostilities, no meetings of the Board of Directors were to take place and that the Bank should maintain a neutral stance in the conduct of its business. However, as the war dragged on evidence mounted that the BIS conducted operations that were helpful to the Germans. Throughout the war, the Allies accused the Nazis of looting and pled with the BIS not to accept gold from the Reichsbank in payment for prewar obligations linked to the Young Plan; this was to no avail as remelted gold was either confiscated from prisoners or seized in victory and thus acceptable as payment to the BIS.
Operations conducted by the BIS were viewed with increasing suspicion from Washington. The fact that top level German industrialists and advisors sat on the BIS board seemed to provide ample evidence of how the BIS might be used by Hitler throughout the war, with the help of American and French banks. Between 1933 and 1945 the BIS board of directors included Walther Funk, a prominent Nazi official, Emil Puhl, as well as Hermann Schmitz, the director of IG Farben, Baron von Schroeder, the owner of the J. H. Stein Bank; the 1944 Bretton Woods Conference recommended the "liquidation of the Bank for International Settlements at the earliest possible moment". This resulted in the BIS being the subject of a disagreement between the U. S. and British delegations. The liquidation of the bank was supported by other European delegates, as well as Americans, but it was opposed by head of the British delegation. Keynes went to Morgenthau hoping to prevent or postpone the dissolution, but the next day it was approved.
However, the liquidation of the bank was never undertaken. In April 1945, the new U. S. president Harry S. Truman and the British government suspended the dissolution, the decision to liquidate the BIS was reversed in 1948. After World War II, the BIS retained a distinct European focus, it acted as Agent for the European Payments Union, an intra-European clearing arrangement designed to help the European countries in restoring currency convertibility and free, multilateral trade. During the 1960s – the heyday of the Bretton Woods fixed exchange rate system – the BIS once again became the locus for transatlantic monetary cooperation, it coordinated a number of currency support operations. The Group of Ten, including the main European economies, Canada and the United States, became the most prominent grouping. With the end of the Bretton Woods system and the transition to floating exchange rates, financial stability issues came to the fore; the collapse of some internationally active banks, such as Herstatt Bank, highlighted the need for improved banking supervision at an inter
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Western European countries and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a negotiated monetary order intended to govern monetary relations among independent states; the chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. There was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well. Preparing to rebuild the international economic system while World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference known as the Bretton Woods Conference.
The delegates deliberated during 1–22 July 1944, signed the Bretton Woods agreement on its final day. Setting up a system of rules and procedures to regulate the international monetary system, these accords established the International Monetary Fund and the International Bank for Reconstruction and Development, which today is part of the World Bank Group; the United States, which controlled two thirds of the world's gold, insisted that the Bretton Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but declined to ratify the final agreements, charging that the institutions they had created were "branches of Wall Street"; these organizations became operational in 1945 after a sufficient number of countries had ratified the agreement. On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold bringing the Bretton Woods system to an end and rendering the dollar a fiat currency; this action, referred to as the Nixon shock, created the situation in which the U.
S. dollar became a reserve currency used by many states. At the same time, many fixed currencies became free-floating; the political basis for the Bretton Woods system was in the confluence of two key conditions: the shared experiences of two World Wars, with the sense that failure to deal with economic problems after the first war had led to the second. There was a high level of agreement among the powerful nations that failure to coordinate exchange rates during the interwar period had exacerbated political tensions; this facilitated. Furthermore, all the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons; the experience of World War II was fresh in the minds of public officials. The planners at Bretton Woods hoped to avoid a repeat of the Treaty of Versailles after World War I, which had created enough economic and political tension to lead to WWII. After World War I, Britain owed the U. S. substantial sums, which Britain could not repay because it had used the funds to support allies such as France during the War.
S. The solution at Versailles for the French and Americans seemed to entail charging Germany for the debts. If the demands on Germany were unrealistic it was unrealistic for France to pay back Britain, for Britain to pay back the US. Thus, many "assets" on bank balance sheets internationally were unrecoverable loans, which culminated in the 1931 banking crisis. Intransigent insistence by creditor nations for the repayment of Allied war debts and reparations, combined with an inclination to isolationism, led to a breakdown of the international financial system and a worldwide economic depression; the so-called "beggar thy neighbor" policies that emerged as the crisis continued saw some trading nations using currency devaluations in an attempt to increase their competitiveness, though recent research suggests this de facto inflationary policy offset some of the contractionary forces in world price levels. In the 1920s, international flows of speculative financial capital increased, leading to extremes in balance of payments situations in various European countries and the US.
In the 1930s, world markets never broke through the barriers and restrictions on international trade and investment volume – barriers haphazardly constructed, nationally motivated and imposed. The various anarchic and autarkic protectionist and neo-mercantilist national policies – mutually inconsistent – that emerged over the first half of the decade worked inconsistently and self-defeatingly to promote national import substitution, increase national exports, divert foreign investment and trade flows, prevent certain categories of cross-border trade and investment outright. Global central bankers attempted to manage the situation by meeting with each other, but their understanding of the situation as well as difficulties in communicating internationally, hindered their abilities; the lesson was that having responsible, hard-working central bankers was not enough. Britain in the 1930s had an exclusionary trading bloc with nations of the British Empire known as the "Sterling Area". If Britain imported more than it exported to nations such as South Africa, South African recipients of pounds sterling tended to put them into London banks.
This meant that th