The International Monetary Fund and World Bank Group

The International Monetary Fund (IMF) and the World Bank Group are two global institutions created to assist nations in becoming and remaining economically viable. Each plays an imporant role in the environment of international trade by helping maintain stability in the financial markets and by assisting countries that are seeking economic development and restructuring. Inadequate monetary reserves and unstable currencies are particularly vexing problems in global trade.

So long as these conditions exist, world markets cannot develop and function as effectively as they should. To overcome these particular market barriers that plagued international trading before World War II, the International Monetary Fund (IMF) was formed. Originally 29 countries signed the agreement; now 184 countries are members. Among the objectives of the IMF are the stabilization of foreign exchange rates and the establishment of freely convertible currencies to facilitate the expansion and balanced growth of international trade.

Member countries have voluntarily joined to consult with one another to maintain a stable system of buying and selling their currencies so that payments in oreign money can take place between countries smoothly and without delay. The IMF also lends money to members having trouble meeting financial obligations to other members. Argentina, Turkey, and Greece have recently received such help from the IMF, but the results have been mixed. To cope with universally floating exchange rates, the IMF developed special drawing rights (SDRs), one of its more useful inventions. Because both gold and the U. S. dollar have lost their utility as the basic medium of financial exchange, most monetary statistics relate to SDRs rather than dollars.

The SDR is in effect “paper gold” and represents an average base of value derived from the value of a group of major currencies. Rather than being denominated in the currency of any given country, trade contracts are frequently written in SDRs because they are much less susceptible to exchange-rate fluctuations. The special drawing right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

Countries can exchange SDRs for hard currency at the IMF. The SDR also serves as the unit of account of the IMF and some other international organisations. Its value is based on a basket of key international currencies. The SDR is in some ways like a currency, but is currently used only at the IMF. The value of the SDR is based on the exchange rates of the US dollar, the euro, the yen and the pound sterling. The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems.

Although the International Monetary Fund has some severe critics,43 most agree that it has performed a valuable service and at least partially achieved many of its objectives. To be sure, the IMF proved its value in the financial crisis among some Asian countries in 1997. The impact of the crisis was lessened substantially as a result of actions taken by the IMF. During the financial crisis, the IMF provided loans to several countries including Thailand, Indonesia, and South Korea. Had these countries not received aid ($60 billion to Korea alone), the economic reverberations might have led to a global recession.

As it was, all the major equity markets reflected substantial reductions in market prices, and the rate of economic growth in some countries was slowed. Sometimes confused with the IMF, the World Bank Group is a separate institution that has as its goal the reduction of poverty and the improvement of living standards by promoting sustainable growth and investment in people. The bank provides loans, technical assistance, and policy guidance to developing country members to achieve its objectives.

The World Bank Group has five institutions, each of which performs the following services: (1)Lending money to the governments of developing countries to finance development projects in education, health, and infrastructure (2)Providing assistance to governments for developmental projects to the poorest developing countries (per capita incomes of $925 or less) (3) Lending directly to the private sector to help strengthen the private sector in developing countries with long-term loans, equity investments, and other financial assistance.

Providing investors with investment guarantees against “non-commercial risk,” such as expropriation and war, to create an environment in developing countries that will attract foreign investment (5)Promoting increased flows of international investment by providing facilities for the conciliation and arbitration of disputes between governments and foreign investors. It also provides advice, carries out research, and produces publications in the area of foreign investment law.

Since their inception, these institutions have played a pivotal role in the economic development of countries throughout the world and thus contributed to the expansion of international trade since World War II. Protests against Global Institutions Beginning in 1999, what some are calling “anti-capitalist protesters” began to influence the workings of the major global institutions described previously. The basic complaint against the WTO, IMF, and others is the amalgam of unintended consequences of globalization: environmental concerns, worker exploitation and domestic job losses, cultural extinction, higher oil prices, and diminished sovereignty of nations.

The anti-globalization protests first caught the attention of the world press during a WTO meeting in Seattle in November 1999. Then came the World Bank and IMF meetings in April in Washington, DC, the World Economic Forum in Melbourne, Australia, in September, and IMF/World Bank meetings in Prague, also in September 2000. Some 10,000 protesters faced some 11,000 police in Prague. And the protests45 and violence have continued at other meetings of world leaders regarding economic issues, such as the G20 meetings in London in 2009,46 and in individual countries affected by the IMF.

Tragically, the terrorism in London was most likely timed to coincide with the G8 meetings in Scotland in 2005. Regardless of the theoretical approach used in defense of international trade, the benefits from an absolute or comparative advantage clearly can accrue to any nation. Heightened competitors from around the world have created increased pressure for protectionism from every region of the globe at a time when open markets are needed if world resources are to be developed and utilized in the most beneficial manner.

And though market protection may be needed in light of certain circumstances and may be beneficial to national defence or the encouragement of infant industries in developing nations, the consumer seldom benefits from such protection. Free international markets help underdeveloped countries become self-sufficient, and because open markets provide new customers, most industrialized nations have, since World War II, cooperated in working toward freer trade.

Such trade will always be partially threatened by various governmental and market barriers that exist or are created for the protection of local businesses. However, the trend has been toward freer trade. The changing economic and political realities are producing unique business structures that continue to protect certain major industries. The future of open global markets lies with the controlled and equitable reduction of trade barriers.