1. Discuss the following:

1. IMF: Tax on Profits/ Transactions- Hit on Banks?

2. Pledge for More IMF Help for Poor. Rescue Package.

Unit 6

The World Bank

Read the text and decide whether the sentences are true or false:

In July 1944 the Bretton Woods agreement, signed at the UN Monetary and Financial Conference, established the International Bank for Reconstruction and Development (IBRD or World Bank). In 1945 the Bank moved into its headquarters in Washington, D.C., and began with an authorized capital of $10 billion, most of which was quickly lent to Western Europe for rebuilding its economic infrastructure, which had been ravaged by World War II. The original purpose of both Bank and IMF was to prevent the monetary insecurity that had arguably led to the Great Depression and trade-war policies in the interwar years, and had perhaps even contributed to the outbreak of the war itself.

Both Fund and Bank were created at a time when it was widely recognized that governments and international regimes should correct for market failures in the economy. John Maynard Keynes, the economist whose ideas inspired the creation of both institutions, envisioned the Bank as a sort of global credit and development arm of the international community whenever the free market would not ensure adequate lending to a country to aid its development. In its initial decades, the Bank focused on “brick and mortar” projects that include building countries’ basic infrastructures, initially in Europe but soon in developing countries. By the 1980s, when a global debt crisis swept the world, the World Bank started to change its lending focus. Slow global economic growth led to overcapacity in many economies while the number of viable new projects the Bank could finance went down. And since poor debtor countries needed substantial funds that could be disbursed quickly, it provided more adjustment loans to streamline economic sectors such as agriculture and telecommunication. At the same time, the United States, the Bank’s main “shareholder”, sought to involve it in solving the debt problem. At the 1985 annual meeting of the World Bank and IMF in Seoul, then secretary of state James A. Baker proposed to solve third world debt by boosting economic growth instead of imposing domestic austerity. The intention was for debtor countries to pursue market-oriented growth, for commercial banks to provide more money, and for the World Bank to disburse loans more quickly.

Today the World Bank counts 185 member states and offers cumulative lending of $371 billion—in 2004 it loaned $20.1 billion for 245 projects in developing countries. It now includes a number of institutions: the IBRD, the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). The focus here is primarily on the IBRD, the institution that provides loans to governments of low- and middle-income countries.

The Bank classifies countries according to their gross national income per capita, which can be low, middle, or high. The low-income economies in 2000 were defined as having $755 or less per capita, lower-middle income $756-$2,995, upper-middle $2,996-$9,266, and high $9,266 or more. Less than 5 percent of IBRD financing comes from member countries. The other type of loan is through the IDA, which uses interest-free loans or long-term credits for which borrowers pay less than 1 percent interest. IDA loans must be paid back in thirty-five to forty years and have a ten-year grace period on the repayment of principal. Some forty countries contribute to IDA funding.

The Bank has broadened its mandate to “fight poverty and improve living standards for people living in the developing world”. It now includes providing loans to governments for health, education, governance, and social protection programs.

The president is appointed by the Executive Board, comprising twenty-four country representatives, but with direction from the United States. The US executive director nominates the candidate; the executive directors then appoint the president, usually by resolution.

The Board of Governors is made up of finance ministers from member governments, who meet at least annually. It is charged with general over-sight and sets the Bank’s de facto policy direction. But the board is heterogeneous and subject to catering to the political will of those member countries with the largest share voting rights, above all the United States and Japan. It tends to delegate much of its authority to the Executive Board, which is involved with the Bank’s internal operations. There are questions about how representative of the member countries the executive directors are. The Executive Board supposedly represents all of the Bank’s 185 member states, but in practice representation is imperfect because country interests are clustered. The Canadian executive director is responsible for representing interests and policy directions not only of Canada, but also of a cluster of other countries with varied interest and policy directions that are grouped under Canada: Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and Grenadines. Executive director positions are typically controlled by member states’ finance ministries, which are often highly insulated and able to resist dissent—for example, from their peers in environmental protection agencies. (Adding to the complexity of this structure, the Bank’s Development Committee, comprising yet another twenty-four members, also makes policy decisions. Appointed by the Board of Directors, the committee meets twice a year to set broad Bank policy and advise the Board of Governors on development issues.)

The Bretton Woods system gives each state a base of 250 votes, but votes are weighted by financial contribution, which is in turn based on the size of a country’s economy. For example, the United States contributes some 22 percent of the Bank’s capital and holds 20.6 percent of the total vote, while the Maldives have 0.3 percent.

What makes the Bank’s activities contentious is that the great majority of voting rights belong to a small number of industrialized countries—the principal shareholders in terms of paid-up capital. For example, the seven wealthiest national economies (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) together command 45 percent of voting shares. The voting weight of the United States gives it the power to veto any changes in the Bank’s capital base and Articles of Agreement since 85 percent of shares are needed to effect such changes. In contrast, the much greater number of developing and emerging economies enjoys the small proportion of voting rights, although they are the principal stake holders and pay interest to the Bank. This arrangements has led critics to charge that the Bank is not accountable to developing countries, but to the United States and other creditor nations.

1. Most of the capital was lent to the African countries.______

2. The Bretton Woods agreement established the World Bank.______

3. The main purpose of the Bank was to prevent the monetary insecurity._____

4. The ideas of John Keynes inspired the creation of the Bank.______

5. Today the World Bank counts 185 member states._____

6. The Bank classifies countries according to their GDP._____

7. It broadened its mandate to fight poverty in the developing world._____

8. The institution also includes providing loans to governments for sports and entertainment._____

9. The President is appointed by the Executive Board.____

10. What makes the Bank’s activities contentious is that minority of voting rights belong to a small number of industrialized countries._____

Choose the most suitable word and fill in the gaps:

1. In July 1944 the Bretton Woods agreement established the ____________.

a) MIGA

b) IBRD

c) IFC

d) IDA

2. Both Fund and Bank were created at a time when it was recognized that international regimes should correct for market failures in the ___________.

a) agriculture

b) economy

c) society

d) horticulture

3. When a global ___________ crisis swept the world, the World Bank started to change its lending focus.

a) economic

b) political

c) financial

d) debt

4.__________ global economic growth led to overcapacity in many economies.

a) Rapid

b) Slow

c) Fruitful

d) Sustainable

5. The Bank planned to improve living standards for people living in the __________.

a) developing world

b) developed countries

c) desert areas

d) industrialized countries

Exercises and Tasks

1. Complete the text with the following words: system, insecurity, appoint, contribution, envisioned, per capita, grace, subject, contribute, practice.

1. The monetary ___________ led to the Great Depression.

2. John Keynes whose ideas inspired the creation of the Bank, _________ it as a sort of global credit and development arm of the international community.

3. The low – income economies were defined as having $ 755 or less __________.

4. IDA loans must be paid back in forty years and have a ten – year _________ period on the repayment of principal.

5. Some forty countries __________ to IDA funding.

6. The executive directors ___________ the president, usually by resolution.

7. The Board is heterogeneous and __________ to catering to the political will of those member countries with the largest share voting rights.

8. The Executive Board supposedly represents all of the Bank’s member states, but in ___________ representation is imperfect.

9. The Bretton Woods ________ gives each state a base of two hundred and fifty votes.

10. Votes are weighted by financial __________, which is in turn based on the size of a country’s economy.