Bretton Woods System (IMF & WB) Notes

Overview

  • United Nations Monetary and Financial Conference (1944): Commonly referred to as the Bretton Woods Conference.

International Monetary Fund (IMF)

  • Status: A specialized agency of the United Nations, operating independently.
  • India: A founding member.
  • Headquarters: Washington, D.C.

Governance Structure

  1. Board of Governors
    • Composed of one governor and one alternate governor from each member country.
    • Responsibilities include approving:
      • Quota increases
      • Special Drawing Rights (SDR) allocations
      • Amendments to the Articles of Agreement (AoA)
      • Admission of new members
      • Appointment of Executive Directors
  2. Ministerial Committees (2)
    • International Monetary and Financial Committee (IMFC):
      • Discusses issues of common concern affecting the global economy.
      • Meets twice a year.
    • Development Committee:
      • Advises the Board of Governors of the IMF and World Bank on development issues.

Roles and Functions

  1. Surveillance: Crisis prevention by monitoring global economic trends.
  2. Lending: Provides financial assistance to countries facing balance of payments (BoP) difficulties.
  3. Addressing Illicit Activities: Focuses on combating money laundering and terrorism financing.

Special Drawing Rights (SDRs)

  • Definition: The IMF’s artificial currency unit and international reserve asset created in 1969.
  • Currency Composition: USD > Euro > Renminbi > Japanese Yen > British Pound.
  • Usage:
    • Not traded in forex markets and not usable by private entities.
    • Can be exchanged for national currencies but is neither a currency nor a claim on the IMF.
  • Review Frequency: Reviewed every five years.

IMF Quota System

  • Payment Structure: Payable partially in SDRs and partially in the member’s own currency.
  • Reserve Tranche:
    • Emergency funds accessible without obliging terms and conditions or specific repayment periods, unlike the credit tranche (three years).
    • Acts as a first-resort facility for short-notice needs before formal loan requests.
  • Guiding Functions:
    1. Subscription (obligated amount)
    2. Voting rights
    3. Loan access
  • India’s Position: 8th largest shareholder with 2.7% quota and 2.6% voting rights.
  • Top 10 Members: BRIC (Brazil, Russia, India, China) + US, Japan, and four major EU members (Germany, UK, France, Italy).

NAB and GAB

  • General Arrangement to Borrow (GAB) and New Arrangement to Borrow (NAB) are credit arrangements between the International Monetary Fund (IMF) and a group of member countries or institutions.
  • These arrangements provide supplementary resources to the IMF to address international financial problems.
  • Example: In the 2012 Mexico Summit, India participated in the NAB to assist during the Eurozone crisis.

IMF Lending and Facilities

  • Does not lend for specific projects: The IMF focuses on providing financial assistance to stabilize economies rather than funding individual projects.

Key Lending Facilities:

  1. Poverty Reduction and Growth Facility (PRGF):
  • Designed for low-income countries (LICs).
  • Provides concessional loans to support poverty reduction and economic growth.
  1. Exogenous Shocks Facility (ESF):
  • Targets LICs impacted by global shocks (e.g., commodity price fluctuations or natural disasters).
  1. Stand-By Agreement (SBA):
  • Offers non-concessional loans to address short-term balance of payments (BoP) crises.
  1. Extended Fund Facility (EFF):
  • Requires structural economic reforms.
  • Aims to support long-term financial stability and growth. Members under SBA may transition to EFF for extended support.

Reports Published by the IMF

  1. World Economic Outlook (WEO):
  • Analyzes global economic trends and forecasts.
  1. Global Financial Stability Report (GFSR):
  • Evaluates financial market stability and risks.
  • Published twice a year.

Conditionalities

  • IMF financial assistance comes with a set of required policies known as conditionalities.
  • These policies ensure that the borrowing country implements economic reforms to stabilize its economy.
  • Often referred to as the Washington Consensus, these conditions typically include fiscal discipline, trade liberalization, and structural adjustments.

India and IMF

  • Joined: 1945
  • Accepted Article VII: 1994
  • Adopts Special Data Dissemination Standard (SDDS): Ensures transparency in data dissemination practices.

Chiang Mai Initiative

  • Multilateral currency pooling arrangement: ASEAN + China + South Korea + Japan
  • Launched: 2010
  • Never used: No crisis like the 1997 Asian financial crisis.

BRICS Contingent Reserve Arrangement (CRA)

  • Established: 2015, Operational: 2016
  • Formation: Treaty signed at the BRICS summit in Brazil, 2014.

World Bank Group and World Bank

  • President: Traditionally American
  • Membership: Must be a member of the IMF.
  • 5 Agencies:
    1. IBRD
    2. International Development Association (IDA)
    3. International Finance Corporation (IFC)
    4. Multilateral Investment Guarantee Agency (MIGA)
    5. International Centre for Settlement of Investment Disputes (ICSID)
  • World Bank: Composed of IBRD + IDA, focused on developing countries (human development, agriculture, poverty, environment, infrastructure, governance).
  • Role: Lends for specific projects, often linked to broader policy changes.

IBRD

  • Provides loans to middle-income developing countries.
  • Supports infrastructure, education, environment, energy, healthcare, water, and sanitation projects.

IDA

  • Focuses on the world’s poorest countries, offering interest-free loans.
  • Established in 1960, supports the 80 poorest countries.
  • Key initiatives: HIPC (Heavily Indebted Poor Countries) and MDRI (Multilateral Debt Relief Initiative).
  • Donors: Rich countries, meet every 3 years.
  • Eligibility: Based on per capita income and poverty level, includes small islands and ‘blend countries’ (e.g., Pakistan, Nigeria).

IFC

  • Promotes private sector investment.
  • Largest multilateral source of loan and equity financing for private sector projects in developing countries.
  • India is a founding member.

MIGA

  • Promotes FDI in developing countries by insuring investors against political risks and advising governments.
  • Covers only new investments: greenfield projects, new investments in expansion, modernization, or financial restructuring of existing projects.
  • India: Member.

ICSID

  • Provides a facility for conciliation and arbitration of investment disputes between countries and investors.
  • India: Not a member

G-20

  • Established in 1999 to discuss key global economic issues.
  • Members: 19 countries + EU.
  • 3 North America, 2 South America (Argentina, Brazil), 4 Europe (Germany, France, Italy, UK), 1 Australia, 1 South Africa, 8 Asia (China, India, Russia, Japan, Turkey, Indonesia, Korea, Saudi Arabia).
  • Includes EU, Managing Director of IMF, World Bank President, Chair of IMFC, and DC of IMF.
  • Chairmanship: Rotates among regional groupings, no permanent secretariat.
  • Permanent Invitees: Spain, Chair of ASEAN, Chair of African Union, Representative of New Partnership for Africa’s Development, and other countries invited by the presidency.

Asian Development Bank (ADB)

  • Established: 1966, HQ in Manila.
  • Members: Not just Asian countries (includes UNESCAP members and non-regional developed countries).
  • President: Traditionally Japanese.
  • Voting Powers: Japan > USA > China > India > Australia.
  • Largest Beneficiaries: China, India, Indonesia, Philippines, Pakistan.
  • Loans:
  1. Ordinary Capital Resource (OCR)
  2. Asian Development Fund (ADF)
  3. Technical Assistance
  4. Innovation and Efficiency Fund (IIF).

European Central Bank (ECB)

  • Monetary authority of the Eurozone.
  • Administers monetary policy for 19 EU Eurozone members.
  • Established by the Maastricht Treaty in 1998.
  • HQ: Frankfurt, Germany.

OECD

  • Established in 1961 to stimulate economic progress and world trade.
  • Official UN observer.
  • HQ: Paris.
  • India: Member of the governing board of OECD’s Development Centre, observer in some OECD committees.

New Development Bank (NDB)

  • Also known as BRICS Bank, proposed by India at the 4th BRICS summit in 2012.
  • Fortaleza Declaration, 2014.
  • HQ: Shanghai.
  • Equal shareholding and voting rights among members.
  • Focus: Support for public and private projects, particularly renewable energy.
  • Emphasis on BRICS countries over AIIB.
  • Allows new members but BRICS shares must remain >55%.
  • Currently, As of August 2024, the members of the New Development Bank (NDB) include: 
  • Founding members: Brazil, China, India, Russia, and South Africa
  • New members: Bangladesh, Egypt, United Arab Emirates, Uruguay, and Algeria

Asian Infrastructure Investment Bank (AIIB)

  • Aim: Provide financial support for infrastructure development and regional connectivity projects in the Asia-Pacific region.
  • Established: 2015, proposed by China in 2013.
  • China’s Vote Share: 28%, India: 8%. For special purposes (e.g., membership approval, president selection), a 75% vote is required.
  • Purpose: Asia’s response to the World Bank and the West-dominated Asian Development Bank (ADB).
  • HQ: Beijing, does not have a permanent board of directors.
  • Not Members: USA and Japan.
  • India: Largest beneficiary.

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