World War II had just ended. The situation in Europe was pathetic; the economy was down, the infrastructure was crumbling. Moreover, the countries that lost the war were breathing huge debt. Will they rebuild their country with this fragile economy or pay off the debt? In such a situation, the world leaders felt that the global economy cannot be threatened in the future. Because the economic effect is much like the butterfly effect, any instability in the economy on one side of the world will have ripple effects on the far side of the planet.
The leaders of 45 countries assembled at Bretton Woods in New Hampshire, USA in 1944 to curb the tension in the world economy. The aim was to create global institutions whose job is to deal with the dynamics of the global economy, creating a universal economic system and helping each other in economic crises when necessary. Thus, the Bretton Woods Conference gave birth to the International Monetary Fund, the World Bank and other international economic institutions collectively known as the Bretton Woods Institutions.
Why was the IMF formed?
Today’s IMF, which deals with global development, was not intended to be so at its birth. World leaders wanted the IMF to help resolve conflicts between countries that lead to global economic catastrophe or war. They also wanted a global platform to solve post-World War II economic problems. At the period after World War I and before World War II,the world economy was unstable; The global economy was plagued with problems such as high inflation, restrictions on global trade, speculation in foreign stock markets, rise and fall in foreign reserves of central banks, gold crisis, currency depreciation, etc. To solve this problem, it was planned to form an economic organization like IMF.
Gold Exchange Standard
The founders of the IMF adopted gold exchange as the standard measure known as the gold exchange standard. In the IMF’s gold exchange standard, each country had pegged their currency against the dollar and the value of the dollar was directly tied to gold. IMF member countries held reserves of dollars and gold and could purchase gold from the US central bank, the Federal Reserve, in exchange for dollars. However, the gold exchange standard is now obsolete in the current world economic system. Instead, a fiat money system is used where the value of the currency is not determined against any visible commodity but rather the government itself guarantees. Most of the world’s currencies, including the dollar, euro, are now considered fiat currencies.
In theory, the gold exchange standard was supposed to work automatically, but in practice this system later proved to be a failed one. Because it can be seen that many countries did not obey the rules that were fixed. Rather, in many cases they violated the rules.
Objectives of the IMF
189 countries are currently members of the IMF. This global financial institution serves several purposes beyond providing loans to various countries. Objectives of the IMF are in brief-
International Financial Cooperation: One of the most important objectives of this organization is to build financial support for infrastructure among the countries of the world. They attempt to solve global economic problems by providing finance, advice, talent etc. During the Second World War, the organization played an important role in establishing financial cooperation between the countries of the world.
Stability of Foreign Exchange: Establishment of orderly exchange system to ensure the fixing of currency of member countries, mutual valuation of foreign currencies etc.
Balanced Commercial Growth: Growth in international trade is another fundamental objective of the organization. In this process, the IMF works with the necessary growth and development of the international trade system so that the member countries can have a high level of income and eliminate unemployment.
Deregulation of the Exchange System: Before World War II, many countries controlled the international exchange system and currency rates as they wished. Therefore, another objective of the IMF is to eliminate or simplify such country-specific exchange rates to pave the way for free international trade.
Balanced growth & Capital Investment: The organization helps the member countries to plan economic growth development especially underdeveloped countries. Plus, it encourages developed countries to invest in developing and underdeveloped countries.
Emergency Assistance: If a member country faces temporary economic difficulties, the IMF provides assistance to that country from the organization’s emergency fund.
The IMF has two types of member countries. Original Members & Ordinary Members. Countries that participated in the Bretton Woods Conference, and countries that agreed to become members before December 31, 1945, are the original members of the IMF. The rest of the member countries except the original ones fall into Ordinary Members’ category.
IMF in Bangladesh
Foreignization of State Assets: Bangladesh government usually take loans from IMF. However, the company also adds some conditions for loan. One of these conditions is the privatization or closure of state-owned industries, services and banks. The fundamental features of liberal economics is the privatization of state assets. That is why many banks of Bangladesh were brought under the control of the state after independence, but later as part of economic reforms, many of these banks (about two) were taken into private ownership, and some private commercial banks were also established. In 2003, Bangladesh received a loan from the IMF and as per the conditions, the government closed down the state-owned Adamjee Jute Mill.
Introduction of contractionary monetary system: Bangladesh Bank adopted contractionary monetary system on the advice of IMF.
VAT and Supplementary Duties Reforms: In 2016, the IMF added conditionality to the country’s VAT and Supplementary Duties reforms for disbursement of loans. Consequently, the Bangladesh government enacted the VAT and Supplementary Duties Act that year. The IMF’s other conditions for granting loans to Bangladesh are the pursuit of a free market economy in trade, further relaxation of regulations on private enterprise business, and lower tax rates on business. Apart from this, the conditions of the IMF also work in the case of increase in fuel prices and reduction of subsidies, privatization of government banks etc.
World Bank and World Bank Group
The World Bank does not mean just one bank but a number of financial institutions collectively known as the World Bank or the World Bank Group. These are:
The International Bank for Reconstruction and Development (IBRD): This organization provides loans to middle-income countries. But sometimes apart from the state, government or private organizations also provide loans for development projects.
The International Development Association (IDA): IDA was established in 1960. The organization provides interest-free or low-interest long-term loans to underdeveloped countries. Because these countries do not have the ability to take high interest loans from IBRD. Although IDA provides financial assistance to poor countries on easy terms, its capital source is grants from developed countries of the world.
The International Finance Corporation (IFC): This is the world’s largest development organization dealing exclusively with the private sector. Through financial investment, capital internationalization, business or government consulting, the organization helps countries around the world reach sustainable development goals.
The International Center for Settlement of Investment Disputes (ICSID): This organization deals with legal issues of global economic investment.
The Multilateral Investment Guarantee Agency (MIGA): Established in 1988, the mission of this organization is to ensure foreign direct investment in developing countries to achieve economic growth, reduce poverty, and improve living standards. For this purpose MEGA provides political risk insurance or guarantee to the investors.
The World Bank basically consists of two institutions- IBRD and IDA. The remaining three organizations are part of the World Bank, but are legally and economically independent. These five organizations together are known as the World Bank Group.
Objectives of the World Bank
The objective of the World Bank, which has 189 member states, is to reduce the economic disparity between rich and poor countries. And for that, the World Bank tries to convert the resources of the rich countries into the growth of the poor countries. The organization’s long-term goal is sustainable poverty alleviation. To achieve this goal, the World Bank works in several areas. For example:
l Poverty alleviation by accelerating growth, especially in countries in the African region.
l The biggest cause of poverty, war. Therefore, the World Bank helps countries that have recently been freed from war to rebuild.
l Guide middle-income countries to freedom from poverty.
l Helping countries combat climate change.
l Relief from AIDS.
l Expansion of free trade.
l Providing low interest loans; interest free lending; grant giving; Development of education, infrastructure etc.; Modernization of economic, agricultural etc. sectors of the state; The World Bank also works on the management of natural resources.
Difference between IMF and
Although the names or types of the two institutions seem close, there are fundamental differences between the IMF and the World Bank. The World Bank is primarily a development agency. On the other hand, the IMF is a cooperative economic organization that basically acts as an international accountant for the debts of various countries. To become a member of the World Bank, a country must first become a member of the IMF. But both have different objectives, different structures, and different sources of capital. Both organizations work in their own ways to achieve their goals.
The IMF is smaller in size than the World Bank. Like the World Bank, it does not have any subsidiary or affiliated organizations. The number of IMF staff is between 2,000 and 2,500, but around 7,000 employees work under the World Bank Group. The type of work, workplace, etc. of these workers are also different in the organization of the two organizations. n
The writer is student of Economics, University of Dhaka