International Bank for Reconstruction and Development (IBRD)

 

 

IBRD and its associate institutions a group are known as the World Bank. The Second World War damaged economies of the most of the countries particularly of those who were directly involved in the war. The global war had completely dislocated the multilateral trade and dislocated multilateral trade and had caused massive destruction of life and property. In 1945, it was realised to concentrate on reconstructing these war affected economies in a planned way. IBRD was established in December 1945 with the IMF on the basis of recommendation of Bretton Wood Conference. This is the reason why IMF and IBRD are called 'Bretton Wood Twins'. IBRD started functioning in June 1946. World Bank and IMF are complementary institutions.

India is a member of four constituents of the World Bank Group i.e. IBRD, IDA, IFC, and MIGA (Multilateral Investment Guarantee Agency) but not of its fifth institute ICSID (International Centre for the Settlement of Investment Disputes).

 

Objective of World Bank

According to the Clause I of the agreement made at he time of establishment of World Bank, it was assigned the following objectives:

1. To Provide long-run capital to member countries for economic reconstruction and development. World Bank provides capital mainly for following purposes -
   (i) To rehabilitate war ruined economies (this objective is fully achieved)
   (ii) To finance productive efforts according to peace time requirement.
   (iii) To develop resources and production facilities in underdeveloped countries.
2. To induce long-run capital investment for assuring BOP equilibrium and balanced development of international trade. (This objective was adopted to increase increase the productivity of member countries and to improve economic condition and standard of living among them).
3. To promote capital investment in member countries in following ways:
   (i) To provide guarantee on private loans and capital investment.
   (ii) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities in considered conditions.
4. To provide guarantee for loans granted to small and large units and other projects of member countries.
5. To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace economy.

IMF Vs. World Bank

IMF and World Bank are Bretton Wood Twins. Both the institutions were established to promote international economic cooperation but a basic difference is found in the nature of economic assistance given by these two institutions. World Bank provides long term loans for balanced economic development, while IMF provides short-term loans to member countries for eliminating BOP disequilibrium. Both these institutions are complementary to each other. The eminent world economist George Schultz had suggested in American Economic Association Conference in January 1995, for the merger of IMF and World Bank.

 

Membership of the World Bank and Voting Right

Generally every member country of the IMF automatically becomes member of World Bank. Similarly, any country which quit IMF automatically expelled from the World Bank's membership. But under a certain provision a country leaving the membership of IMF can continue its membership with World Bank. If 75% member of the bank gives their vote in its favour.

Any member country can be debarred from the membership of World Bank on following grounds:

1. Any member country can quit the bank simply by written notice to bank, but such country has to repay the granted loans on terms and conditions decided at the time of sanctioning the loan.
2. Any country working against the guidelines of bank can be debarred from membership by the board of governors.

Like IMF, World Bank has also two types of members: 'founder members' and 'general members' the world bank has 30 founder members who attained membership by December 31, 1945. India is also among these founder members. The countries joining the World Bank after December 13, 1945 come under the category of general members. At present total membership of the World Bank is 182. The voting right of member country is determined on the basis of member country's share in the total capital of the bank. Each member has 240 votes plus one additional vote for each 1,00,000 shares of the capital stock held.

 

Capital Resources of World Bank

The initial authorized capital of World Bank was $ 10,000 million, which was divided in 1 lakh share of $ 1 lakh each. The authorized capital of the bank has been increased from time to time with the approval of member countries. On June 30, 1996 the authorized capital of the bank was $ 188 billion out of which $ 180.6  billion (96% of total authorized capital) was issued to member country in the form of shares. Member countries repay the share amount to the world bank in following ways:

1. Two percent of allotted shares are repaid in Gold, USD or SDR. 
2. Every member country is free to repay 18% of its capital share in its own currency.
3. The remaining 80% share is deposited by member country only on demand by the World Bank.

Bank is managed by an elected President. On July 1, 2007, Robert B. Zoellick became the 11th President of the World Bank. The headquarter of World Bank is at Washington DC.

IDA (established on Spetemeber 24, 1960) and IFC (established in July, 1956) are the tow main associate institutions of IBRD. These institutions work under the supervision of World Bank. MIGA is also an associate institution in the World Bank group.

 

Banks Lending Operations

IBRD gives loan to members in anyone or more of the following ways:

1. By granting or participating in direct loans but its own funds.
2. By granting loans out of the fund raised in the market of a member or otherwise borrowed by the bans and 
3. By guaranteeing the whole or part loans made by private investors through the investment channels.

Before a lone is made or guaranteed the bank ensure that the -

1. Project fro which the loan is asked has been carefully examined by the competenet committee as regards the merits of the proposal.
2. Borrower has reasonable prospect for the repayment of loans.
3. The loan is meant for productive purposes and 
4. Tthe loan is meant for reconstruction and development.

Functions of the World Bank

Presently, The World Bank is playing the main role of providing loans for development works to member countries, specially to under-developed countries. The World Bank provides long-term loans for various development projects of 5 to 20 years duration. The loaning system of the bank can be explained with the help of following points:

1. Bank can grant loans to a member country upto 20% of its share in paid up capital.
2. Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors have to seek prior permission from those countries where the amount will be collected. For such loans the consent of that country is also required whose currency is given in loans. For granting such guarantee, the Bank charges 1% to 2% as service charge.
3. The quantum of loans, interest rate and term and conditions are determined by the Bank itself.
4. Generally, Bank grants loan for a particular project duly submitted by the member country.
5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.

Besides, granting loans for reconstruction and development, World Bank also provides various technical services to the member countries. For this purpose, the Bank has established 'The Economic Development Institute' and a Staff College in Washington.

 

Appraisal of the World Bank Activities

Bank has sanctioned 75% of its total loans to developing countries of Africa, Asia and Latin America while only 25% was given to developed nations of Europe. IFC, IDA and MIGA were established as the associate institutions of the World Bank in extending financial assistance to member countries. Besides, the Bank also tried its best to coordinate the functioning of nations granting loans to underdeveloped countries. In 1958, the Bank played an important role in establishing 'India Aid Club' for providing specific economic assistance to India. It has now been renamed as 'India Development Forum'. Such types of clubs and forums has also been established for other developing countries. The Bank has also established its mission in various developing countries for providing technical assistance for development project in these countries. The Bank also takes the guidance of experts of various international institutions like FAO, WHO, UNIDO, UNESCO for providing assistance for various projects related to agriculture, education and water supply.

South Asian Free Trade Area (SAFTA)

The most significant aspect of the 12th SAARC Summit (Jan 4-6, 2004) at Islamabad, the capital city of Pakistan, was the signing of a historic Agreement on Free Trade. The leaders of India, Pakistan, Bangladesh, Bhutan, Maldives, Nepal, and Sri Lanka have agreed upon to create a "South Asian Free Trade Area".

SAFTA has come into force since January 1, 2006 replacing South Asian Preferential Trade Agreement (SAPTA) which was operative among SAARC countries since December 7, 1995. SAPTA was the success of 9th SAARC conference held in New Delhi in 1995 where this new concessional trade system SAPTA was approved. SAPTA was the factor which really opened all positive possibilities to to establish SAFTA.

SAFTA presupposes abolition of all kind of trade and tariff restrictions. Ultimately it will pave the way for the creation of common market with common currency.

Seven SAARC member countries agreed upon to reduce tariff between 0-5% by 2016. The SAFTA agreement allows any states to pull out of any treaty at any time.

• Formation of sensitive lists.
• Outlining the products whose tariffs will not be reduced.
• Rules of origin.
• Revenue loss compensation mechanism for LDCs. (Bangladesh, Bhutan, Maldives and Nepal) by comparatively developed nations (India, Pakistan, and Sri Lanka).
• An arbitration council or dispute settlement body.
• India and Pakistan will reduce their tariffs 0-5% level within 7 years, while Sri Lanka gets 8 years, and LDCs like Nepal, Bangladesh, Bhutan and Maldives in 10 years.
• Each of the countries will create two sensitive lists, one of more developed countries and other for less developed countries. 
• A SAFTA Ministerial council with membership of commerce/trade ministers.
• A committee of Exports for the administration and implementation of treaty.
• Removal of barriers to the intra-SAARC investment, harmonisation of custom facilities transit facilities for intra-SAARC trade and simplification of procedure for visa.

Asian Development Bank (ADB)

ADB was established in Dec. 1966 on the recommendation of ECAFE (Economic Commission for Asia and Far East). The aim of this Bank is to accelerate economic and social development in Asia and Pacific region. The  Bank started its functioning on January 1, 1967. The head office of the Bank is located at Manila, Philippines. It is worth mentioning here the Chairmanship of ADB is always allotted to a Japanese while its three Deputy Chairman belong to USA, Europe and Asia. At present, 63 nations are partner members of ADB.

The principle functions of ADB are:

1. To make loans and equity investments for the economic and social advancement of its developing member countries.
2. To provide technical assistance for the preparation and execution of development projects and programs and advisory services.
3. To respond to the request for assistance in coordinating development policies and plans in developing member countries.

Asian Development Bank constituted 'Asian Development Fund'  in 1974, which provides loans to Asian countries on concessional interest rates. India started borrowing from ADB's Ordinary Capital Resources (OCR) in 1986.

World Trade Organisation

The Uruguay round of GATT (1986-93) gave birth to World Trade Organisation. The members of the GATT signed on an agreement of Uruguay round in April 1994 in Morocco for establishing a new organisation named WTO. It was officially constituted on January 1, 1995 which took the place of GATT as an effective formal organisation. GATT was an informal organisation which regulated world trade since 1948. Like GATT, the headquarter of WTO is also in Geneva.

Contrary to the temporary nature of GATT, WTO is a permanent organisation which has been established on the basis of an international treaty approved by participating countries. It achieved the international status like IMF and IBRD but it is not an agency of UNO.

WTO has a General Council for its administration which includes one permanent representative of each member nation. Generally, it has one meeting per month which is held in Geneva.

The highest authority of policy making is WTO's Ministerial Conference which is held after every two years.

The present strength of WTO membership is 151. this includes China and Nepal whose accession was approved by the WTO Ministerial  Conference held in Doha and Cancun in November 2001 and September 2003 respectively. There are presently 30 countries in the process of accession to the WTO. Vietnam joined WTO as 150th member. Tonga is the 151st member of WTO.

There are number of important committees for administration of WTO, out of which two committees play the pivotal role in WTO. They are :

1. Dispute Settlement Body (DSB)
2. Trade Policy Review Body (TRRB)

DSP considers the complaints of member countries against violation of rules by any member country. This body appoints a group of experts to investigate into such complaints. This body meets twice a month for such cases.
TPRB reviews the trade policy of member countries. The trade policy of all big trade powers of the world are reviewed after every 2 years. All the members of WTO are the members of TRPB.
Other important bodies of WTO are:

1. Council for Trade in Goods
2. Council for Trade in Services
3. Council for Trade related aspects of Intellectual Property Rights

Objectives of WTO

1. To improve standard of living of people in the member countries.
2. To ensure full employment and broad increase in effective demand.
3. To enlarge production and trade of goods.
   The above three objectives were also included in GATT, but WTO also included some other objectives which are :
4. To enlarge production and trade of services.
5. To ensure optimum utilisation of world resources.
6. To accept the concept of sustainable development.
7. To protect environment.

Functions of WTO

1. To provide facilities for implementation, administration and operation of multilateral and bilateral agreements of the world trade.
2. To provide a platform to member countries to decide future strategies related to trade and tariff.
3. To administer the rules and processes related to dispute settlement.
4. To implement rules and provisions related to trade policy review mechanism.
5. To assist IMF and IBRD for establishment coherence in universal economic policy determination.

International Monetary Fund

IMF is an international monetary organisation. It was established on December 27, 1945 in Washington on the recommendations of Bretton Woods Conference. But it started it's operation on March 1, 1947. At present 184 nations are members of the IMF. East Timor became the newest member in July 2002.

In place of Dominique Strauss-Kahn, Christine Lagard has been made as new Managing Director of IMF on July 5, 2011. She is serving as 11th MD of IMF.

Objective of IMF

According to Article of Agreement of the IMF, its main objectives are as follows:

1. To promote international monetary co-operation
2. To ensure balanced international trade
3. To ensure exchange rate stability
4. To eliminate or to minimize exchange restrictions by promoting the system of multilateral payments
5. To grant economic assistance to member countries for eliminating the adverse imbalance in balance payments.
6. To minimize imbalance in quantum and duration of international trade

Constitution, Membership and Capital of IMF

IMF is controlled and managed by a board of Governors. Each member country nominates a Governor. All the nominated Governors make a board of governors. Each country also nominates an alternate Governor who casts his vote in absence of the Governor. Each Governor is allotted a number of votes which is determined by the quota allotted to respective country in the capital of IMF. Each Governor has got the right of 250 votes on the basis of membership and one additional vote for each SDR 1,00,000 of quota. The additional of these two types of votes becomes the actual voting right of the member country. For example, India's voting right is 250 + 30555 = 30805 because India's quota is SDR 30555 lakh. It clearly indicates that the voting right depends on the quantum of quota of a particular country with IMF. This is the reason why the rich and industrialised countries got the higher voting rights due to their higher quotas. with the IMF.

The main source of IMF resources is the quota allotted to the member countries. Till 1971, all the amounts of quotas and the assistance provided were denominated in US dollar, but since December 1971, all the quotas and transactions are expressed in SDR (Special Drawing Right) which is also known as Paper Gold. In 1971, one SDR was assumed equivalent to 1 dollar but due to subsequent decline in dollar value  SDR 1 became equivalent to $1.585 by the end of April 1995. Since January 1, 1981 the value of SDR is being determined by the basket  of currency of 5 largest exporting member countries: US dollar, Deutsche Mark, Yen, Franc, and Pound Sterling.
In 1991, the weight to these 5 currencies in SDR price determination was as follows:

American Dollar	40 %
German Franc	21 %
Japanese Yen	17 %
British Pound	11 %
French Franc	11 %

The currency value of SDR is determined by the IMF each day by summarising the value in US dollars, based on the market exchange rates of a basket of fine currencies.

The IMF's financial year is from 1 May to 30 April. IMF lends to various member countries in the form of various facilities (Extended Fund Facility, Standby Facility, Contingent Credit Lines, Compensatory Facility etc.) designed to serve specific purpose, but essentially aimed at balance of payments stabilisation or meeting the emergent foreign exchange needs. The poor countries are also helped by funding from Poverty Reduction and Growth Facility. As on June 2004, the IMF was lending to 13 members in the from of standby facility, to two members under Extended Arrangements and 38 poor countries under poverty Reduction and Growth Facility.

The quota allotted by the IMF to each member has to be deposited partly in their own currency and remainder in form of foreign exchange.

India's 11th Place in IMF General Quota

After the review of IMF's General Quota, India's quota has been raised to 582.15 crore SDR from the existing level of 415.82 crore SDR. (at the time of increase time 1 SDR = $ 1.54 = Rs 69.48). This quota hike has raised India's vote share from 1.91% to 2.44%.

India has been placed at 11th place in IMF's General Quota. USA remains in biggest quota holder despite its quota share coming down to 17.09%.

Country Quota USA 17.09% Japan 6.13% Germany 5.99% UK 4.94% France 4.94% China 3.72%

Country Quota Italy 3.25% Saudi Arabia 3.21% Canada 2.93% Russia 2.74% India 2.44% - -

India and IMF

IMF has played an important role in Indian economy. IMF has provided economic assistance from time to time to India and has also provided appropriate consultancy in determination of various policies in the country. India is the founder member of IMF. The finance minster is ex-officio governor in IMF board of Governors. Till 1970, India was among the first five nation highest quota with IMF and due to this status India was allotted a permanent Place in executive Board of Directors.

India participate in FTP of the IMF from 2002. 43 countries, including India now participate in FTP. By participation in FTP India is allowing IMF to encash its rupee holding as a part of our quota contribution for hard currency which is then lent to other member countries who are debtors to the IMF. From 2002 to Feb 2006, India has made purchases transactions of SDRs 493.23 million and four repurchase transaction amounting to SDRs 466.474 million.

In July India and IMF joint training program at the National Institution of Bank Management, Pune was established. The training program will provide policy oriented training in economics and related operational fields to Indian officials and officials of countries in South Asia and East Africa. The first training program was held during July 2006. The RBI is a nodal body to co-ordinate the training program with the IMF.

Enhanced Structural Adjustment Facility (ESAF) was established in 1987 with an amount of SDR 6 billion to help the low income countries with heavy debt burdens in difficult external environment and implement comprehensive  macro-economic and structural policy program aiming at strengthening their balance of payments position and fostering growth. India contributes as donations to Subsidy Account and made a commitment to provide grant contribution to the extent of US $ 1 million per year over 15 years for a total of US $ 15 million.