POLS2133 Study Guide - Final Guide: Bretton Woods System, Jim Yong Kim, Government Debt
(WK 8) THE BRETTON WOODS INSTITUTIONS
Introduction: what are the IMF and World Bank? And why should I care?
Introducing the Bretton Woods Institutions
The IMF and the World Bank are international organisations who lend other states’
money to countries
-The IMF provides short-term loans in foreign currencies to help countries
with balance of payments problems, which means they don’t have enough
foreign exchange to pay off their foreign debts
-The World Bank makes longer-term loans to finance specific development
projects, such as building a school or a power plant
Both were designed to help avoid the situation in which the economic problems of
one country lead to a generalized crisis in the international system
Both were built on the recognition that extreme poverty and extreme financial
instability are potentially dangerous to the stability of the system as a whole, are
potentially contagious, and have negative externalities that are easier to remedy early
in the development of a crisis rather than later, at a point of all-out crisis
As lenders both the Bank and the Fund have leverage over their members that is
distinctively different than the power of the other IOs mentioned
Both also have leverage it he sense that they can control countries’ access to future
capital through the mechanism of the credit rating, and more generally by signaling
either positive or negative information to world markets
However, states retain some measure of agency relative to the IOs and may find
leverage over the Bank or Fund, most dramatically by threatening to default
The catch: (1) A country has no automatic right to a loan (so someone has to agree to
it – the IO? States?); and (2) Loans have conditions attached, with ongoing
financially generally subject to governments implementing the (often very strict)
conditions
Basic intentions at founding, Bretton Woods, NH, 1944
The IMF: to promote international financial stability
-Central coordinating mechanism for exchange rates (needed because of the
gold standard)
-Collect and pool foreign exchange deposits into a fund to be loaned to states
in balance-of-payments difficulty
The World Bank: to finance development (and reconstruction)
-Pool and lends states’ money-but for project finance and reconstruction (post-
war Europe/Asia). Over time, mandate expanded to poverty reduction
Generally: an individual’s state’s short- and long-term economic problems can create
problems for other states (negative externalities) or the broader international system
(contagion). States seek to pool resources to fix problems locally before they become
global. Managing interdependence!
States’ obligations
1. General commitments (all members): Pay money into the common pool of funds to
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be loaned; manage own exchange rates in certain ways (for the IMF).
2. Specific commitments made by debtors: negotiated, and tailored to each loan and
the situation of the borrower
Hurd (p.140): ‘Over non-borrowing members, the IMF and World Bank have almost
no authority at all”
The lecture in one slide
For a wealthy country like Australia, most debate regarding the two institutions
seems remote and academic. Only rarely does their work have meaningful impact on
the rich world
For those states that do need them, the impact of these IOs on the sovereignty and
welfare of the state arguably comes second only to that of military intervention.
Accordingly, the politics of their work is hugely contested and controversial
Why should we care?
1. Economic problems have political consequences – e.g. Brexit. The impact these IOs
on global politics and international stability can thus be profound
2. The structural power of markets, leveraged by both the IMF and World Bank as a
source on influence, is a significant constraint on state sovereignty (and has positive
and negative aspects to it)
3. States, especially the most powerful states, don’t often use war as a major tool of
statecraft anymore. Economic statecraft, including working through IOs like the
Bretton Woods institutions, is increasingly a /the major arena of interstate
competition, and the most common instrument for achieving national interests
The World Bank
The World Bank
“Working for a world free of poverty”
Mandate: to reduce poverty by lending the money of the rich countries to the
poor countries for specific development projects, and by providing technical
assistance to poor countries
Obligations: all members contribute to the common pool of resources. Those
who borrow agree to the terms of the loan, which may include policy changes
Enforcement: borrowings become part of the sovereign debt of the borrower
and must be repaid according to the rules of sovereign debt payments
Expanded from a single institution to five, which are closely linked and governed (but
perform different functions – development assistance, private finance, arbitration).
Note: Articles of Agreement.
188 member countries; HQ in DC; represented by a Board of Governors (states’
finance or development ministers). Board delegates to 25 Executive Directors.
Five largest shareholders (US, German, Japan, UK, France) have an automatic
Executive Director.
Strive to operate by consensus; voting weighted by member share subscriptions
(contributions) – e.g. U.S. holds about 16% voting share.
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President overseas day-to-day operations and management and chairs the Board.
Currently: Jim Yong Kim – by convention appointed by the U.S.
$65b in loans, grants and other commitments in 2014, over 12,000 staff and 5,000
consultants operating in 131 countries.
Operations
Money paid in by member states “capitalises” the Bank, which then uses it as
collateral to borrow larger amounts from international financial markets.
Bank is a low-risk borrower because of its rich country backing. Means it can borrow
at low interest rates, and on-loan those funds (plus a fee) for development purposes at
rates more favourable than countries would get themselves.
Engages in project-specific lending; loan maturities tend to be long (~30 years). .
Project-specific lending
“Second Agricultural Growth Project” (Ethiopia US$350m, Mar 2015): Improve
access of small farmers to agricultural support services, technology, irrigation, and
commercialisation.
“Maternal and child health services” (Laos, US$26.4m, June 2015): Increase
service coverage, benefitting ~1m women and kids, includes health management
information system.
“Palau-FSM Connectivity project” (FSM, US$47.5m, Dec 2014): Reduce the cost
and increase the availability of information and communication technology (ICT)
services
Enforcement powers
Like the IMF, the World Bank relies on states’ concerns with their future borrowing
as their lever to induce them to repay their loans
The Bank has no capacity, legal or otherwise, to access government accounts to force
them to repay their loans, they can’t compel repayment of loans – in this respect state
sovereignty is respected. However:
-Future consequences: The bank can refuse to make further loans.
-Structural power: A failure to repay sends a bad signal to international
financial markets regarding a country’s creditworthiness.
Borrower’s leverage?
-The Bank may face pressure to complete projects even if the borrower shows
signs of non-repayment.
-The borrower may also have a “powerful friend” at the Bank, such as the
United States (more on this in a moment).
-Birdsall (2003) refers to repeated failures to implement programs and
repeated waivers of pre-agreed loan conditions, including because of “strategic
reneging” and domestic political change.
Phases in the World Bank’s lending history
Inception-late 1960s: Very large construction projects (dams!) with an anti-
communist agenda.
Late 1960s-1980s: Basic needs of the very poorest (in the aftermath of
decolonisation).
1980s-early 2000s: “Structural adjustment” and the “Washington Consensus”:
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Document Summary
The imf and the world bank are international organisations who lend other states" money to countries. The imf provides short-term loans in foreign currencies to help countries with balance of payments problems, which means they don"t have enough foreign exchange to pay off their foreign debts. The world bank makes longer-term loans to finance specific development projects, such as building a school or a power plant. Both were designed to help avoid the situation in which the economic problems of one country lead to a generalized crisis in the international system. As lenders both the bank and the fund have leverage over their members that is distinctively different than the power of the other ios mentioned. Both also have leverage it he sense that they can control countries" access to future capital through the mechanism of the credit rating, and more generally by signaling either positive or negative information to world markets.
