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Chapter 9

POLS 2080 Chapter Notes - Chapter 9: Capital Account, Good Governance, Judicial Independence

Political Science
Course Code
POLS 2080
Steffi Hamann

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Chapter 9: The International Financial Institutions
The Origins of IMF and World Bank:
The formation of the IMF and World Bank dates to the Bretton Woods Conference held in 1944. The
forefront of their concerns was the creation of an international economic system to promote trade an
provide rules for economic relations between countries.
The Bretton Woods system was founded on the establishment if fixed exchange rates between
national currencies.
At the end of 1945 the International Monetary Fund (IMF) was set up to oversee the workings of the
system and to manage any potential disruptions. Usage of these funds therefore was intended to
provide a country with sufficient time to stabilize its economy without resorting to measures such as
currency devaluation that would cause international monetary instability.
New countries that emerged from the collapse of colonialism were commonly considered to be on a
natural path towards development.
IMF Initial Function: to provide financial resources to allow countries to solve balance of payments
crises without devaluing their currencies. This would help maintain the system of stable exchange
rates established at Bretton Woods.
World Bank Initial Function: provide financing for post-war reconstructive projects. From 1950
onwards, the Bank focused on providing funds to lower income countries at lower interests than other
private international banks. These loans were mainly for building infrastructure for development.
The International Development Association (IDA) was formed in 1960 as a part of the World Bank.
IDA loans were used for large-scale infrastructure projects and these loans were provided at a
virtually interest free status.
Voting rights in the IMF and World Bank are weighted according to quota subscriptions. They're
based on the size of a country’s economy meaning the advanced and industrialized countries have
consistently held the majority voting power.
The US appoints the president of the World Bank; Europe designates the president of IMF.
Decade of the 1970s was a notably period of instability and crisis in the global economy.
United States withdrew its support for the Bretton Woods agreement and abolished the system by
1971 by suspending the convertibility of dollars into gold.
Countries that needed short time injections of money to pay international debts could turn to the IMF
without needing to maintain the value of their exchange rate.
The IMF also began to expand the number of conditions attached to its loans and increase its
surveillance of the policies.
In the World Bank, the 1970s was a notable transformative period. McNamara viewed the Bank as an
under-utilized instrument in fighting against global poverty and communism. McNamara emphasized
the need for the Bank to fund direct anti-poverty efforts through social programs and projects aimed
at modernizing the agricultural sector.
The debt crisis and structural adjustment:
The IMF and World Bank proposed dramatic reforms for developing countries. The development
policy in the preceding decades had become profoundly misguided. It was generally accepted that the
institutions of the state had a major role to play in promoting modernization through industrialization.
These policies created both inefficient industrial sectors that were a drain on national resources and
over-inflated bureaucracies.
Severe austerity programs put in place following the debt crisis often achieved their goals of reducing
inflation, lowering government deficits and ameliorating balance-of-payment problems.
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