Prospects and Challenges
As the World Bank and the IMF hold their annual meetings in October, the former would be pressed to move into new activities. The most important change will be to provide funding to the developing world, including Pakistan.
The members of the World Bank Group (WBG) and the International Monetary Finance (IMF) are meeting in Morocco in October 2023. The two institutions meet for their annual meetings two times in Washington; for the third year, they select a foreign site. This time, they had selected Morocco as the place to meet. However, Marrakech, the site for the meeting, was badly damaged by an earthquake. No new location had been chosen at the time of this writing. As discussed later in this short article, some significant initiatives are likely to be taken in the next annual meetings.
Initially, the international financial system was based on the agreement signed by 44 nations that gathered in 1944 at the Mount Washington Hotel in Bretton Woods, a resort in the northeastern American state of New Hampshire. The delegates discussed what they viewed as the most reasonable response to deal with the destruction that had resulted from the Second World War in which Germany and Italy in Europe and Japan in Asia had challenged the existing world order. Present at the meeting held in 1944 was the British economist John Maynard Keynes, who had studied the impact of the actions taken by the winning nations in the First World War to continue to punish those who had been defeated in what was then the most disastrous encounter among the world’s nations. Then, the approach was to continue with the punishment that had been inflicted on the nations that lost on the battlefield. They were required to pay reparations to those who had won to compensate them for the resources the latter had spent in conducting the war.
The result of this approach was to create extreme distress in the parts of Europe that had lost in the war. This distress led to the rise of extremism and nationalism in Germany and Italy, which eventually led to the Second World War. Keynes was anxious that this time, the victors would not continue to punish the losers but, instead, rebuild their economies. For that to be done, new institutions would be needed. The Bretton Woods agreement led to the establishment of two new institutions, the International Monetary Fund, the IMF, and the International Bank for Reconstruction and Development, the IBRD. The IBRD eventually became the WBG. These organizations became operational in 1945. There was to be a third institution to regulate international trade. However, it took half a century before the world nations could agree to the establishment of the World Trade Organization, the WTO. Regulation of trade remains a contentious issue even after the creation of the WTO.
The agreement establishing the IMF and the IBRD did not provide capital for their operations. Instead, a system was created that divided capital contributions by member nations into two parts. These were called the “paid-in capital” and “callable capital.” The first part was less than 10 per cent of the total. The second part was treated as a guarantee against possible default by the institutions of the amounts they had borrowed from the financial markets. This made it possible for international institutions to borrow at rates close to what the United States Treasury paid for raising funds. The amounts raised were then lent to the member countries at rates slightly higher than the institutions had paid to the markets. The addition was to cover the expenses for running the institutions. The United States committed the most.
While the IMF has changed relatively little since its creation, the IBRD was radically transformed into what is now called the WBG. The most significant change was the addition of three institutions to the original IBRD. The International Development Association, the IDA, was created to provide highly concessional development funds to low-income countries such as Pakistan. The International Finance Corporation, the IFC, was created to provide resources to the private sector. The Multilateral Guarantee Agency, the MIGA, was set up to provide guarantees to the private sector investing in developing countries.
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