The International Monetary Fund and World Bank Group

The International Monetary Fund and the World Bank group are two global institutions crated to assist nations in becoming and remaining economically viable. Each plays an important role in the environment of international trade by helping to maintain stability in the financial markets and by assisting countries that are seeking economic development and restructuring.

Inadequate monetary reserves and unstable currencies are particularly vexing problems in global trade. So long as these conditions exist, world markets cannot develop and function as effectively as they should. To overcome these particular market barriers that plagued international trading before World War II, the International Monetary Fund IMF was formed. Originally 29 countries signed the agreement; now 184 countries are members. Among the objectives of the IMF are the stabilization of foreign exchange rates and the establishment of freely convertible currencies to facilitate the expansion an balanced growth of international trade. Member countries have voluntarily joined to consult with one another in order to maintain a stable system of buying and selling their currencies so that payments in foreign money can take place between countries smoothly and without delay. The IMF also lends money to members having trouble meeting financial obligations to other members. Argentina and Turkey have recently received such help from the IMF, but the results have been mixed.

To cope with universally floating exchanges rates, the IMF developed special drawing rights (SDRs) one of its more useful inventions. Because both gold and the US dollar have lost their utility as the basic medium of financial exchange most monetary statistics relate to SDRs rather than dollars. The SDR is in effect paper gold and represents an average base of value derived from the value of a group of major currencies. Rather than being denominated in the currency of any given country, trade contracts are frequently written in SDRs because they are much less susceptible to exchange to exchange arte fluctuations. Even floating rates do not necessarily accurately reflect exchange relationships. Some countries permit their currencies to float cleanly without manipulation (clean float) whereas other nations systematically manipulate the value of their currency (dirty float) thus modifying the accuracy of the monetary marketplace Although much has changed in the world’s monetary system since the IMF was establish it still plays an important role in providing short term financing to governments struggling to pay current account debts as well.

Although the International Monetary Fund has some severe critics, most agree that it has performed a valuable service and at least partially achieved many of its objectives. To be sure, the IMF proved its value in the financial crisis among some Asian countries in 1997. The impact of the crisis was lessened substantially as a result of actions taken by the IMF . During the financial crisis, the IMF provided loans to several countries including Thailand, Indonesia, and South Korea. Had these countries not received aid ($ 60 billion to Korea alone) the economic reverberations might have led to a global recession. As it was, all the major equity markets reflected substantial reductions in market prices and the rate of economic growth in some countries was slowed.

Sometimes confused with the IMF, the World Bank Group is a separate institution that has as its goal the reduction of poverty and the improvements of living standards by promoting sustainable growth and investment in people. The bank provides loans, technical assistance, and policy guidance to developing country members to achieve it objectives. The World Bank Group has five institutions, each of which render the followings services: (1) lending money to the governments of developing countries to finance development projects in education, health and infrastructure; (2) providing assistance to governments for developmental projects to the poorest developing countries (per capita incomes of $925 or less; (3) lending directly to the private sector to help strengthen the private sector in developing countries with long term loans, equity investments, and other financial assistance; (4) providing investors with investment guarantees against non commercial risk such as expropriation and war, to create an environment in developing countries that will attract foreign investment; and (5) promoting increased flows of international investment by providing facilities for the conciliation and arbitration of disputes between governments and foreign investors. It also provides advice, carries out research and produces publications in the area of foreign investment law. Since their inception, these institutions have played a pivotal role in the economic development of countries throughout the world and thus contributed to the expansion of international trade since World War II.