International banking and financial organizations exist to encourage economic and financial stability, help facilitate trade, and help with economic development. In this lesson, you’ll learn about some of these important organizations.
The World Bank
The economies of the world are all at different stages of development. Some countries, such as the United States and Western European countries, have highly developed economies that have created a great amount of wealth for its citizens. Other countries, such as the countries of sub-Saharan Africa, are quite underdeveloped compared to the U.S. and large parts of their populations live in poverty.
The World Bank was initially created to help with economic development. It was originally formed shortly after World War II in an effort to rebuild the economies of war-torn countries, but its mission is now global in scope. The general mission of the World Bank is to provide long-term financing for economic development.
The World Bank is actually comprised of two institutions. The International Bank for Reconstruction and Development (IBRD), which provides low-interest and no-interest loans to developing countries who cannot get financing elsewhere. The IBRD also provides technical and research assistance to developing countries. Examples of projects funded by these loans include infrastructure projects, such as power plants, roads, railroads, ports, telecommunication, and water systems. Loans have also been provided for health, education, and debt relief. As you can probably see, these types of projects are foundational for further economic development. For example, if you don’t have a healthy, educated population with access to roads, power, safe water, and communications, you will not have significant economic development.
The IBRD has about 188 member nations, which is pretty close to every nation on the planet. A country must pay a subscription to join. Each member country gets 250 votes and can get more votes by buying shares of the IBRD at $100,000 per share. Decisions are made by majority vote, but the largest shareholders can control the outcome because they have most of the votes. The U.S. is the largest shareholder.
The other part of the World Bank is the International Development Association, or IDA. The IDA was started in 1960. It works with the IBRD and focuses its efforts on the poorest countries in the world and offers assistance in turning their struggling economies around.
World Bank Group
The World Bank Group consists of the IBRD, IDA and three other institutions. The International Finance Corporation, or IFC, helps high-risk business sectors and high-risk countries obtain private sector investors. The Multinational Investment Guarantee Agency, or MIGA, offers political risk insurance to investors and lenders to encourage investment in developing countries. Finally, the International Centre for Settlement of Investment Disputes, or ICSID, settles disputes between foreign investors and developing countries taking the investment funds.
International Monetary Fund
The International Monetary Fund, commonly referred to as the IMF, was created in 1944 and currently has about 188 member countries. One goal of the IMF is to promote international cooperation on international monetary policy. Monetary policy is a country’s decision regarding interest rates and money supply. The IMF also tries to encourage the expansion of international trade and promote currency exchange stability. Currency exchange rate stability means that the value of one currency in relation to another is fairly stable.
Finally, the IMF helps countries meet their balance of payment obligations. Balance of payments is the difference in value between imports and exports in a country. A negative balance means there is more money going out of the country than coming in. The IMF can provide short-term financing if a country needs help with a negative balance of payment.
The IMF primarily uses three different tools to accomplish its mission. First, the IMF monitors the economic developments at the global level all the way down to individual nations. It tries to figure out how the monetary and fiscal policies of individual countries affect other countries and their economies. It also analyzes economic trends at all levels – from a global perspective down to a national perspective.
Second, the IMF also provides training and technical assistance in four areas. The IMF offers technical assistance and training regarding monetary and fiscal policies. It also provides training and assistance in fiscal policy and management, including such things as tax and customs policies, budget formulation, designing of social safety nets, and management of debt. Assistance and training is also provided for compiling, managing, and improving statistical data. Finally, the IMF will help with economic and financial legislation.
Lending is the third tool that the IMF uses. The IMF provides short-term financing to help countries that need to correct their balance of payments. Remember, a negative balance of payments means that there is more money leaving the country than coming into it. A negative balance of payments means that a country may not be able to pay its bills because it doesn’t have enough currency. The IMF’s short-term lending can help manage this problem and provide funds so that a country can honor its financial obligations. The aim of the lending is not to finance projects, like the World Bank’s lending, but to stabilize economies and restore economic growth to economies in crisis.
Bank for International Settlement
The Bank for International Settlements, or BIS, is an international bank based in Switzerland. Its membership includes about 60 central banks, and it’s considered the central bankers’ bank. A central bank is the bank in a country that is responsible for developing and implementing a country’s monetary policy, which is decisions about interest rates and money supply. The BIS’s primary role today is to assist its members with short-term fluctuations in currency rates and by providing a forum for central bank cooperation.
Let’s review what we’ve learned. The World Bank consists of two different institutions, which are the International Bank for Reconstruction and Development and the International Development Association. The World Bank’s primary mission is to aid in the economic development of countries with a particular focus on middle-income and lower-income countries.
The World Bank Group consists of the World Bank and three other institutions. The International Finance Corporation helps high-risk countries obtain private sector investors, while the Multinational Investment Guarantee Agency provides political risk insurance to investors. The International Centre for Settlement of Investment Disputes helps resolve disputes between investors and the countries receiving the investment.
The International Monetary Fund’s mission is to promote international cooperation regarding monetary policy, encourage the expansion of international trade, and currency exchange stability. It also provides short-term financing to help countries meet their financial obligations. Remember that the World Bank provides long-term project financing, and the IMF provides short-term help with balance of payment problems. The Bank for International Settlements is the central bankers’ bank. Today, it is primarily a forum for central bank cooperation to help create and maintain a stable international financial system.
When you are done with this lesson, you should be able to:
- Tell when and why the World Bank was created
- Name the two institutions that make up the World Bank
- Recall the multiple institutions of the World Bank Group and their functions
- Discuss the mission of the International Monetary Fund
- Understand the Bank for International Settlements’ major role