World Economy I

Delhi Law Academy

World Bank

•            The World Bank (WB) is an international organization which provides facilities related to “finance, advice and research to developing nations” in order to bolster their economic development.

•            It is a unique financial institution that provides partnerships to reduce poverty and support economic development.

•            It is actually composed of two institutions namely the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

However, there are five institutions within the larger World Bank group. They are following:

1. The International Bank for Reconstruction and Development

•            The International Bank for Reconstruction and Development (IBRD) lends to governments of middle-income and creditworthy low-income countries.

2. The International Development Association

•            The International Development Association (IDA) provides interest-free loans — called credits — and grants to governments of the poorest countries.

•            It is called the soft loan window of the World Bank. Together, IBRD and IDA make up the World Bank.

3. The International Finance Corporation

•            The International Finance Corporation (IFC) is the largest global development institution focused exclusively on the private sector.

•            It helps developing countries achieve sustainable growth by financing investment, mobilizing capital in international financial markets, and providing advisory services to businesses and governments.

4. The Multilateral Investment Guarantee Agency

•            The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 to promote foreign direct investment into developing countries to support economic growth, reduce poverty, and improve people’s lives.

•            MIGA fulfils this mandate by offering political risk insurance (guarantees) to investors and lenders.

5. The International Centre for Settlement of Investment Disputes

•            The International Centre for Settlement of Investment Disputes (ICSID) provides international facilities for conciliation and arbitration of investment disputes.

Purpose and Function of the World Bank

•            The World Bank provides low-interest loans, interest-free credit and grants.

•            It focuses on improving education, health, and infrastructure.

•            It also uses funds to modernize a country’s financial sector, agriculture, and natural resources management.

•            The Bank’s stated purpose is to “bridge the economic divide between poor and rich countries”. 

•            It has a long-term vision to “achieve sustainable poverty reduction”.

•            To achieve this goal, the World Bank focuses on six areas:

  • Overcome poverty by spurring growth
  • Help reconstruct countries emerging from war
  • Provide a customized solution to help middle-income countries remain out of poverty
  • Spur governments to prevent climate change
  • Control communicable diseases, especially HIV/AIDS, and malaria
  • Manages international financial crises and promotes free trade

The International Monetary Fund (IMF)

•            The International Monetary Fund (IMF) is an international organization that aims to promote global economic growth and financial stability meant to encourage international trade and reduce poverty.

•            It is working to foster global monetary cooperation, secure financial stability, facilitate international trade, and promote high employment and sustainable economic growth.

•            The primary purpose of the IMF is to ensure the stability of the international system– the system of exchange rates and international payments. A

•            Because membership of the World Bank is conditional on being a member of the IMF, the World Bank also has 187 members.

•            These members govern the World Bank through a Board of Governors.

Similarities between the WB and IMF

•            Both the International Monetary Fund and the World Bank were formed together at Bretton Woods, New Hampshire, in July 1944. They are called Bretton Woods twins.

•            Both are headquartered in Washington D.C, the U.S.A.

•            They have the same membership as no admission to the World Bank is possible without the IMF membership.

•            The management structure of the World Bank is largely similar to that of the IMF. Voting rights in these institutions depend primarily on capital contribution of the member countries.

Differences between the WB and the IMF

•            The World Bank is primarily a development institution but the IMF is a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations.

•            The IMF exists to preserve an orderly monetary system whereas the World Bank performs an economic development role.

•            Both have different purposes. The IMF supervises the economic policies of its members and expects them to allow free exchange of national currencies. To keep this financial order, the IMF also acts as a provider of emergency loans to members who run into difficulties, in exchange for a promise from the member to reform its economic policies.

•            The World Bank finances economic development among poorer nations by funding specific and targeted projects, aimed at helping to raise productivity.

o           The World Bank consists of two organizations: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

o           The IBRD lends to developing nations at preferential interest rates, while the IDA only lends to the poorest nations, on an interest-free basis.

•            They have different funding sources. The IMF raises its money through membership fees, known as quotas. Each member country pays a quota based on its relative economic size so that the larger economies pay more.

•            The World Bank raises most of its money through borrowing by issuing bonds to investors. It also receives grants from donors.

•            The IMF exists primarily to stabilize exchange rates, while the World Bank’s primary goal is to reduce poverty.

Criticism of the WB and the IMF

•            Critics are concerned about the ‘conditionalities’ imposed on borrower countries. The World Bank and the IMF often attach loan conditionalities based on what is termed the ‘Washington Consensus’, focusing on liberalisation—of trade, investment and the financial sector—deregulation and privatisation of nationalised industries.

•            Both the WB and the IMF have been accused of coercing poor countries to undertake structural adjustment programmes (SAPs) under the aegis of economic globalization. Sometimes, this has led to under-development of these economies bringing severe domestic crisis in multiple dimensions.

•            The World Bank’s role in the global climate change finance architecture has also caused much controversy. Civil society groups see the Bank as unfit for a role in climate finance because of the conditionalities and advisory services usually attached to its loans.

•            The WB and the IMF have also been criticised for being western-dominated undemocratic bodies. Decisions are made and policies implemented by leading industrialised countries because they represent the largest donors without much consultation with poor and developing countries.

•            The IMF has quota system which is yet to give adequate weightage to the emerging economies like India, China and Brazil despite their increased economic importance in contemporary times.

•            The global economic centre of gravity has shifted from the “global North” to the “global South”. But these Brettonwoods institutions are yet to realise that even though there has been the formation the BRICS bank and the AIIB.

The World Trade Organization (WTO)

•            In international economic relations, the most significant event to occur in recent times has been the establishment of the World Trade Organization (WTO) in 1995.

•            The WTO replaced GATT (General Agreement on Tariffs and Trade) formalised in 1947.

•            The GATT structure had the following weaknesses:

o           It lacked institutional structure. GATT by itself was only the set of rules and multilateral agreements.

o           It covered only trade in goods. It didn’t cover trade in services, Intellectual Property Rights etc. Its main focus was on textiles and agriculture sector.

o           A strong Dispute Resolution Mechanism was absent.

•            To iron out these flaws, the WTO was born in 1995 as a result of Uruguay round of negotiations (1986-94).

•            This new organisation was set up as a permanent body and is designed to play the role of a watchdog in the spheres of trade in goods, trade in services, foreign investment, intellectual property rights etc.

•            It oversees the operation of the rules-based multilateral trading system. Its main function is to monitor and enforce trade rules in the global economy.

WTO Agreements:

•            Agreement on Agriculture

This provides a framework for the long-term reform of agricultural trade and domestic policies with the objective of introducing increased market orientation in agricultural trade.

•            Domestic support entails three types of subsidies-

A)          Amber box subsidies– They are most directly linked to production levels and are trade-distorting.

B)          Blue box subsidies– These are production-limiting programmes that still distort trade.

C)          Green box subsidies– They are permitted as they are non-trade distorting. They are heavily used by the USA and EU.

•            Agreement on TRIMs

The Agreement on Trade Related Investment Measures (TRIMs) call for introducing national treatment of foreign investments and removal of quantitative restrictions.

•            Agreement on TRIPs (Trade Related Intellectual Property Rights)

It provides a multilateral framework of principles and services which should govern trade in services under conditions of transparency and progressive liberalisation.

Important WTO Ministerial Conferences

•            The Doha Round began in November 2001 and the talks were finally suspended in June 2006.

•            The developed countries have tended to either under-implement their commitments or to implement them in a manner that makes the fruits of liberalisation unavailable to the developing countries.

•            They want the developing nations to eliminate domestic subsidies in agriculture sector.

•            But developed nations themselves continue to provide significant domestic support to their agricultural production.

•            Also, they are reluctant to provide reasonable market access to industrial products of developing countries.

BRICS Bank (New Development Bank)

•            The New Development Bank (NDB) is a multilateral development bank established by the BRICS states.

•            At the 6th BRICS summit held in Fortaleza, Brazil, the BRICS states signed the agreement on the NDB.

•            In the year 2015, an Indian K.V. Kamath was appointed as the President of the NDB.

•            The headquarter of the Bank is in Shanghai, China.

Major Objectives of the Bank

Promotion of infrastructure and sustainable development projects in member countries

Establish strategic partnerships with other multilateral development institutions and national development banks

Build a balanced project portfolio giving due respect to their geographic location, financing requirements and other factors

Promoting competitiveness and facilitating job creation

•            The NDB has been envisaged as a “dedicated channel of alternate finance” with greater focus on emerging economies and the Global South.

•            Some experts also see it as an alternative to the existing US-dominated World Bank and the IMF.

The Asian Infrastructure Investment Bank (AIIB)

•            The AIIB was established in January 2016 with its headquarters located in Beijing.

•            The core mandate of the AIIB is to address Asia-Pacific’s acute infrastructural needs.

•            Its mission is “to improve economic and social development in Asia by investing in high-quality, financially viable and eco-friendly infrastructure projects”.

•            It also aims to mobilize private capital to co-finance projects.

•            The creation of the AIIB is a welcome initiative given Asia’s huge infrastructural deficit.

Chinese interests in creation of the AIIB

•            Firstly, China has huge forex reserves. Chinese banks seek to circulate loan money on which they will earn interest. This will help China in making huge profits as China is the largest shareholder of the Bank.

•            Secondly, it is expected to bolster China’s One Belt One Road Initiative (OBOR). The AIIB is going to finance rail-roads-ports infrastructure along the ancient silk route. Hence, the Bank is going to help in China’s grand strategic designs and geopolitical motives.

•            Thirdly, China wants to counter hegemonic dominance of the west-dominated World Bank and the IMF. China wants to counter the hegemony of the WB, IMF and the Asian Development Bank through New Development Bank and the AIIB.

India and the AIIB

•            The Indian economy also has huge infrastructural funding requirements wherein the AIIB is playing a key role.

•            India has become an important recipient of the AIIB loans. India is one of the most significant countries that the bank is supporting.

•            The AIIB is involved in the transmission lines, rural roads and green projects among others.

•            The bank has laid special emphasis on renewable energy projects in India and elsewhere.

Similarities between the NDB and AIIB

•            The NDB and the AIIB are very similar as far as their purposes and functions are concerned.

•            Both are chiefly concerned with financing projects of infrastructure and sustainable development in the emerging economies and developing economies.

•            Their strategy is also geared towards forging partnerships with national development banks.

•            They were created out of a shared frustration with existing multilateral lending forums, whose voting structures are stacked against emerging markets. 

•            The BRICS nations were given just 10.3 percent of the votes at the IMF. The countries like Japan, Germany, France, and the U.K., each hold greater voting shares than China, despite the latter being the world’s second largest economy.

•            Each of the BRICS countries will contribute an equal share of the NDB’s $100 billion start-up capital, giving them 20 percent of the voting rights each. The 5-year presidency is to be rotated equally among its members in the NDB.

•            The AIIB has reserved at least 75 percent of voting shares for Asia-Pacific countries, in a powerful contrast to its hierarchal, Western-centric counterparts.

•            The presidency at the IMF is confined to Europeans, whereas the United States has sole discretion over the top role at the World Bank. Japan has led the ADB since its founding in 1966. This is not the state of affairs in either the NDB or the AIIB.

•            Both the banks have sought to fill the gap in infrastructure investment. They are expected to meet the enormous demand for infrastructure investment in the developing world.

•            Both the banks are a peaceful way of projecting Chinese power on the global stage concealing the assertive grand strategic designs of Chinese foreign policy. They are expected to help in consolidating and cementing the grand Chinese plan of One Belt One Road initiative (OBOR).

Differences between the NDB and AIIB

•            Although the two institutions have overlapping mandates and other significant similarities they have substantial differences as well.

•            The NDB has been more of a collaborative effort among the BRICS members where China’s role is markedly different from that in the AIIB. China’s dominance is more starkly visible in the AIIB.

•            Membership of the two banks is also different. The five BRICS members are members of the NDB and its membership has not expanded since its inception. The AIIB began its operations with a membership of 57 signatories (including many non-regional members). However, its membership has since grown rapidly to more than 75 members.

•            The distribution of voting powers is much simpler and much more egalitarian in the NDB than in the AIIB. The five founding members of the NDB are entitled with the same voting power (20% each) in sync with their subscribed capital and no single member has veto power.

•            In the case of AIIB the member’s voting power reflects the relative size of its subscription and is determined mostly on its financial capacity.

Major Achievements of the NDB

•            Since its inception the NDB has come a long way. Apart from its headquarters in Shanghai, China it has come up with Africa Regional Centre of NDB in Johannesburg, South Africa.

•            It has issued its first green bond raising RMB 3 billion in the Chinese bond market exemplifying its commitment to sustainable development ethics.

•            It has primarily stayed committed to its core concern of financing infrastructure and sustainable development projects in BRICS countries. It has expressed strong emphasis on renewable energy related projects.

•            By implication the formation of the NDB and AIIB has brought to the limelight the urgent need for reforms in WB and IMF. These two Brettonwoods institutions need to be reformed in the right earnest if they are to stay relevant in the context of the changing geo-economic realities in the 21st century world.