Inside the atrium at the World Bank building in Washington, DC. Photo Credit: Stock.xchng.com

Many of the institutions that affect the global economy can be difficult to understand, historically as well as functionally. In this section we will dispel some of the mystery around institutions such as the International Monetary Fund and the World Bank by providing historical context and an outline of institutional goals and objectives.

In addition there are new terms that are being thrown around in the corporate world and in the development sector that can be very confusing. These include ideas such as microfinance and corporate social responsibility. Read on to find more information about these ideas and institutions with definitions and articles for a more in-depth presentation.

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The Bretton Woods System:

The Bretton Woods system was developed in 1944 in Bretton Woods, United States and prevailed until the mid 1970s. It was history's first example of an international monetary regime that would "combine binding legal obligations with multilateral decision-making conducted through an international organization." Two prominent economists of the era were the architects of the system, namely, Harry Dexter White of the U.S. Treasury and John Maynard Keynes of Britain. While both economists contributed to the debate, the system that ultimately emerged was much closer to White's plan than Keynes, reflecting the power of the US at the close of World War II.

There are four main aspects of the Bretton Woods System:

• Pegged Rate' or ‘Adjustable Rate' Currency
  In the 1930s currency rates were adjustable or "floating" which was believed to discourage international trade and investment and encourage unstable speculation and depreciation. To counter this problem members of the Bretton Woods assembly established a ‘pegged rate' or ‘adjustable rate' currency. Members declared a par value for their national money and intervened to limit fluctuations in the exchange rate. At the same time members retained the right to alter their par value in response to any crisis or major disequilibrium in the currency market.
• Gold Exchange
  The gold exchange essentially referred to the monetary reserves of the system. Member governments agreed that if exchange rates were not to float freely, states would also require assurance of an adequate supply of monetary reserves. International liquidity would still consist primarily of national stocks of gold or currencies convertible, directly or indirectly, into gold.
• Binding Framework of Rules
  In order to institute the above all governments agreed on a binding framework of rules. They knew it was necessary to avoid the kind of extreme economic competition between states that had happened in the 1930s. They decided to come up with a set of rules that once agreed to were inflexible. The International Monetary Fund was responsible for implementing these rules and dealing with the legal aspect of converting currencies.
• International Forum
  In order to avoid conflict members also decided to create a forum for conversation and cooperation which the International Monetary Fund was able to provide. ¹

In the 1970s under President Nixon the gold exchange component of the system was changed -essentially bringing the monetary aspect of the Bretton Woods System to an end. However, the institutions put in place remain, as do the international ‘rules' of the game.

Bretton Woods Institutions:

The International Monetary Fund and the World Bank are both Bretton Woods institutions. The IMF was established at the Bretton Woods conference in 1944. The World Bank, originally the International Bank for Reconstruction and Development (IBRD), was conceived of at the Bretton Woods meeting. The WTO was also conceived at the Bretton Woods Conference; however, the trade organization was not made active until 1995, because it lacked the necessary political support. The General Agreement on Tariffs and Trade (GATT) functioned as a substitue until 1995.

Both the IMF and World Bank work together under the United Nations system with the "goal of raising living standards of individuals in their member countries". The World Bank and the IMF both work to stabilize the international economic system, but specialize in different areas. The IMF focuses on creating international financial stability while the World Bank focuses more on long-term development and poverty reduction in individual countries. ²

Links to Articles on Bretton Woods:

Working with Bretton Woods Institutions

Making the IMF and World Bank Work for the Poor

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International Monetary Fund (IMF):

The IMF is an international organization with more than 180 member states. It was conceived at the Bretton Woods conference in 1944. The IMF engages in three main activities to increase international financial stability. These are surveillance, financial assistance and technical assistance.

• Surveillance
  Surveillance is the process of keeping an ongoing dialogue about the consequences and results of economic policies both domestically and internationally. The IMF encourages transparency in surveillance, in order to create more open communication and detect problems in the international financial system early.
• Financial Assistance
  Each member state of the IMF countributes a certain quota to the fund based on its economic size. This money is then used to help member states if they have balance of payment needs. Essentially, if a state has issues paying international debt it may apply to the IMF for a loan. The IMF hopes that by providing these loans, states can continue to support their economies and pay international debts. The IMF has many different ways of lending money. Usually, there is an agreement between the state and the IMF on policies that will be implemented in order to restore financial stability of the state.
• Technical Assistance
  The technical assistance that the IMF provides includes suggestions on macroeconomic policy, tax policy, monetary policy and expenditure management. These services are usually provided free of charge, and more than three quarters are provided to low and lower-middle income countries. The purpose of these policies is the stregthen the international financial system. ²

Links to Articles on the IMF:

The IMF and World Bank - An Overview

Skepticism about Argentina's Early Payment to the IMF

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World Bank:

International Bank for Reconstruction and Development (IBRD) was founded in 1944 at the Bretton Woods conference. Since that time the World Bank has grown and now includes to International Development Association (IDA) and several smaller programs that are run through these institutions.

According to the World Bank, "The World Bank is a vital source of financial and technical assistance to developing countries around the world. We are not a bank in the common sense. We are made up of two unique development institutions owned by 185 member countries—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Each institution plays a different but supportive role in their mission of global poverty reduction and the improvement of living standards. The IBRD focuses on middle income and creditworthy poor countries, while IDA focuses on the poorest countries in the world. Together they provide low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and many other purposes." ³

Structural Adjustment Programs (SAP):

Structural Adjustment Programs are economic policies promoted by the World Bank, beginning in the 1980s. These policies provided conditional loans to developing nations. In order for nations to receive loans they were required to implement certain policies as prescribed by the World Bank. Privatization, free-trade and other reforms were instituted in an attempt to liberalize trade, break down barriers and spur economic development.

SAPs have received a high amount of criticism from a variety of fronts as these policies often result in the breakdown of social service systems previously in place. SAPs in order to curtail government spending require cuts that often affect the already unstable welfare system in place in many developing nations.

Heavily Indebted Poor Countries (HIPC) Initiative:

Another program called the HIPC initiative was launched in 1996 by the World Bank to "To ensure deep, broad and fast debt relief and thereby contribute toward growth, poverty reduction, and debt sustainability in the poorest, most heavily indebted countries." ³ Since that time many major international leaders have attempted to come together on this issue, but vast amounts of debt remain, crippling the economies of many developing nations.

Links to Articles on the World Bank:

Developing Countries to Drive Global Growth

World Bank's Dirty Power Plan

African Continent Tops World Bank Priorities

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Corporate Social Responsibility:

Corporate social responsibility, as defined by faculty members at Harvard, deals with how companies make their profits and what they then use those profits for.

"We define corporate social responsibility strategically. Corporate social responsibility encompasses not only what companies do with their profits, but also how they make them. It goes beyond philanthropy and compliance and addresses how companies manage their economic, social, and environmental impacts, as well as their relationships in all key spheres of influence: the workplace, the marketplace, the supply chain, the community, and the public policy realm.

"The term "corporate social responsibility" is often used interchangeably with corporate responsibility, corporate citizenship, social enterprise, sustainability, sustainable development, triple-bottom line, corporate ethics, and in some cases corporate governance. Though these terms are different, they all point in the same direction: throughout the industrialized world and in many developing countries there has been a sharp escalation in the social roles corporations are expected to play. Companies are facing new demands to engage in public-private partnerships and are under growing pressure to be accountable not only to shareholders, but also to stakeholders such as employees, consumers, suppliers, local communities, policymakers, and society-at-large.

"Laggard firms and governments can sometimes use the existence of corporate social responsibility programs to shirk their roles. Government ultimately bears the responsibility for leveling the playing field and ensuring public welfare. In order for corporate social responsibility programs to work, government and the private sector must construct a new understanding of the balance of public and private responsibility and develop new governance and business models for creating social value." ⁴

Links to Articles on Corporate Social Responsibility:

Corporate Responsibility and Globalization

Fair Trade Sweatshops?

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Group of Eight (G8):

Starting in 1975 the heads of state or government of the major industrial democracies have been meeting each year to discuss important economic and political issues facing their countries and the international community. The first meeting was comprised of six countries, France, the United States, Britain, Germany, Italy and Japan. Canada joined them in 1976 and the European Community has been participating since 1977. In 1998 Russia also became a fully participating member after several years of engaging in only political matters.

Some of the issues that the G8 deals with include international trade, developed nations' relationship with developing nations and macroeconomic policies. Recently they have also dealt with issues of energy, terrorism, the environment and human rights.

Each year the G8 meets at a summit to discuss these major issues. These meetings and summits attract much attention as they are central to the process of global governance and international relations. In addition meetings of the G8 attract attention from many smaller countries and non-governmental organizations, as decisions reached at these meetings have consequences for everyone not just those that participate. For example, the G8 has an incredible influence over the IMF and the World Bank. In recent years there has been speculation that China, a major growing economic power may want to participate in these summits in the future. ⁵

Links to Articles on the G8:

Debt Cancellation - Historic Victories, New Challenges

Where's the Jubilee?

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Microfinance:

Microfinance refers to the provision of financial services to the poor. These services include loans, savings accounts and insurance. Most of the individuals that are benefited by microfinance institutions do not have access to more conventional, larger financial institutions.

The institutions that provide these services rage from international non-governmental organizations to small community groups. These institutions normally provide services with low interest rates and fees that simply cover the cost of the services provided.

Over the last two decades, programs have grown and in some cases have been very successful. Microfinance has been useful as a means to reduce poverty and assist the poor with savings and lessening of economic vulnerability. ⁶

Links to Articles on Microfinance:

Defining Microfinance

The Microfinance Moment

Microcredit Wins the Nobel Peace Prize

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Footnotes:

¹ Benjamin J. Cohen of University of California, Santa Barbara, Department of Political Science

² International Monetary Fund

³ The World Bank

⁴ Corporate Social Responsibility Initiative of the John F. Kennedy School of Government at Harvard

⁵ G8 Information Centre at the University of Toronto

⁶ The Consultative Group to Assist the Poor (CGAP)




Contributed by Rachelle Vanderzanden, Project Intern at GlobalEnvision. Rachelle is an undergraduate student at Portland State University where she is currently studying political science. She comes to GlobalEnvision and Mercy Corps through a community-based learning program at her university called Student Leaders for Service. Upon completing her degree, Rachelle hopes to pursue a career in international development.

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