1 / 34

Institution

Institution. Institutions are humanly devised constraints that structure political , economic and social interactions (North, 1991). Intsitution -2-. Informal Constraints: Customs, Traditions, Codes of Conduct Formal Constraints: Constitutions, Laws, Property Rights

kenna
Download Presentation

Institution

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Institution Institutionsarehumanlydevisedconstraintsthatstructurepolitical, economicandsocialinteractions (North, 1991).

  2. Intsitution -2- • Informal Constraints: Customs, Traditions, Codes of Conduct • Formal Constraints: Constitutions, Laws, Property Rights • Eg. Institutions of Free Market Economy are: Property Rights and Free Competition • Institutions determine the choice set • Transaction and Production Costs

  3. International Institutions • Supra-national • Multi-lateral Agreements • Inter-governmental vs. Non-governmental • International Laws applied

  4. International Financial Institutions International Bank forReconstructionandDevelopment InternationalMonetaryFund

  5. Two Questions • What is the role assigned to international financial institutions? • How did this role change throughout the years since Bretton Woods?

  6. The Bretton Woods Rationale • LessonsfromtheGreatDepression, • Internationalcorporationtoavoidrepetition of the “beggarthyneighbour” tradepoliciesandcompetitivedevaluations, • Countriesdevastatedbythewarrequiredmoreinvestmentthancould be financedbydomesticsavings, thereforeofficialcapitalflowsbecameessentialforreconstructionanddevelopment

  7. ThreePillars of the Post-WarSystem • An institutiontooverseeexchange rate arrangementsandtoprovidetemporaryfinancewhenBoPdifficultiesdid not resultfrom “fundamentaldisequilibrium”, • An institutiontoenableofficialcapitalflowstofacilitateinvestmentwhereprivatecapitalflowswereinadequate, • An institutiontooverseetraderelationsamongcountriesandtoprovide a frameworkfor an openmultilateraltradingsystem.

  8. Bretton Woods - 1945 • Agreed on an institutionalframeworkforinternationaleconomiccooperation • IMF cameintoexistence in Dec., 1945 withtheaims of ensuringexchange rate stabilityandencouragingmemberstoeliminateexchangerestrictions. • 29 membersinitially, but expandedto 184 countries as of June, 2006. • Number of membersincreasedesp. In 1960s and 1990s.

  9. Twin Institutions of Bretton Woods • IMF & IBRD • Aim => to help rebuilding war-ravaged countries (i.e. Europe and Japan). • In 1960s: Newly independent and emerging nations of Africa, Asia, L. America, Middle East. • In 1990s: Transition countries of Central and Eastern Europe.

  10. IMF & IBRD: Complementary Institutions • IMF focuses on macroeconomic and financial sector issues. • IBRD is concerned mainly with long term development and poverty reduction (i.e.infrastructure building) • Countries must join the IMF to be eligible for IBRD membership.

  11. IBRD & IMF • Similar governance structures => shareholder based, • Memeber governments are the shareholders of each institution, • Shares are in proportion to countries’ economic importance, • Votes allocated to each countryare in proportion to countries’ shareholdings, • Rich countries possess higher representation.

  12. The IMF -1- • Threat: DOMESTIC DEPRESSION and UNEMPLOYM ENT • Policiespursuedtocombatdomesticunemployment, • Beggar-thy-neighbourpolicies: shiftingeffectivedemandawayfromimportsontodomesticallyproducedgoods, • TarriffsandQuotas on Imports, • CompetitiveDevaluations . • Result: ExportingInternalImbalances

  13. The IMF -2- • Role: Tooverseeexchange rate relationships in a fixed but, adjustableexchange rate system. • Memberscannotaltertheirexchangerateswithoutapproval of IMF, • It is onlypossibletoaltertheexchange rate when it weredeterminedthattherewas a “fundamentaldisequilibrium” in theBoP, • Whentherewas no “fundamentaldisequilibrium”, countriescouldborrowfromthe IMF totidethemovertemporaryimbalances.

  14. Pusposes of the IMF are:(Article 1 of theArticles of Agreement) • promoting international monetary cooperation; • facilitating the expansion and balanced growth of international trade; • promoting exchange stability; • assisting in the establishment of a multilateral system of payments; and • making its resources available (under adequate safeguards) to members experiencing balance of payments difficulties.

  15. Exchange Rate Stability • Between 1945 – 71, membercountriesagreedtokeeptheirexchangeratespegged at ratesthatcould be adjustedonlytocorrect a fundamentaldisequilibrium in theBoP, andonlywith IMF agreement. • In 1971, U.S. Suspendedtheconvertibility of DollarintoGold. • IMF members, since then, arefreetochooseany form of exchangearrangement (i.e. Freefloat, peggedsys.)

  16. IMF had to develop new initiatives and reform its policies: • New members, whoaretransitioncountries, exhibitdifferentneeds. • U.S. abandonement of the par valuesystem. • Oilpriceshocks in 1970s. • Latin Americandebtcrisis in 1980s. • Crises in emergingfinancialmarkets in 1990s. • Argentinadebtdefault in 2001. => InstitutionalRestructuring!

  17. IMF Activities • Surveillance • Lending • Technical Assistance

  18. Surveillance -1- • Surveillance is the regular dialogue and policy advice that the IMF offers to each of its members. • Once a year, IMF conducts in-depth appraisals of each member country’s economic situation. • IMF monitors national, global, and regional economic and financial developments and advising member countries on their economic policies.

  19. Surveillance -2- • “Multilateral Surveillance” => IMF assessment on global and regional developments and prospects: World Economic Outlook Global Financial Stability Report

  20. Financial Assistance • A core responsibility of the IMF is to provide loans to countries experiencing BoP problems • A member country may request financial assistance if it cannot find sufficient financing to meet its international payments • Precisely the oil shock of 70s, and the debt crises of 80s were followed by sharp increases in IMF lending, transition process in CEE, and the crises in emerging markets in 90s led to further surges of demand for IMF resources

  21. Financial Assistance:Process of Lending • Loan is provided under an “arrangement” stipulates the specific policies and measures a country has agreed to implement to resolve its BoP problem. • Letter of Intent-Memoranda of Economic and Financial Policies are prepared by the member country, and describe the policies that a country intends to implement in the context of its request for financial support from the IMF

  22. Financial AssistanceLoan Instruments -1- • Various “facilities” are tailored to address the specific circumstances of diverse members. 1. Poverty Reduction and Growth Facility=>to the poorest members 2. Exogeneous Shocks Facility => Low income countries may borrow at concessional interest Rates 3. Stand-by Agreements=>short term BoP problems 4. Extended Fund Facility=>BoP related to structural problems 5. Compensatory Financing Facility => Non-concessional

  23. Financial AssistanceLoan Instruments -2- 6. Emergency Assistance: To support recovery from natural disasters and conflicts, in some cases at concessional interest rates 7. Supplemental Reserve Facility: large loans with short maturities, to countries going through capital account crises. 8. Trade Integration Mechanism: to developing countries, whose BoP suffers from multilateral trade liberalisation

  24. General Terms of IMF Financial Assistance-1- • All facilities, except PRGF &ESF, are subject to IMF’s market related interest rates = “rate of charge” + surcharge • “Rate of interest rate” is based on SDR and revised weekly. • A surcharge can be levied above a certain threshold to discourage countries from borrowing large amounts

  25. General Terms of IMF Financial Assistance-2- • The amount that a country can borrow from the Fund, its “access limit”, varies depending on the type of loan, but typically it’s the multiple of the country’s IMF quota. • “Safeguards” on members’ use of IMF resources: IMF requires assessment of CB compliance with desirable practices, i.e. internal control, financial reporting, auditing

  26. IMF’s Resources • Most resources for IMF loans are provided by member countries, primarily through their payment of quotas. • Each member of the IMF is assigned a quota, based broadly on its relative size in the world economy (i.e. İts GDP, current account transactions,official reserves), which determines its contribution to the IMF's financial resources.

  27. Functions of Quotas • Subscriptions => financial resources that the member is obliged to provide to the IMF. • Voting Power: U.S. has 16.79% of total votes, Palau has 0.01% of total votes • Access to Financing • SDR allocations=>A member’s share of general SDR allocations is established in proportion to its quota

  28. What is SDR?-1- • The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. • A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate.

  29. What is SDR?-2- • The international supply of two key reserve assets— gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. • => the international community decided to create a new international reserve asset under the auspices of the IMF.

  30. What is SDR?-3- • In 1973, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. • Today the main function of SDR is to serve as theunit of account of the IMF and some other international organizations.

  31. SDR Calculation • Initially, SDR was valued as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. • After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies,consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.

  32. Borrowing Procedures • Initialfinancing of theFundcamefrommembers’ paid-in-capital, • Paymentsmadepartly in gold, partly in convertablecurrencies, andpartly in nationalcurrency, • MembersborrowfromtheFund in “tranches”, whichwere in proportiontotheircapitalsubscriptions, • Access tothefirst “tranche” wasautomatic, andequaltothegoldproportion of paid-in-capital, • Successiveincreases in “tranches” aresubjectto “conditionality.

  33. Technical Assistance & Training -1- • The objective is to help improve the design and implementation of members' economic policies, including by strengthening skills in institutions such as finance ministries and central banks.

  34. Technical Assistance & Training -2- • monetary and financial policies (monetary policy instruments; banking system supervision, and restructuring; foreign management and operations; clearing settlement systems for payments; and structure development of central banks); • fiscal policy and management (tax and customs policies and administration, budget formulation, expenditure management, design of social safety nets, and management of domestic and foreign debt); • compilation, management, dissemination, and improvement of statistical data; and • economic and financial legislation

More Related