Know about Multilateral Financial Institutions and WTO

Multilateral institutions refer to global institutions relating to finance, trade and investment. In the post second world war period the international trade payments and exchange rate system was in doubt and shambles on one hand on the other hand the devastation of infrastructure caused by the two wars needed post war reconstruction and development. Due to these urgencies “Bretton Woods Twins”, the International Monetary Fund (IMF) and the International Bank for reconstruction and Development (IBRD, later World Bank) were born in 1945. The same could not happen in the case of setting up a body for regulating and promoting free trade together with these institutions. However, separately, an institution called General Agreement on Trade and Tariff was created in 1947, which later gave birth to the World Trade Organisation (WTO) in 1995.

The International Monetary Fund

The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Before Nauru, the last country to join the World Bank and IMF as 188th member was South Sudan in April 2012. Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership. The Headquarters of IMF is situated in Washington, D.C., United States. Christine Madeleine Odette Lagarde is a French lawyer and politician who has been the Managing Director of the International Monetary Fund since 5 July 2011 till date.

The IMF, also known as the Fund, was conceived at a UN conference in Bretton Woods, New Hampshire, United States, in July 1944. The 44 countries at that conference sought to build a framework for economic cooperation to avoid a repetition of the competitive devaluations that had contributed to the Great Depression of the 1930s.

The IMF’s responsibilities

The IMF’s primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

A country can face economic Crisis due to

  • Domestic factorsinclude inappropriate fiscal and monetary policies, which can lead to large economic imbalances (such as large current account and fiscal deficits and high levels of external and public debt); an exchange rate fixed at an inappropriate level, which can erode competitiveness and lead to persistent current account deficits and loss of official reserves; and a weak financial system, which can create economic booms and busts. Political instability and/or weak institutions can also trigger crises.
  • External factorsinclude shocks ranging from natural disasters to large swings in commodity prices. These are common causes of crises especially for low-income countries, which have limited capacity to prepare for such shocks and are dependent on a narrow range of export products. Also, in an increasingly globalized economy, sudden changes in market sentiment can result in capital flow volatility. Even countries with sound fundamentals could be severely affected by the impact of economic crises and policies in other countries.

IMF assistance to member countries

The IMF assists countries hit by crises by providing them financial support to create breathing room as they implement adjustment policies to restore economic stability and growth. It also provides precautionary financing to help prevent and insure against crises. The IMF’s lending toolkit is continuously refined to meet countries’ changing needs. IMF lending aims to give countries breathing room to implement adjustment policies in an orderly manner, which will restore conditions for a stable economy and sustainable growth. These policies will vary depending upon the country’s circumstances. For instance, a country facing a sudden drop in the prices of key exports may need financial assistance while implementing measures to strengthen the economy and widen its export base. A country suffering from severe capital outflows may need to address the problems that led to the loss of investor confidence—perhaps interest rates are too low; the budget deficit and debt stock are growing too fast; or the banking system is inefficient or poorly regulated.

In the absence of IMF financing, the adjustment process for the country could be more abrupt and difficult. For example, if investors are unwilling to provide new financing, the country would have no choice but to adjust—often through a painful compression of government spending, imports and economic activity. IMF financing facilitates a more gradual and carefully considered adjustment. As IMF lending is usually accompanied by a set of corrective policy actions, it also provides a seal of approval that appropriate policies are taking place.

The IMF’s various lending instruments

The IMF’s various lending instruments are tailored to different types of balance of payments need as well as the specific circumstances of its diverse membership (see table). Low-income countries may borrow on concessional terms through facilities available under the Poverty Reduction and Growth Trust ( IMF Support for Low-Income Countries ), currently at zero interest rates. Historically, for emerging and advanced market economies in crises, the bulk of IMF assistance has been provided through Stand-By Arrangements (SBAs) to address short-term or potential balance of payments problems. The Standby Credit Facility (SCF)serves a similar purpose for low-income countries. The Extended Fund Facility (EFF) and the corresponding Extended Credit Facility (ECF) for low-income countries are the Fund’s main tools for medium-term support to countries facing protracted balance of payments problems. Their use has increased substantially in since the global financial crisis, reflecting the structural nature of some members’ balance of payments problems.

To help prevent or mitigate crises and boost market confidence during periods of heightened risks, members with already strong policies can use the Flexible Credit Line (FCL) or the Precautionary and Liquidity Line (PLL).

The Rapid Financing Instrument (RFI) and the corresponding Rapid Credit Facility(RCF) for low-income countries provide rapid assistance to countries with urgent balance of payments need, including from commodity price shocks, natural disasters, and domestic fragilities.

Conditionality

Typically, a country’s government and the IMF must agree on a program of economic policies before the IMF provides lending to the country. A country’s commitments to undertake certain policy actions, known as policy conditionality, are in most cases an integral part of IMF lending

IMF Quota

The IMF is a quota-based institution. Quotas are the building blocks of the IMF’s financial and governance structure. An individual member country’s quota broadly reflects its relative position in the world economy. Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account.

There are many role of IMF Quota

  1. Resource Contributions– Quotas determine the maximum amount of financial resources a member is obliged to provide to the IMF.
  2. Voting Power– Quotas are a key determinant of the voting power in IMF decisions. Votes comprise one vote per SDR100,000 of quota plus basic votes (same for all members).
  • Access to Financing– The maximum amount of financing a member can obtain from the IMF under normal access is based on its quota.
  1. SDR Allocations– Quotas determine a member’s share in a general allocation of SDRs.

Special Drawing Right (SDR)

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. So far SDR 204.2 billion (equivalent to about US$291 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

The role of the SDR

The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system. The collapse of Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset. Nonetheless, SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case with the 2009 allocations totaling SDR 182.6 billion to IMF members amid the global financial crisis.

The SDR serves as the unit of account of the IMF and some other international organizations.

The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.  It is an accounting creation, so it is also called “paper gold.”

The value of the SDR

A basket of currencies determines the value of the SDR. The SDR was initially defined 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.

The SDR basket is reviewed every five years, or earlier if warranted, to ensure that the SDR reflects the relative importance of currencies in the world’s trading and financial systems. The reviews cover the key elements of the SDR method of valuation, including criteria and indicators used in selecting SDR basket currencies and the initial currency weights used in determining the amounts (number of units) of each currency in the SDR basket. These currency amounts remain fixed over the five-year SDR valuation period but the actual weights of currencies in the basket fluctuate as cross-exchange rates among the basket currencies move. The value of the SDR is determined daily based on market exchange rates. The reviews are also used to assess the appropriateness of the financial instruments comprising the SDR interest rate (SDRi) basket.

   CurrencyWeights determined in the 2015 ReviewFixed Number of Units of Currency for a 5-year period Starting Oct 1, 2016
  U.S. Dollar41.730.58252
  Euro30.930.38671
  Chinese Yuan8.331.0174
  Japanese Yen8.0911.900
  Pound Sterling 10.920.085946

During the last review concluded in November 2015, the Board decided that the Chinese renminbi (RMB) met the criteria for inclusion in the SDR basket. Following this decision, the Chinese RMB joined the US dollar, euro, Japanese yen, and British pound sterling in the SDR basket, effective October 1, 2016.

The SDR interest rate (SDRi)

The SDRi provides the basis for calculating the interest rate charged to members on their non-concessional borrowing from the IMF and paid to members for their remunerated creditor positions in the IMF. It is also the interest paid to members on their SDR holdings and charged on their SDR allocation.

The World Bank

The World Bank was born in Bretton Woods with the IMF as the International Bank for Reconstruction and Development in 1944. The WBG came into formal existence on 27 December 1945 following international ratification of the Bretton Woods agreements, which emerged from the United Nations Monetary and Financial Conference (1–22 July 1944). It also provided the foundation of the Osiander Committee in 1951, responsible for the preparation and evaluation of the World Development Report. Commencing operations on 25 June 1946, it approved its first loan on 9 May 1947 (US$250M to France for postwar reconstruction, in real terms the largest loan issued by the Bank to date). With 189 member countries, staff from more than 170 countries and offices in over 130 locations, the World Bank Group is a unique global partnership: five institutions working for sustainable solutions that reduce poverty and build shared prosperity in developing countries.

The bank is based in Washington, D.C. and provided around $61 billion in loans and assistance to “developing” and transition countries in the 2014 fiscal year. Kristalina Ivanova Georgieva-Kinova is a Bulgarian politician and the current chief executive officer of the World Bank. Until 2017, she was European Commissioner for Budget and Human Resources in the college of the Juncker Commission.

 Although it started as the International Bank for Reconstruction and Development (IBRD), later in due course of time it added four more institutions in its ambit- the IDA (International Development Association, soft loan window of the World Bank for LDCs and developing countries), the IFC (International Finance Corporation, World Bank window for private sector lending), the ICSID (the International Centre for Settlement of Investment Disputes (ICSID) and the MIGA (Multilateral Investment Guarantee Agency). IFC, MIGA, and ICSID focus on strengthening the private sector in developing countries.  IBRD and IDA are sometimes referred to as the World Bank and taken all other arms it is called World Bank Group. The bank’s stated mission is to achieve the twin goals of ending extreme poverty and building shared prosperity. Total lending as of 2015 for the last 10 years through Development Policy Financing was approximately $117 billion.

The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. Its five institutions share a commitment to reducing poverty, increasing shared prosperity, and promoting sustainable development. While the five institutions have their own country membership, governing boards, and articles of agreement, they work as one to serve the partner countries.  Today’s development challenges can only be met if the private sector is part of the solution.  But the public sector sets the groundwork to enable private investment and allow it to thrive.  The complementary roles of our institutions give the World Bank Group a unique ability to connect global financial resources, knowledge, and innovative solutions to the needs of developing countries.

The World Bank’s (the IBRD and IDA’s) activities are focused on developing countries, in fields such as human development (e.g. education, health), agriculture and rural development (e.g. irrigation and rural services), environmental protection (e.g. pollution reduction, establishing and enforcing regulations), infrastructure (e.g. roads, urban regeneration, and electricity), large industrial construction projects, and governance (e.g. anti-corruption, legal institutions development). The IBRD and IDA provide loans at preferential rates to member countries, as well as grants to the poorest countries. Loans or grants for specific projects are often linked to wider policy changes in the sector or the country’s economy as a whole. For example, a loan to improve coastal environmental management may be linked to development of new environmental institutions at national and local levels and the implementation of new regulations to limit pollution.

In fact all the countries do not participate in all the five organs of the World Bank Group, All of the 193 UN members and Kosovo that are WBG members participate at a minimum in the IBRD. The International Bank for Reconstruction and Development (IBRD) has 189 member countries, while the International Development Association (IDA) has 173 members. As of May 2016, all of them also participate in some of the other four organizations: IDA, IFC, MIGA, ICSID. Here is a description:

WBG members by the number of organizations which they participate in:

  1. only in IBRD: None
  2. IBRD and one other organization: San Marino, Nauru, Tuvalu, Brunei
  3. IBRD and two other organizations: Antigua and Barbuda, Suriname, Venezuela, Namibia, Marshall Islands, Kiribati
  4. IBRD and three other organizations: India, Mexico, Belize, Jamaica, Dominican Republic, Brazil, Bolivia, Uruguay, Ecuador, Dominica, Saint Vincent and the Grenadines, Guinea-Bissau, Equatorial Guinea, Angola, South Africa, Seychelles, Libya, Somalia, Ethiopia, Eritrea, Djibouti, Bahrain, Qatar, Iran, Malta, Bulgaria, Poland, Russia, Belarus, Kyrgyzstan, Tajikistan, Turkmenistan, Thailand, Laos, Vietnam, Palau, Tonga, Vanuatu, Maldives, Bhutan, Myanmar
  5. All five WBG organizations: the rest of the 138 WBG members

Non-members are: Andorra, Cuba, Liechtenstein, Monaco, State of Palestine, Vatican City, Taiwan, and North Korea.

The World Trade Organisation

The World Trade Organization (WTO) was created in the Uruguay Round of GATT. It became operational since January 995. It started with only 139 members. Today, the WTO has 164 members and 23 observer governments. Liberia became the 163rd member on 14 July 2016, and Afghanistan became the 164th member on 29 July 2016. In addition to states, the European Union, and each EU Country in its own right, is a member. The current Director-General is Roberto Azevêdo of Brazil, since 1 September 2013. Before the creation of the WTO, the General Agreement on Tariffs and Trade had a series of Directors-General. Peter Sutherland was the last DG of GATT and the first of the WTO.

It is the only global international organization dealing with the rules of trade between nations. At the heart of the system — known as the multilateral trading system — are the WTO’s agreements, negotiated and signed by a large majority of the world’s trading nations, and ratified in their parliaments. These agreements are the legal ground-rules for international commerce. Essentially, they are contracts, guaranteeing member countries important trade rights. They also bind governments to keep their trade policies within agreed limits to everybody’s benefit. The agreements were negotiated and signed by governments. But their purpose is to help producers of goods and services, exporters, and importers conduct their business.

Basic Principles of WTO

The basic principle of the WTO is “Non-discrimination”. It has two major components: the most favoured nation (MFN) rule, and the national treatment policy. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these areas. The WTO agreements later on added the principle of reciprocity. It means lowering of import duties and other trade barriers in return for similar concessions from another country. Reciprocity is a traditional principle of GATT/WTO, but is practicable only between developed nations as they have similar level of development. Of late in the Doha round there is a demand for reciprocity from emerging economies like India and China.

Special and Differential Treatment

The WTO agreements contain special provisions which give developing countries special rights and allow other members to treat them more favourably. These are “special and differential treatment provisions” (abbreviated as S&D or SDT). The special provisions include:

  • longer time periods for implementing agreements and commitments
  • measures to increase trading opportunities for these countries
  • provisions requiring all WTO members to safeguard the trade interests of developing countries
  • support to help developing countries build the infrastructure to undertake WTO work, handle disputes, and implement technical standard
  • provisions related to least-developed country (LDC) members

In the Doha Declaration, ministers agreed that all special and differential treatment provisions should be reviewed, in order to strengthen them and make them more precise, effective and operational.

 Objectives

  • The primary purpose of the WTO is to open trade for the benefit of all.
  • It is an organization for trade opening.
  • WTO acts as a forum for negotiating trade agreements. The goal is to help producers of goods and services, exporters, and importers conduct their business.
  • WTO operates a global system of trade rules. It is a forum for governments to negotiate trade agreements. The main goal is to ensure that trade flows as smoothly, predictably and freely as possible.
  • It settles trade disputes between its members and it supports the needs of developing countries.

The WTO Agreements

The WTO’s rules — the agreements — are the result of negotiations between the members. The current set were the outcome of the 1986–94 Uruguay Round negotiations which included a major revision of the original General Agreement on Tariffs and Trade (GATT). GATT is now the WTO’s principal rule-book for trade in goods. The Uruguay Round also created new rules for dealing with trade in services, relevant aspects of intellectual property, dispute settlement, and trade policy reviews. The complete set runs to some 30,000 pages consisting of about 30 agreements and separate commitments (called schedules) made by individual members in specific areas such as lower customs duty rates and services market-opening. Through these agreements, WTO members operate a non-discriminatory trading system that spells out their rights and their obligations. Each country receives guarantees that its exports will be treated fairly and consistently in other countries’ markets. Each promises to do the same for imports into its own market. The system also gives developing countries some flexibility in implementing their commitments.

GATT

General Agreement on Tariffs and Trade (GATT) is about trade in goods and tariff reduction. It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers; the text of the General Agreement spelt out important rules, particularly non-discrimination.Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping.

GATS

GATS refer to General Agreement on Trade in Services. Banks, insurance firms, telecommunications companies, tour operators, hotel chains and transport companies looking to do business abroad can now enjoy the same principles of freer and fairer trade that originally only applied to trade in goods. These principles appear in the new General Agreement on Trade in Services (GATS). WTO members have also made individual commitments under GATS stating which of their services sectors they are willing to open to foreign competition, and how open those markets are.

TRIPS

TRIPS refer to trade related intellectual property rights. The WTO’s intellectual property agreement amounts to rules for trade and investment in ideas and creativity. The rules state how copyrights, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuit layout-designs and undisclosed information such as trade secrets — “intellectual property” — should be protected when trade is involved.

TRIMS

TRIMS refer to Agreement on Trade-Related Investment Measures (TRIMs). This Agreement, negotiated during the Uruguay Round, applies only to measures that affect trade in goods. Recognizing that certain investment measures can have trade-restrictive and distorting effects, it states that no Member shall apply a measure that is prohibited by the provisions of GATT Article III (national treatment) or Article XI (quantitative restrictions). Examples of inconsistent measures, as spelled out in the Annex’s Illustrative List, include local content or trade balancing requirements. The Agreement contains transitional arrangements allowing Members to maintain notified TRIMs for a limited time following the entry into force of the WTO (two years in the case of developed country Members, five years for developing country Members, and seven years for least-developed country Members). The Agreement also establishes a Committee on TRIMs to monitor the operation and implementation of these commitments.

Agreement on the Application of Sanitary and Phytosanitary Measures

The Agreement on the Application of Sanitary and Phytosanitary Measures is one of the final documents approved at the conclusion of the Uruguay Round of the Multilateral Trade Negotiations. It applies to all sanitary (relating to animals) and phytosanitary (relating to plants) (SPS) measures that may have a direct or indirect impact on international trade. The SPS agreement includes a series of understandings (trade disciplines) on how SPS measures will be established and used by countries when they establish, revise, or apply their domestic laws and regulations. Countries agree to base their SPS standards on science, and as guidance for their actions, the agreement encourages countries to use standards set by international standard setting organizations. The SPS agreement seeks to ensure that SPS measures will not arbitrarily or unjustifiably discriminate against trade of certain other members nor be used to disguise trade restrictions. In this SPS agreement, countries maintain the sovereign right to provide the level of health protection they deem appropriate, but agree that this right will not be misused for protectionist purposes nor result in unnecessary trade barriers. A rule of equivalency rather than equality applies to the use of SPS measures.

The 2012 classification of non-tariff measures (NTMs) developed by the Multi-Agency Support Team (MAST), a working group of eight international organisations, classifies SPS measures as one of 16 non-tariff measure (NTM)chapters. In this classification, SPS measures are classified as chapter A and defined as “Measures that are applied to protect human or animal life from risks arising from additives, contaminants, toxins or disease-causing organisms in their food; to protect human life from plant- or animal-carried diseases; to protect animal or plant life from pests, diseases, or disease-causing organisms; to prevent or limit other damage to a country from the entry, establishment or spread of pests; and to protect biodiversity”.

Examples of SPS are tolerance limits for residues, restricted use of substances, labelling requirements related to food safety, hygienic requirements and quarantine requirements.

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