Roles of International Financial Institutions
January 10, 2011
When listening to the latest television report concerning global business news or world economics, names of financial institutions such as World Bank, International Monetary Funds, and Asian Development Bank may be the center of some discussion. A major player on the global forefront, international financial institutions function much differently from local neighborhood banks. In this paper the author will define the roles of international financial institutions and explain the role international financial institutions play in global financing operations. Also the ...view middle of the document...
357). After designing a new international monetary system, precipitated by the collapse of the gold standard, the delegation instituted The International Monetary Fund (IMF) along with its prime directive. The International Monetary Fund’s (IMF) main goal was to govern the international monetary system to prevent “the general economic disintegration” worldwide.
The World Bank’s, whose official name is the International Bank of Reconstruction and Development (IRBD), initial prime directive chosen by the delegates was to help finance the rebuilding of Europe’s war torn lands. Because the United States directly provided these European countries financial assistance for reconstruction, “the bank turned its attention to “development” and began lending money to Third World nations” (Hill, 2009, p. 359). The World Bank provides financing governed by two schemes. By raising money through bond sales in the international capital market, the International Bank of Reconstruction and Development (IRBD) scheme offers low-interest loans to high risk customers who have poor credit ratings. These customers often include governments of underdeveloped nations. Under the International Development Association (IDA) borrowers receive loans repayable at a 1% interest rate a year and 50 years to repay the loan. To provide capital for the International Development Association (IDA) loans, the World Bank raises funds through subscriptions from rich members. The International Development Association (IDA) scheme also provides interest free loans and grants reserved only for the poorest of nations.
Role in Global Financing Operations
With the rise of globalization, two elemental transformations have taken place in the role of international financial institutions. According to Buiter and Lankes (2002), the advancement of globalization is allowing “foreign trade and private capital now play a far greater role in economic development than ever before. Second, the poor performance of statist models of development (so popular in the past) led to a re-examination of the role of the state, which in turn motivated a strong shift towards private, market-based approaches.” Because of these changes economic development is facilitated by the private sector and private international finance.
However, the main objectives of international financial institutions are to alleviate poverty, increase economic growth, and protect the environment. In order to carry out these objectives these international financial institutions are working with governments and governmental agencies. They have provided loans for public sector projects or programs, technical assistance and policy-based lending. These international financial institution loans come with a guarantee by the borrowing states. However, in the new economic environment, the importance of international financial institutions as source of funds has decreased and the role of the private sector has increased. According...