International Financial Institutions | Model Diplomacy

November 13, 2019 0 By Kody Olson

The two major international financial institutions are the International Monetary Fund or IMF and the World Bank. Both were created in 1944 at the Bretton Woods international monetary conference. The U.S. Treasury was responsible for convening the conference. The Treasury believed that it was the currency trade wars of the early 1930s that spread the Great Depression globally and created the environment of misery and anger that paved the path to war. They were determined to stamp out economic aggression in the postwar landscape by creating these two new institutions, which they believed would stop countries from resorting to destructive measures like trade protectionism and competitive devaluation and would lead to more cooperation. The United States contributed the most capital and it also in consequence had the most votes. It was always the only country that had veto power over policy changes within the organizations. The international Monetary Fund was created to preside over a new fixed exchange rate system based on the United States dollar. Countries with temporary balance of payments deficits would be able to borrow from the IMF on concessionary terms. The IMF found itself taking on a very different role after the collapse of fixed exchange rates. International financial crises became much more frequent after the 1980s and the IMF was able to reinvent itself as an international crisis firefighter. The world Bank was established initially in order to assist in the reconstruction of Europe after the war. It was however the Marshall Plan that the United States instituted in 1948 that primarily filled this role and the World Bank went on to focus on other areas in particular economic development in poorer countries. In 2014 the so-called BRICS countries Brazil, Russia, India, China, and South Africa created two new institutions. One is a so-called contingent reserve arrangement, which mimics the activities of the IMF. The resources behind it or rather minimal. They also established a so-called new Development Bank that will mimic the activities of the World Bank funding mainly infrastructure development in emerging economies. More recently in 2015, China spearheaded the establishment of the Asian Infrastructure Investment Bank or AIIB. The AIIB will also focus on infrastructure development, but mainly concentrated in the Asia-Pacific region. The new Development Bank and the Asian Infrastructure Investment Bank reflect the frustrations in particular of China, India, and Brazil over the unwillingness of the U.S. Congress to ratify IMF governance reform. They want more say in international financial diplomacy, so establishing their own institutions was their mechanism for securing greater voice. The World Bank I believe is going to be facing increasingly useful competition from other mechanisms in the coming years. The IMF however really is the closest thing we have and probably will ever have to a true international lender of last resort. We’ve seen over the decades that without the IMF the world is very dependent on either direct lending from the U.S. Treasury or from currency swaps authorized by the Federal Reserve, but if the United States wants to multilateralize these initiatives and not have the world dependent entirely on its own resources, it needs to ensure that major emerging economies have a voice commensurate with their new power in the global economy.