LM07 International Trade and Capital Flows

Part 6

12. Trade Organizations

12.1 International Monetary Fund

Primary responsibilities of the IMF: To ensure the stability of the international monetary system, the system of exchange rates and international payments that enables countries to buy goods and services from each other.

• Provides a forum for cooperation on international monetary problems.
• Facilitates the growth of international trade and promotes employment, economic growth and poverty reduction.
• Supports exchange rate stability and an open system of international payments.
• Lends foreign exchange to members when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems.

How does the IMF ensure global economic stability?

• Financial assistance: The IMF stands ready to lend foreign currencies to member countries to assist them during periods of significant external deficits. A pool of gold and currencies contributed by members provides the IMF with the resources required for these lending operations. Following the 2007-09 crisis, the IMF has enhanced its lending facilities and member countries’ access to fund resources.
• Surveillance: In the wake of several financial crises in the recent past (downgrading of Greek sovereign debt to non-investment grade and its cascading effects on other EMU countries such as Italy, Spain, etc.), the IMF has improved its monitoring of global, regional, and country economies on macroeconomic policies.
• Helping resolve global economic imbalances.
• Technical assistance: Offers training to country officials on how to design and implement effective macroeconomic policies, and how to manage their financial systems and capital markets.

12.2 World Bank Group

The World Bank’s main objective is to help developing countries fight poverty and enhance environmentally sound economic growth. One of the current goals of the World Bank to achieve by 2030 is to end extreme poverty by decreasing the percentage of people living on less than $1.25 a day to less than 3%. (Source: worldbank.org)

The World Bank funds projects in developing countries and provides financial and technical expertise with an objective to reduce poverty. It finances these projects through its two affiliated entities, IBRD and IDA. Both these organizations provide low or no interest loans to countries that have unfavorable or no access to international credit markets.

• The International Bank for Reconstruction and Development (IBRD): The primary source of funding for the bank is by selling AAA- rated bonds in the world’s financial markets. It has enjoyed this high rating since 1959. IBRD’s reserves have been built up over the years with the capital contributed by the bank’s 188 member countries. It generates income from lending out its own capital. IBRD’s income pays for World Bank’s operating expenses.

The International Development Association (IDA): World’s largest source of interest-free loans and provides assistance to the poorest countries.

12.3 World Trade Organization

The WTO is the only organization that deals with the rules of trade between nations. The most important functions of the WTO include:

• Implementation, administration, and operation of individual agreements. All the major decisions are taken by the representatives of the governments who meet regularly in Geneva.
• Acting as a platform for negotiations such as lowering customs tariffs, removing trade barriers, etc.
• Settling disputes: If the countries feel there has been an infringement of an agreement, or any other dispute, then the issue is settled by the WTO.
• Building trade capacity: The WTO helps developing countries to build the skills and infrastructure needed to boost their trade.
• WTO agreements have been signed by a large majority of the world’s trading nations and ratified in their respective parliaments.
• The WTO has the mandate to review and propagate its members’ trade policies and ensure the coherence and transparency of trade policies through surveillance in a global policy setting.

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