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JC History Tuition - What is the difference between World Bank and the IMF - Global Economy Notes

What is the difference between the World Bank and the IMF?

Topic of Study [For H2 History Students]: 
Paper 1: Understanding the Global Economy (1945-2000)
Section B: Essay Writing
Theme II Chapters 1: Reasons for growth of the global economy & Problems of economic liberalisation

Learn more about the differing functions of the World Bank and the IMF [Video by CNBC International]

A confusing perspective: The World Bank and IMF
It has become a common issue for people to ask what are the defining roles of the World Bank and the International Monetary Fund (IMF). In fact, during the inaugural meeting of the IMF, the British economist John Maynard Keynes was confused by the names. He added the the IMF should have been described as a ‘bank’, whereas the World Bank should be recognised as a ‘fund’.

Let’s recap on the roles of the IMF and the World Bank separately.

#1. The IMF
From 1945 to 1971, the IMF was established for two key purposes:

  • Currency stabilisation through a fixed exchange rate system
  • Provision of short-term loans to finance balance of payment deficits

Currency stabilisation was achieved through the US Dollar (USD) that was pegged to the gold. From 1958 to 1971, the USD was fixed in value to gold at $35 per ounce. Then, all other foreign currencies were pegged to the USD. In other words, USD became the international reserve currency. As such, stable currency values ascertain prices, thus encouraging greater trading and investment activities.

As for the second purpose, the IMF held a pool of funds that nations could borrow from to finance their debts. This pool of funds was to be contributed by member states, including the USA. The correction of balance of payment deficits is critical in maintaining exchange rate stability as well. These conditional loans were given to countries that agreed to correct their trade deficits through policy adjustments like austerity measures.

#2. The World Bank
As for the World Bank, its immediate role after World War Two was to provide long-term financing for devastated nations to rebuild their economies. Formerly known as the International Bank for Reconstruction and Development (IBRD), the institution was initially backed by the USA. For instance, the Marshall Aid was given to Europe for post-war reconstruction.

By the 1960s, the World Bank was more involved in financing the infrastructure projects in developing countries to realise their economic potential. Following the decolonisation of the Third World nations in Asia and Africa, many developing countries were in dire need of these loans.

Changes in the functions of the IMF and the World Bank: 1970s
After the US experienced the twin deficits in the 1960s and realised that a fixed exchange rate system was unsustainable, US President Nixon announced the abandonment of the fixed exchange rates regime on 15 August 1971. From 1973 onward, the IMF focused its efforts in providing short-terms to correct the balance of payment deficits of member nations.

Also, it was involved in managing the Third World Debt Crisis of the 1980s. In 1982, the Latin American nations negotiated with both banks and the IMF for debt repayments. As a result, the ‘bail-out loans’ were introduced. Should the debtor nation agree to accept the IMF loan, the government must agree to conduct policies to achieve macroeconomic stabilisation, such as reduction in government subsidies (part of the austerity measures).

However, the IMF bail-outs had disastrous impacts on the debtor nations. Without government subsidies, many households were unable to cope with the high cost of living. In Bolivia, the price of bread rose four times. Living standards deteriorated significantly. On separate but related note, the ‘IMF bail-out loans’ were introduced to Thailand and Indonesia during the Asian Financial Crisis.

As for the World Bank, it expanded its lending role to include “structural- and sector-adjustment loans” in the 1980s. These loans were meant to facilitate economic reforms to support the heavily indebted nations in Latin America and sub-Saharan Africa.

What can we learn from this article?
Consider the following question:
– Assess the significance of the IMF and World Bank in contributing to the growth of the global economy [to be discussed in class].

Sign up for our JC History Tuition and review your comprehension of the Global Economy as well as other topics like the United Nations to be ready for the GCE A Level History examinations. We also conduct classes for students taking H1 History, which covers contrasting topics such as Superpower Relations with China and the Cold War in Southeast Asia.

Besides, we have other JC tuition classes, such as GP TuitionEconomics Tuition, JC Chemistry Tuition, JC Math Tuition and China Studies in English Tuition. For Secondary Tuition, we provide Secondary English Tuition, Secondary Math tuition, Secondary Chemistry Tuition and Secondary Economics Tuition. Call 9689 0510 to find out more.

JC History Tuition Bishan Singapore - What happened at the Bretton Woods Conference in 1944 - Global Economy Notes

What happened at the Bretton Woods Conference in 1944?

Topic of Study [For H2 History Students]: 
Paper 1: Understanding the Global Economy (1945-2000)
Section B: Essay Writing
Theme II Chapter 1: Reasons for growth of the global economy

A quick recap on what the “Bretton Woods” system – loosely described as a “three-legged stool” that features the International Monetary Fund (IMF), World Bank and General Agreement on Tariffs and Trade (now called the World Trade Organisation)
[Video by Center for Strategic & International Studies]

Historical Context
Amidst the ongoing World War Two, world leaders from 44 nations, including USA and Soviet Union, attended a conference at Bretton Woods, New Hampshire in July 1944.

As the Great Powers envisioned a world that is free from Nazi and Japanese occupation, there were calls for a global financial order. Two institutions were established following the Bretton Woods Conference: The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) [later known as the World Bank].

1. The International Monetary Fund
Before the Conference, Harry Dexter White (Special Assistant to the US Secretary of the Treasury) and John Maynard Keynes (advisory to the British Treasury) carried out plans in 1942.

Their drafts include the creation of organisations that provide financial assistance to countries that are experiencing balance of payment deficits. Eventually, there was common consensus to pursue fixed exchange rates at the global level.

On 21 April 1944, leaders of the Allied Powers released a joint statement that officially declared the creation of the IMF. The IMF was responsible for the maintenance of a system of fixed exchange rates.

In particular, it was based on a Gold-US Dollar exchange rate system. Till 1971, the USD was pegged to gold at $35 per ounce. Other foreign currencies were fixed to the USD. By doing so, USD became the anchor for stable currencies and facilitated international trade and investments.

Additionally, the IMF was also charged with the responsibility to provide short-term financial assistance to countries that experience temporary deficits in their balance of payments.

2. The World Bank
The second product of the Bretton Woods Conference was the IBRD. Both White and Keynes observed that many developing nations were lacking funds to develop their infrastructure.

Furthermore, the devastation caused by World War Two left these countries in dire need of post-war recovery, which incurred large expenditures. Therefore, the IBRD was set up to provide financial assistance to Europe, Japan and developing nations for reconstruction.

At the early stages, USA provided a major source of financing for post-war recovery, as evidenced by the Marshall Plan. Nevertheless, the IBRD played its part, as seen by its first issuance of loan to France.

Later, the organisation was renamed as World Bank. It expanded into multiple sub-entities, such as the International Development Association in 1960 (IDA) that lends to low-income countries and the International Finance Corporation in 1956 (IFC) that supports private investments in countries.

3. General Agreement on Tariffs and Trade (GATT)
The third feature was formed much later in April 1947. During the Bretton Woods Conference, proposals were made to establish an International Trade Organisation. However, USA did not ratify the treaty, thus an alternative arrangement was carried out, known as the GATT.

The GATT was introduced to encourage free trade between countries. This is done through regular meetings that facilitate periodic bargaining, in which member countries agree to reduce tariffs for various products.

In 1995, GATT was replaced by the World Trade Organisation (WTO). It was a milestone achievement as more countries agreed to liberalise their markets and reduce tariffs.

What can we learn from this article?
Consider the following question:
– How far do you agree that the Bretton Woods system was the main reason for the growth of the global economy from 1945 to 1973 [to be discussed in class]?

Sign up for our JC History Tuition and learn how to apply your knowledge to essay questions for GCE A Level History.

Also, we have other JC tuition classes, such as GP TuitionEconomics Tuition, JC Chemistry Tuition, JC Math Tuition and China Studies in English Tuition. For Secondary Tuition, we provide Secondary English Tuition, Secondary Math tuition, Secondary Chemistry Tuition and Secondary Economics Tuition. Call 9689 0510 to learn more.