The IMF, World Bank and global economic bodies

International institutions give examiners easy one-mark questions (headquarters, founding years, members of the World Bank Group) and serious descriptive ones (why emerging economies want IMF reform, whether new development banks challenge the old order). They also matter to the RBI's daily work: the RBI Governor is India's Alternate Governor at the IMF, the RBI is a member of the Bank for International Settlements, and Indian regulators sit on the Financial Stability Board. Learn the facts in tables and the debates in arguments.

Bretton Woods and after

In July 1944, delegates from 44 countries met at Bretton Woods, New Hampshire, to design a post-war system that would avoid the competitive devaluations and trade wars of the 1930s. They created the International Monetary Fund and the International Bank for Reconstruction and Development. India was a founding member of both.

The system fixed currencies to the US dollar, and the dollar to gold at $35 an ounce. It broke down when the US suspended dollar–gold convertibility in 1971. The Jamaica Accords (1976), given effect through the Second Amendment to the IMF's Articles (1978), legalised floating exchange rates.

The International Monetary Fund

Headquarters: Washington, D.C. Purpose: international monetary cooperation, exchange rate stability, balance of payments support and orderly growth of trade.

Three functions

1. Surveillance: annual Article IV consultations with each member; global reports such as the World Economic Outlook, Global Financial Stability Report and Fiscal Monitor; the Financial Sector Assessment Program (run jointly with the World Bank for developing countries).
2. Lending: to members with balance of payments problems, usually with policy conditions. Main windows include the Stand-By Arrangement (short-term), the Extended Fund Facility (longer, structural problems), the Rapid Financing Instrument (emergencies), the Flexible Credit Line (precautionary, for strong performers), the Poverty Reduction and Growth Trust (concessional, for low-income countries) and the Resilience and Sustainability Trust (2022, for climate and pandemic preparedness).
3. Capacity development: technical assistance and training.

Quotas and votes

Every member has a quota, expressed in SDRs. It sets:

• how much the member pays in (subscription);
• its voting power (basic votes shared equally, plus one vote per SDR 100,000 of quota);
• how much it can borrow.

Quotas are calculated with a formula that weights GDP (50%), openness (30%), economic variability (15%) and reserves (5%). Major decisions need an 85% majority, so any member with more than 15% of votes can block them. Only the United States holds that much.

The 14th General Review (agreed 2010, effective 2016) doubled quotas and shifted about 6% of quota share to dynamic emerging economies; India's share rose. The 16th Review (2023) agreed a 50% increase in quotas without changing shares, leaving realignment for later.

India's Governor at the IMF is the Union Finance Minister; the Alternate Governor is the RBI Governor. India's Executive Director represents a constituency that includes Bangladesh, Sri Lanka and Bhutan.

Special Drawing Rights

The SDR, created in 1969, is an international reserve asset. It is not a currency: it is a potential claim on the freely usable currencies of IMF members. Its value is based on a basket of five currencies: the US dollar, euro, Chinese renminbi (added in 2016), Japanese yen and pound sterling. The basket is normally reviewed every five years. The IMF made a general SDR allocation of about $650 billion in August 2021 to help members through the pandemic.

India and IMF lending

India borrowed from the IMF in 1981 and again during the 1991 balance of payments crisis, and has not needed IMF finance since then. It is now a contributor to the Fund's resources.

The World Bank Group

The World Bank Group has five institutions. "The World Bank" in the narrow sense means the first two.

India's position: India is a member of four of the five. It has not joined ICSID. India was long one of IDA's largest borrowers and graduated from IDA in 2014; it now borrows from the IBRD.

By tradition, the IMF has been led by a European and the World Bank by an American, an arrangement emerging economies criticise.

Regional and newer development banks

BRICS also created a Contingent Reserve Arrangement of US$100 billion to provide liquidity support to members facing balance of payments pressure.

The standard-setters and forums

India held the G20 presidency from December 2022 to November 2023, under the theme "One Earth, One Family, One Future" (Vasudhaiva Kutumbakam). The New Delhi summit admitted the African Union as a permanent member and backed reform of multilateral development banks, supported by an Independent Expert Group report.

The governance debates

Model answer outline (15 marks)

Question: Why do emerging economies seek reform of the IMF's governance? Assess the progress made.

1. Opening: Bretton Woods origins; quotas decide money, votes and access.
2. Grievances: quota shares below economic weight; US veto on 85% decisions; European leadership convention; conditionality.
3. Progress: 14th Review (quota doubling, shift to emerging economies); 16th Review (increase without realignment); G20 push for MDB reform.
4. Alternatives: AIIB, NDB, the BRICS Contingent Reserve Arrangement, regional swap lines.
5. India's stake: a larger voice, stable global liquidity, climate finance.
6. Way forward: new quota formula, realignment, more SDR use, open leadership selection.
7. Conclusion: legitimacy depends on reflecting today's world economy.

Short model answer (10 marks)

Question: What are Special Drawing Rights? How are they valued and used?

Special Drawing Rights are an international reserve asset created by the IMF in 1969 to supplement members' official reserves. An SDR is not a currency and not a claim on the IMF. It is a potential claim on the freely usable currencies of IMF members: a country can exchange its SDRs for currencies through voluntary trading arrangements.

The SDR's value is based on a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen and the pound sterling. The composition and weights are normally reviewed every five years. The renminbi was added in 2016.

SDRs are allocated to members in proportion to their quotas. The largest allocation, of about $650 billion in August 2021, boosted reserves during the pandemic, but most of it went to rich countries because of the quota link. This led to proposals to channel unused SDRs to poorer countries through IMF trusts such as the Resilience and Sustainability Trust. SDRs also serve as the IMF's unit of account.

Practice questions

1. Where and when was the Bretton Woods conference held?
   • Bretton Woods, New Hampshire, USA, in July 1944.
2. Which World Bank Group institution is India not a member of?
   • ICSID.
3. What voting majority do major IMF decisions need?
   • 85%.
4. Which currency was added to the SDR basket in 2016?
   • The Chinese renminbi.
5. Where is the New Development Bank headquartered?
   • Shanghai.
6. Who is India's Alternate Governor on the IMF Board of Governors?
   • The RBI Governor.

What to do next

• Make a one-page table of headquarters, founding years and India's role for every body above.
• Read the latest IMF Article IV report on India and note its main recommendations.
• Revise with the balance of payments guide and the trade guide.