INTERNATIONAL ORGANIZATIONS AND TRANSITION TO MARKETS Several major international organizations such as the International Monetary Fund and the World Bank have become leading players in the process of transition from central planning and command systems to market economies.* Until the late 1980s the USSR, China, and other communist countries refused to become members. The two organizations have many common functions and some of their activities are different to distinguish from each other. Keynes quipped at one point that the names of the two organizations are confusing -- the World Bank should have been called a fund and the International Monetary Fund should have been called a bank. The main difference is that the purpose of the World Bank is to assist member countries in economic development and improvement in quality of life while the IMF is responsible for coordination of financial relations among members, solving balance-of-payments problems and maintaining orderly foreign exchange relations in the world. Unlike United Nations and UN affiliated organizations which have been essentially neutral in their financial assistance programs, the IMF and the World Bank are at the present time clearly committed to free market systems, fiscal and monetary conservatism, price stability, multinational unrestricted trade and currency convertibility. Most loans, grants, subsidies, and technical assistance programs extended by these two organizations are contingent on continuation of liberalization and market reform in recipient countries; specific measures, policies or indexes are often imposed on borrowers. This, the IMF may say that the stabilisation hard currency loan requested by a transition country will be paid in several "tranches" as long as the country's budgetary deficit does not exceed, say, six percent of GDP, and the deficit is financed by bonds and not by inflationary printing money. Both the IMF and the World Bank may suspend credits and impose other sanctions if, in the opinion of lenders, the transition countries slow down or reverse their liberalization reforms. Not surprisingly, communist, unreformed socialist and authoritarian nationalistic political parties in transition countries object to these policies viewing them as "Western capitalist intervention." The grant and humanitarian aid component of international assistance to transition countries has been relatively low. Recipient countries and many international specialists have repeatedly said that the level of assistance is inadequate but it would be unrealistic to expect an aid program of the Marshall Plan magnitude. _____________ * There are other groups involved in financial assistance such as the European Community, and the "Big-Seven" group. * * * The International Monetary Fund (IMF) The International Monetary Fund (or IMF), was established at the Bretton Woods conference at the end of World War II to facilitate expansion of world trade and to administer stable currency exchange mechanism. Members subscribe by lending their currencies to the IMF; the IMF then lends these funds to assist members with balance-of-payments difficulties. In recent years, the IMF has played a key role in organizing a cooperative response to the international debt crisis and in helping formerly communist countries make the transition to the market. How would the IMF accomplish this objective? Suppose, for example, that Russia's program to introduce a market economy is in trouble because of a rapid inflation and inability to raise funds in private markets. It is having trouble paying interest and principal on its foreign loans. The IMF might send a team of specialists to pore over the country's books. The IMF team would come up with an austerity plan for Russia, generally involving reducing the budget deficit and tightening credit; these measures would slow inflation and increase confidence in the Russian ruble. When Russia and the IMF agree on the plan, the IMF would lend money to Russia, perhaps $1 billion, to "bridge" the country over until its balance of payments improves. In addition, there would probably be a debt rescheduling, wherein banks would lend more funds and stretch out payments on existing loans. If the IMF program was successful, Russia's balance of payments might begin to improve, and the country would resume economic growth. The World Bank Another international financial institution created after World War II was the World Bank. The Bank is capitalized by lending nations that subscribe in proportion to their economic importance in terms of GDP and other factors. The Bank makes low interest loans to countries for projects which are economically sound but which cannot get private-sector financing. As a result of such long-term loans, goods and services flow from advanced nations to developing countries. In recent years, the World Bank has made new loans averaging $25 billion per year. If the projects are chosen correctly, then eventually production in the borrowing lands will rise by more than enough to pay interest on the loans; wages and living standards generally will be higher, not lower, because the foreign capital has raised GDP in the borrowing countries. In addition, as the loans are being paid back, the advanced nations will gain by enjoying somewhat higher imports of useful goods. Demise of the Breton Woods System For the first three decades after World War II, the world was on a dollar standard. Under Breton Woods, the U.S. dollar was the key currency: most international trade and finance were carried out in dollars and payments were most often made in dollars. Exchange- rate parities were set in dollar terms, and private and government reserves were kept in dollar balances. This was a period of unprecedented growth and prosperity. The industrial nations began to lower trade barriers and to make all their currencies freely convertible. The economies of Western Europe and East Asia recovered from war damage and grew at spectacular rates. But recovery contained the seeds of its own destruction. Dollars began to pile up abroad as Germany and Japan developed trade surpluses. Meanwhile, U.S. trade deficits were fueled by an overvalued currency, budget deficits, and growing overseas investment by American firms. Dollar holdings abroad grew from next to nothing in 1945 to $50 billion in the early 1970s. By 1971, the amount of liquid dollar balances had become so large that governments had difficulty defending the official parities. People began to lose confidence in the "almighty dollar." And the lower barriers to capital flows meant that billions of dollars could cross the Atlantic in minutes and threaten to overwhelm existing parities. In August 1971, President Nixon formally severed the link between the dollar and gold, bringing the Breton Woods era to an end. No longer would the United States automatically convert dollars into other currencies or into gold at $35 per ounce; no longer would the United States set air official parity of the dollar and then defend this exchange rate at all costs. As the United States abandoned the Breton Woods system, the world moved to the modern era. The United States is a participant in the World Bank, whose major objective is assisting less developed countries in achieving growth. Supported by nearly 180 member nations, the World Bank not only lends out of its capital funds, but also (1) sells bonds and lends the proceeds, and (2) guarantees and insures private loans. Several characteristics of the World Bank are noteworthy. 1. The World Bank is a "last resort" lending agency; its loans are limited to productive projects for which private funds are not readily available. 2. Because many World Bank loans have been for basic development projects -- dams, irrigation projects, health and sanitation programs, communications and transportation facilities -- it has been hoped that the Bank's activities will provide the infrastruc- ture needed to encourage flows of private capital. 3. The Bank has played a role in providing technical assistance to the less developed countries by helping them discover what avenues of growth seem appropriate for their economic development. From Campbell McConnell and Stanley Brue, ECONOMICS, 13th edition, McGraw Hill, 1996, pp. 801-802 and Paul Samuelson and William Nordhouse, ECONOMICS, 15th edition, McGraw Hill, NY 1995, pp. 726- 728