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Global Financial Institutions

Insights on the Role of Global Financial Institutions in Economic Development

by Skills.Money
in Blog, Economy
Reading Time: 4 mins read
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The economies of the world are all at different stages of development. Some countries, such as the United States and European countries, have highly developed economies that have created significant wealth for their citizens. On the other hand, other countries, such as Africa and Asia, are underdeveloped compared to the developed countries of Europe and the USA.

World Bank

The World Bank was initially created to promote economic development. It was originally formed shortly after World War II to rebuild the economies of war-torn countries, but its mission is now global in scope. The general mission of the World Bank is to provide long-term financing for economic development.

The World Bank is comprised of two institutions. The International Bank for Reconstruction and Development (IBRD) provides low-interest and no-interest loans to developing countries that cannot get financing elsewhere. The IBRD also provides technical and research assistance to developing countries. Examples of projects funded by these loans include infrastructure projects, such as power plants, roads, railroads, ports, telecommunication, and water systems. Loans have also been provided for health, education, and debt relief. As you can probably see, these projects are foundational for further economic development. For example, if a country doesn’t have a healthy, educated population with access to roads, power, safe water, and communications, it will not have significant economic development.

The IBRD has about 188 member nations. A country must pay a subscription to join. Each member country gets 250 votes and can get more by buying shares of the IBRD at $100,000 per share. Decisions are made by majority vote, but the most significant shareholders can control the outcome because they have most of the votes. The USA  is the largest shareholder.

The other part of the World Bank is the International Development Association or IDA. The IDA was started in 1960. It works with the IBRD, focuses its efforts on the poorest countries in the world, and offers assistance in turning their struggling economies around.

World Bank Group

The World Bank Group consists of the IBRD, IDA, and three other institutions. The International Finance Corporation, or IFC, helps high-risk business sectors and high-risk countries obtain private sector investors. The Multinational Investment Guarantee Agency, or MIGA, offers political risk insurance to investors and lenders to encourage investment in developing countries. Finally, the International Centre for Settlement of Investment Disputes, or ICSID, settles disputes between foreign investors and developing countries taking the investment funds.

International Monetary Fund

The International Monetary Fund, commonly referred to as the IMF, was created in 1944 and currently has about 188 member countries. One goal of the IMF is to promote international cooperation on international monetary policy. Monetary policy is a country’s decision regarding interest rates and money supply. The IMF also tries to encourage the expansion of international trade and promote currency exchange stability. Currency exchange rate stability means that the value of one currency to another is relatively stable.

Finally, the IMF helps countries meet their balance of payment obligations. Balance of payments is the difference in value between imports and exports in a country. A negative balance means more money going out of the country than coming in. The IMF can provide short-term financing if a country needs help with a negative balance of payment.

Tools Used by IMF

Monitoring Economic Development

First, the IMF monitors the economic developments at the global level down to individual nations. It tries to figure out how individual countries’ monetary and fiscal policies affect other countries and their economies. It also analyzes economic trends at all levels – from a global perspective down to a national perspective.

Training and Technical Assistance

Second, the IMF also provides training and technical assistance in four areas. First, the IMF offers technical assistance and training regarding monetary and fiscal policies. It also provides training and assistance in fiscal policy and management, including tax and customs policies, budget formulation, social safety nets, and debt management. Third, assistance and training are also provided for compiling, managing, and improving statistical data. Finally, the IMF will help with economic and financial legislation.

Lending

Lending is the third tool that the IMF uses. The IMF provides short-term financing to help countries that need to correct their balance of payments. Remember, a negative balance of payments means more money leaving the country than coming into it. A negative balance of payments means that a country may be unable to pay its bills because it doesn’t have enough currency. The IMF’s short-term lending can help manage this problem and provide funds so that a country can honor its financial obligations. The lending aims not to nance projects, like the World Bank’s lending, but to stabilize economies and restore economic growth to economies in crisis.

Bank for International Settlement

The Bank for International Settlements, or BIS, is an international bank based in Switzerland. Its membership includes about 60 central banks, and it’s considered the central bankers’ bank. A central bank is a bank in a country responsible for developing and implementing a country’s monetary policy, which is decisions about interest rates and money supply. The BIS’s primary role today is to assist its members with short-term fluctuations in currency rates by providing a forum for central bank cooperation.

Bottomline: Global Financial Institutions Play a Pivotal Role in Economic Development of the World

The World Bank’s primary mission is to aid in the economic development of countries with a particular focus on middle-income and lower-income countries.

The International Monetary Fund’s mission is to promote international cooperation regarding monetary policy, encourage the expansion of international trade, and currency exchange stability. It also provides short-term financing to help countries meet their financial obligations.

Remember that the World Bank provides long-term project financing, and the IMF provides short-term help with the balance of payment problems. The Bank for International Settlements is the central bankers’ bank. Today, it is primarily a forum for central bank cooperation to help create and maintain a stable international financial system.

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