General Studies and Communication Skills

TOPIC 2 Sustainable Development: International Monetary Systems

Key unit competence: To be able to analyse the role of international financial institutions, impact of international aid and international cooperation

Activity

1. Identify international financial institutions that you know.

2. Explain the role of international financial institutions.

8.1 International financial institutions

Activity 1

Discuss and give answers to the following questions.

1. What do you understand by the term international financial institutions?

2. Based on your explanation in question (1) above, give examples of international financial institutions that you know.3. Research and find out why international financial institutions were formed.

The Second World War (1939-1945) brought massive destruction to European economies. At the end of the war, the Western allies strongly felt that there was an urgent need to create international financial institutions to rebuilt war-torn economies in Western Europe. Towards the end of the war in 1944, an international conference was held at Bretton Woods in the United States of America (USA).

The conference was then referred to as the United Nations Monetary and Financial Conference. The main concern was to set up international financial institutions to regulate financial order in the world economies. At the end of the conference, all the delegates signed binding agreements that established the International Bank for Reconstruction and Development and the International Monetary Fund. These were the first international financial institutions.

The following are some of the international financial institutions.

8.1.1 The World Bank

                            

8.1.2 The International Bank for Reconstruction and Development (IBRD)

Activity 4

1. Research the history of the International Bank for Reconstruction and Development.

2. Explain the roles and functions of the IBRD.

The IBRD was formed in 1944 to rebuild European countries that were affected by the Second World War. Today, the institution offers loans to developing countries. The loans offered to middle income developing countries are meant to eradicate poverty, promote economic growth and build prosperity. The IBRD offers the following services to many developing nations in the world:

a) Provision of financial advice and innovative financial solutions

b) Promotion of reforms and policies

c) Support to long-term human and social development

                                        

d) Creation of favourable environment for investment

e) Facilitation of access to financial markets at favourable terms

f ) Preservation of borrowers' financial strength by providing support in times of crisis

The IBRD supports various projects in developing countries and provides technical support and expertise at various stages in the development of a project. It also offers governments advice on public debt and asset management so that they are able to support and expand their financial resources. Th e bank offers loans to support projects in health, safety needs, infrastructure development, environmental protection, education, private sector development and communication. IBRD also provides training, technical assistance, inter-organisational cooperation, research and studies in the settlement of investment disputes among members. As part of the World Bank Group, the IBRD has two main goals. These are: to end extreme poverty by 2030 and to promote shared prosperity in a sustainable manner.

(Sources: Th e World Bank 2011; pages,2-49, 209-216; Lessambo, F.I., 2015; pages 35-82)

8.1.3 The International Development Association (IDA)

Activity 5

1. Research the history of the International Development Association.

2. Identify the roles of the International Development Association

The International Development Association (IDA) is an international financial institution that was formed in 1960 as part of the World Bank. It was meant to help the world’s poorest countries to reduce poverty levels and income inequalities in the world economies. It provides long-term loans at low interest rates and gives grants to the world poorest nations to boost economic growth. These loans and grants support the following programmes:

                                       

a) job creation

b) provision of better housing

c) reduction of income inequality

d) provision of basic health programmes

e) provision of clean water and sanitation

f ) provision of primary education

g) infrastructure and other reforms in the social sector, and

h) promotion of sustainable development and reducing the effects of climate change.

Another noticeable support from the IDA is the fight against malnutrition and HIV and AIDS, improvement of governance, prevention of conflict and accountability and transparency. The IDA receives most of the resources for lending to poorest countries in form of donations, subscriptions and supplementary funding from the world’s wealthiest economies.

(Sources: World Bank 2011, pages 18-27; Lessambo, F.I., 2015, pages 53-59)

Activity 6

Discuss and answer the question below.How effective are the loans and grants towards helping the world's poorest economies especially in sub-Saharan Africa?

8.1.4 The International Finance Corporation (IFC)

Activity 7

Research the history and role of the International Finance Corporation.

The IFC was created in 1956 as part of the World Bank Group. It was set up to assist the World Bank in offering advisory and management services to businesses investing in developing countries. It also supports the private sector in poverty reduction programmes and improving the living conditions of people in developing countries. It provides credit and equity financing of projects in developing countries.It focuses mainly on private sector investment in developing countries. There are three key areas in which the IFC is involved; that is, investment services, advisory services and asset management.

                                        

Women in developing countries are disadvantaged in accessing financial services, so the IFC offers advisory services to womens' groups especially in obtaining credit to fi nance their businesses. It also provides access to clean water for people living in rural areas, creating opportunities in the private education sector and infrastructural development projects.

(Sources: World Bank 2011, pages 21-25, 165-191; Lessambo, F. I., 2015, pages 47-52)

Activity 8

1. Find out if there are programmes sponsored by the IFC in Rwanda.

2. If women in sub-Saharan Africa could have access to funds, would poverty be eradicated? Justify your views.

8.1.5 The Multilateral Investment Guarantee Agency (MIGA)

1. Research the history and role of the Multilateral Investment Guarantee Agency.

2. Identify some of the challenges investors may face in developing countries.

In the 1970s and 80s, many investors experienced challenges in emerging markets especially in developing countries. There were political risks resulting from poor governance in some developing countries. It was due to these challenges that the MIGA was established in 1988 as part of the World Bank Group. The institution was to protect investors in developing countries against losses that might arise from governance-related economic risks, problems of converting local currency into hard currencies and local currency depreciation.

                             

It also protects investors from undesirable policies such as nationalisation and confiscation of investment assets by state governments and destruction of investments due to wars, terrorism and internecine conflicts. Some governments lack democratic institutions of governance and often experience civil unrest, coup d’état, sabotage and unwillingness of the ruling establishments to hand over power to their rivals if they lose elections. Investors may lose their investments through political conflicts and related violence. Insurance may provide a hedge against loss of investments. There is also a risk arising from breach of contract by a government and investors losing assets in the case of government interference in domestic courts of law. The MIGA helps in paying compensation for such cases and disputes.

(Sources: World Bank 2011 pages 25-27, 51-105; Lessambo, F. I., 2015, pages 73-82)

Activity 10

1. What do you think would happen to foreign investments in Africa and Asia if there was no MIGA?

2. Examine solutions to challenges experienced by governments in Africa to encourage regional and foreign investment in their countries.

8.1.6 The International Centre for Settlement of Investment Disputes (ICSID)

Activity 11

Research the history and role of the International Centre for Settlement of Investment Disputes.

The ICSID is an international arbitration institution that was established as part of the World Bank Group in 1966. It was to provide facilities for conciliation and arbitration of international investment disputes between investors and state governments.

                                        

In recent years, many cases, which have arisen from state interference, have been submitted for arbitration and resolution. Other confl icts arise from political divisions of states to form other states, for example, the creation of the state of South Sudan from Sudan. The ICSID also promotes awareness of international law on foreign investments; this reduces the chances of conflict and misunderstanding between the investors and state governments.

(Sources: World Bank 2011, pages 27-29; Lessambo, F. I., 2015, pages 61-52)

Activity 12

1. Discuss what would happen if the International Centre for Settlement of Investment Disputes (ICSID) did not provide an avenue for investors and state governments to solve disputes.

2. Explain the effects of wars, conflicts and coups on a developing country’s economy.

8.1.7 The International Monetary Fund (IMF)

Activity 13

Research the history and role of the International Monetary Fund.

After the Second World War, global economic markets were fragile, international currency markets were unstable and international trade faced serious problems of political restrictions. There was a need to stabilise the world economies for the sake of peace and cordial relations among world states. This led to the creation of the International Monetary Fund (IMF). The main goals of the establishment of the IMF were as follows:

a) To facilitate, regulate, safeguard and maintain a stable international financial system through facilitation of cooperation of member countries and appropriate monetary policies.

b) To make international trade more liberalised without the imposition of adverse trade restrictions by member countries.

c) To stabilise the exchange rates of national currencies of member countries and avoid speculation on world currencies.

d) To safeguard and off er surveillance of balance of payments accounts of member countries so that international trade is not disrupted and relationships between trading countries are fostered for the welfare of all.

e) To eliminate foreign exchange restrictions so that member countries freely trade with each other.

f ) To control and safeguard member countries against major adverse crises in the balance of payment which could result in lack of confidence in the national currencies of the member countries. This was intended to avoid unnecessary devaluation of the currencies of the trading partners.

                                               

Through these goals, the IMF provides financial assistance to member countries. As a result, the IMF has been providing technical assistance to world countries on fiscal and monetary policies. In the 1970s and 80s, the IMF set up Structural Adjustments Programmes (SAPs) to boost the economic growth of member countries and control high rates of inflation.

In 2012, the mandate of the IMF was extended to include the correction of macro-economic imbalances of the economies of member countries. Economic data, which is collected by the IMF, is used to forecast the growth rate of member countries. Today, the IMF also promotes employment, facilitates sustainable economic growth and promotes poverty reduction programmes.

(Sources: Lessambo, F.I., 2015, pages 9-33; Copelovitch, M. S.(2010), pages 1-68 and Bhargava, V.K., 2006, pages 396-397).

Activity 14

Discuss and write an essay on the following: The need for international financial institutions in Africa is part of the fight to reduce infant and child mortality rates, eradicate extreme poverty and hunger, achieve universal primary education, eliminate gender disparity in schools, promote the empowerment of women, and seek an understanding of global environmental problems, among other goals.

8.2 The role of international financial institutions

Activity 1

From the roles of the respective international financial institutions we have discussed, identify the general roles of these institutions.

Since the creation of international financial institutions (IFIs), there have been socio-economic and political transformations in the world. The role which the IFIs have played in the transformation of the world’s socio-economic and political development is noticeable. The following are the roles of (IFIs).

1. Accelerate the globalisation process. People from different countries have interacted to bring about peace and cordial relations between people and governments. The IFIs have enhanced international trade and reduced conflicts between nations. These interactions speed up the globalisation process.

2. Accelerate foreign direct investments. There is a rise of multinational corporations with enormous investments in most nations with the support of IFIs. This enables governments to have a liberalised economic environment for doing business. Such an environment attracts investors in an economy.

3. Facilitate the transfer of management expertise and the liberalisation of democratic institutions of governance. IFIs have supported foreign direct investments in bilateral and multilateral partnered projects in agriculture, communication, energy generation, water resources and environment conservation. These projects have assisted in boosting the living conditions of people in less developed nations.

4. Influence the stability of macro-economic variables in developing countries. Macro-economic stability has provided favourable conditions for economic growth and the development of developing countries.

5. Stabilise foreign exchange rates of domestic currencies of world states.The structural adjustment policies of the 1980s and 90s slowed down the high rates of inflation in many developing countries. They also control the infl ationary tendencies experienced in most economies in Latin America, Africa and South East Asia.

6. Stabilise the banking sector. Central banking supervision has been enforced to maintain banking stability in a number of countries through public expenditure and financial accountability.

7. Improve living conditions and reduce poverty. Support programmes to improve agricultural production, energy projects, infrastructural services, access to clean water and environmental conservation have contributed to the reduction of poverty and improved living conditions of the majority of the population in developing economies.

Sources: World Bank 2011, pages 3-4,14-15,51-105; Lessambo, F. I., 2015, pages 1-82 and Bhargava, V.K., 2006, pages 1-82)

Activity 2

1. Highlight projects in Rwanda that are currently receiving assistance from various international financial institutions. Cite some of these international institutions. Explain the benefits of these projects to the people of Rwanda.

2. Despite the positive roles that have been influenced by the international financial institutions to the world economies, there have been noticeable drawbacks experienced in a number of countries. Discuss setbacks that have been experienced by developing economies because of the role of IFIs.

3. Hold a debate on the motion, ‘Home-grown development interventions or solutions in developing countries in Africa are better than structural support programmes enforced by the international financial institutions’.

8.3 Impact of international aid and international cooperation on sustainable development

Activity 1

Discuss and answer the question below.

How effective is aid from international financial institutions towards achieving sustainable development in developing countries?

During the second half of the 20th Century, developing countries have experienced a rapid increase in population. Constrained by lack of economic resources to sustain the rapidly growing populations, high levels of poverty have been experienced. There is also a wide gap between the rich and the poor in developing countries.

The poor have to live within the constraints of their environment to survive. This has brought about environmental degradation, health problems and high poverty levels. All these factors led to the International Union for the Conservation of Nature and Natural Resources (IUCN) setting up the World Conservation Strategy (WCS) in 1980, in which, the phrase ‘sustainable development’ came about. The phrase was refi ned by UNEP to comprise the following:

a) There was a need to help the very poor in society who are left with limited options but to destroy their environment for survival.

b) Economic development should adopt a self-reliant approach within the constraints of the available natural resources in a country.

c) Development strategies set should be effective.

d) Issues of health control should use appropriate technology.

e) Self-reliance on food, provision of clean water and decent shelter for all should be of utmost consideration to humankind.

f ) Socio-economic development should be driven by people-centred initiatives.

Activity 2

Examine some of the activities of the poor in developing nations that have led to environmental degradation and health problems.

The World Commission on Environment and Development (WCED) provided a popularly accepted definition of sustainable development as ‘the development that meets the needs of the present generations without comprising the ability of future generations to meet their own needs’. The concept of sustainable development has been adopted and ingrained into the goals and objectives of international aid from IFIs to the developing nations.

The concept of international cooperation means a network of global team players from various countries whose mutual interest is sustainable development for humanity. There are disparities in the levels of economic development between the developed and developing countries. International cooperation among nations addresses the problem of disparities in living standards of the world's population.

There are other challenges experienced in developing countries such as environmental degradation, spread and control of diseases, ethnic tensions and conflicts.

International cooperation involves world governments, United Nations agencies, international financial institutions and non-governmental organisations. International cooperation may involve cooperation between two nations (bilateral) or many nations (multilateral).

Activity 3

Discuss and answer the following questions.

1. Explain the positive impacts of international aid and international cooperation on sustainable development in Rwanda.

2. Examine the negative impacts of international aid and international cooperation on sustainable development in Africa.

3. Hold a talk on the impact of international aid and cooperation on sustainable development in Africa.

(Sources: Debnbol-mertinussen, J. and Engberg-pedersen, 2005, pages 1-56, 305-342; Bhargava, V.K. 2006, pages 1-82)

Assessment Exercise 8.0

1. Discuss factors that influenced economic and financial experts to hold the United Nations Monetary and Financial Conference towards the end of the Second World War.

2. Discuss the roles of the International Monetary Fund in the development of world economies.

3. Why are poverty levels in some African economies rising despite massive financial support from international financial institutions?

4. Analyse the contribution of international financial institutions towards the development of the economy of developing countries.

5. To what extent has the Rwandan economy benefited from international financial institutions?

6. Examine the impact of international aid and international cooperation on sustainable development.

7. Write an article expressing your appreciation of the contribution of international financial institutions to sustainable development.

8. ‘Without the existence of the World Bank Group, most of the developing world economies would experience socio-economic and political challenges today.’ To what extend do you agree with this statement?

Project

Research the contribution of international financial institutions to developing economies. Analyse the contributions and make a presentation in class.