international monetary fund by mijud

VIEWS: 176 PAGES: 55

									Table of contents                                                Pages

Executive Summary                                                        2-3

International Monetary System (IMS)
     The Gold Standard and The Gold Bullion Standard……………………….5-7
     The Collapse of Gold Standard…………………………………………….8-9
     Bretton Woods System……………………………………………………..10
     Features of Bretton Wood System in International Dollar Standard………11-12
     Bretton wood System of Exchange Rates………………………………….13-14
     Formal Regimes……………………………………………………………15

World Bank                                                              16-27

International monetary Fund (IMF)                                       28-30
     Role and Function of The IMF ……………………………………………..31-35
     The Structure of IMF………………………………………………………..36
     High Vote Country………………………………………………………….37-45
     Low vote Country…………………………………………………………...46-52

International Debt Crisis                                               53-54

Conclusion                                                              55


        The story of International of Monetary Fund begin with International Monetary

System whereby starting when the domestic firm start thinking of having trade in

international. The currencies are different each country. Then The International Monetary

System establishes the rules by which countries value and exchanges their currencies. During

the late 19th and early 20th cents, the gold standard provided for the free circulation between

nations of gold coins of standard specification. During the 1920s but backed their currencies

with gold bullion and agreed to buy and sell the bullion at a fixed price. the Bretton Woods

system were an obligation for each country to adopt a monetary policy that maintained the

exchange rate of its currency within a fixed value—plus or minus one percent—in terms of

gold and the ability of the IMF to bridge temporary imbalances of payments.

        After the Bretton Woods System were applies, the World Bank also be implied in

1944 and focuses on achievement of Millennium Developing Goals which attention to reduce

poverty in the world. Under the World Bank, there are 5 institution; IBRD, IDA, IFC, MIGA

and ICSID that are called World Bank Group (WBG) where IBRD and IDA are the non-

interest rate and others are high interest rate.

        The International Monetary Fund (IMF) is an international organization that oversees

the global financial system by following the macroeconomic policies of its member countries,

in particular those with an impact on exchange rates and the balance of payments. It also

offers financial and technical assistance to its members, making it an international lender of

last resort. It has been created by the Bretton Woods conference and has been given the task

of maintaining order in the international monetary system.

       The IMF lends money to member countries faced with balance of payments problems.

In return the borrower countries must implement a set of economic reforms aimed at

overcoming their balance of payments problems.

       In this paper we investigate the voting power implications of this change in structure,

involving a simultaneous reduction in voting weight and a move to bloc voting, which are

complex. Currently, the United States controls 17 percent of the votes in the IMF which once

for all be the largest and highest votes for the IMF followed by Germany and Japan which

control each with 6 percent followed by France 5 percent, United Kingdom 5 percent, and

Saudi Arabia with 3 percent.

       The unequal allocation of votes is magnified by the system of allocating seats on the

IMF and World Bank boards and on the Development Committee and IMFC. Those countries

with the greatest voting power also have a louder ‗voice‘.

       The international debt crisis happens when the price of oil increases immediately.

Simply when the price of oil increase make the exporter became rich and the importer richer

goes to exporter income.



       The International Monetary System (IMS) exists because most countries have their

own currencies. A means of exchanging these currencies is needed if business is to be

conducted across national boundaries. The International Monetary System establishes the

rules by which countries value and exchange their currencies. It also provides a mechanism

for correcting imbalances between the country‘s international payments and its receipts.

Further, the cost of converting foreign money into a firm‘s home currency- a variable critical

to profitability of international operations- depends on the smooth functioning of the

international monetary system. The accounting system that governs the international monetary

system is the balance of payments (BOP). The BOP records international transactions and

supplies vital information about the health of a national economy and likely changes in its

fiscal and monetary policies.

The Gold and Gold Bullion Standards

       The first modern international monetary system was the gold standard. Operating

during the late 19th and early 20th cents, the gold standard provided for the free circulation

between nations of gold coins of standard specification. Under the gold standard, countries

agree to buy or sell their paper currencies in exchange for gold on the request of any

individual or firm and, in contrast to mercantilism‘s hoarding of gold, to allow the free export

of gold bullion and coins. For other meaning, gold was the only standard of value. In 1821

the United Kingdom (UK) became the first country to adopt the gold standard.

       During the 19th century, most other important trading countries- including Russia,

Austria-Hungary, France, Germany and the United States-did the same.

       The gold standard effectively created a fixed exchange rate system. An exchange rate

is the price of one currency in term of a second currency. Under a fixed exchange rate system

the price of a given currency does not change relative to each other currency. The gold

standard created a fixed exchange rate system because each country tied, or pegged, the value

of its currency to gold. The par value of currency is its official price in terms of gold. For

example, the United Kingdom pledged to buy or sell an ounce of gold for 4.247 pounds

sterling, thereby establishing the pound‘s par value, or official price in terms of gold. The

United States agreed to buy or sell an ounce of gold for a par value o $20.67. The two

currencies colud be freely exchanged for the stated amount of gola, making £4.247 = 1 ounce

of gold = $20.67. This implied a fixed exchange rate between the pound and the dollar of £1

= $4.867, or $20.67/£4.247.

        The advantages of the system lay in its stabilizing influence. A nation that exported

more than it imported would receive gold in payment of the balance; such an influx of gold

raised prices, and thus lowered the value of the domestic currency. Higher prices resulted in

decreasing the demand for exports, an outflow of gold to pay for the now relatively cheap

imports, and a return to the original price level (see balance of trade and balance of


        A major defect in such a system was its inherent lack of liquidity; the world's supply

of money would necessarily be limited by the world's supply of gold. Moreover, any unusual

increase in the supply of gold, such as the discovery of a rich lode, would cause prices to rise

abruptly. For these reasons and others, the international gold standard broke down in 1914.

        From 1821 until the end of World War in 1918, the most important currency in

international commerce was the British pound sterling, a reflection of the United Kingdom‘s

emergence from the Napoleonic Wars as Europe‘s dominant economic and military power.

Most firms worldwide were willing to accept either gold or British pounds in settlement of

transactions. As a result, the international monetary system during this period is often called a

sterling-based gold standard. The pound‘s role in world commerce was reinforced by the

expansion of the British Empire. The Union Jack flew over so many lands-for example,

present-day Canada, Australia, New Zealand, Hong Kong, Singapore, India, Pakistan,

Bangladesh, Kenya, Zimbabwe, South Africa, Gibraltar, Bermuda, and Belize - that the claim

was made that ― the sun never sets on the British Empire.‖ In each colony British banks

established branches and used the pound sterling to settle international transactions among

themselves. Because of the international trust in British currency, London became a dominant

international financial center in the 19th century, a position it still holds.

         The international reputations and competitive strengths of such British firms as

Barclays Bank, Thomas Cook, and Lloyd‘s of London stem from the role of the pound

sterling in the 19th century gold standard.

         During the 1920s the gold standard was replaced by the gold bullion standard, under

which nations no longer minted gold coins but backed their currencies with gold bullion and

agreed to buy and sell the bullion at a fixed price. This system, too, was abandoned in the


The Collapse of The Gold Standard

       During World War 1, the sterling-based gold standard unraveled. Most countries

including the United States, the United Kingdom, and France, readopted the gold standard in

the 1920s despite the high levels of inflation, unemployment, and political instability that

were wracking Europe.

       The Classical Gold Standard was shattered by the outbreak of WW1. The system

collapsed not because of an internal dilemma but because of an external violence. As soon as

the fighting began in Europe, private trade and financial transactions were suspended. Gold

exports were banned. As international linkage disappeared, each country started to issue

bonds and print money to finance the war effort. They began to have different inflation rates.

       When WW1 ended, the major countries wished to restore the prewar gold standard,

which seemed to offer prosperity and stability. "Return to gold" became the national and even

global slogan, and it was believed that returning to gold at the prewar parities (i.e., at the

previous exchange rates) was the right thing to do. A report was published, and a few

important international conferences were held for this purpose (UK's Cunliffe Report, 1919;

conferences in Brussels 1920, in Genoa 1922).

       The US returned to gold early, in 1919. The UK returned in 1925. Most other

European states also returned by 1928, so it looked like the gold standard was resurrected. But

this system lacked leadership and coordination, and turned out to be fragile and short-lived.

As France demanded only gold for international settlements, a speculative downward pressure

on the UK pound emerged. In 1931, the UK abandoned the gold standard again, and the other

countries followed. In the midst of the Great Depression (1929-), countries began to form

trade blocs and protected their internal markets.

       Global trade continued to shrink. Militarism and fascism rose. Japan returned to the

gold standard in January 1930 and abandoned it in December 1931.

       Those in the commonwealth, pegged their currencies to the pound after the gold

standard was abandoned, others linked their currencies to the United States dollar or the

French franc. Some countries engaged themselves in a beggar-thy-neighbor policy, in which

nations deliberately devalued their currencies in the hope of making their goods cheaper in the

world market place.

Bretton Woods System

       The Bretton Woods system of monetary management established the rules for

commercial and financial relations among the world's major industrial states. The Bretton

Woods system was the first example of a fully negotiated monetary order intended to govern

monetary relations among independent nation-states.

       Preparing to rebuild the international economic system as World War II was still

raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in

Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference.

The delegates deliberated upon and signed the Bretton Woods Agreements during the first

three weeks of July 1944.

       Setting up a system of rules, institutions, and procedures to regulate the international

monetary system, the planners at Bretton Woods established the International Bank for

Reconstruction and Development (IBRD) (now one of five institutions in the World Bank

Group) and the International Monetary Fund (IMF). These organizations became operational

in 1946 after a sufficient number of countries had ratified the agreement.

       The chief features of the Bretton Woods system were an obligation for each country to

adopt a monetary policy that maintained the exchange rate of its currency within a fixed

value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge

temporary imbalances of payments. In the face of increasing strain, the system collapsed in

1971, following the United States' suspension of convertibility from dollars to gold. Until the

early 1970s, the Bretton Woods system was effective in controlling conflict and in achieving

the common goals of the leading states that had created it, especially the United States.

Features of The Bretton Woods International Dollar


Four main features of the Bretton Woods system was as follows:

          First, it was a US dollar-based system. Officially, the Bretton Woods system was a

gold-based system which treated all countries symmetrically, and the IMF was charged with

the responsibility to manage this system. In reality, however, it was a US-dominated system

with the US dollar playing the role of the key currency (the dollar's dominance still continues

today). The relationship between the US and other countries was highly asymmetric. The US,

as the center country, provided domestic price stability which other countries could "import,"

but did not itself engage in currency intervention (this is called benign neglect; i.e., the US did

not care about exchange rates, which was desirable). By contrast, all other countries had the

obligation to intervene in the currency market to fix their exchange rates against the US


          Second, it was an adjustable peg system. This means that exchange rates were

normally fixed but permitted to be adjusted infrequently under certain conditions. As a

consequence, exchange rates were supposed to move in a stepwise fashion. This was an

arrangement to combine exchange rate stability and flexibility, while avoiding mutually

destructive devaluation. Member countries were allowed to adjust "parities" (exchange rates)

when "fundamental disequilibrium" existed. However, "fundamental disequilibrium" was not

clearly defined anywhere. In reality, exchange rate adjustments were implemented far less

often than the builders of the Bretton Woods system imagined. Germany revalued twice, the

UK devalued once, and France devalued twice. Japan and Italy did not revise their parities.

       Third, capital control was tight. This was a big difference from the Classical Gold

Standard of 1879-1914, when there was free capital mobility. Although the US and Germany

had relatively less capital-account regulations, other countries imposed severe exchange


       Fourth, macroeconomic performance was good. In particular, global price stability and

high growth were simultaneously achieved under deepening trade liberalization. In particular,

stability in tradable prices (wholesale prices or WPI) from the mid 1950s to the late 1960s

was almost perfect and globally common. This macroeconomic achievement was historically


The Bretton Woods System of Fixed Exchange Rates

       The Bretton Woods system sought to secure the advantages of the gold standard

without its disadvantages. Thus, a compromise was sought between the polar alternatives of

either freely floating or irrevocably fixed rates—an arrangement that might gain the

advantages of both without suffering the disadvantages of either while retaining the right to

revise currency values on occasion as circumstances warranted.

       The rules of Bretton Woods, set forth in the articles of agreement of the International

Monetary Fund (IMF) and the International Bank for Reconstruction and Development

(IBRD), provided for a system of fixed exchange rates. The rules further sought to encourage

an open system by committing members to the convertibility of their respective currencies

into other currencies and to free trade.

       What emerged was the "pegged rate" currency regime. Members were required to

establish a parity of their national currencies in terms of gold (a "peg") and to maintain

exchange rates within plus or minus 1% of parity (a "band") by intervening in their foreign

exchange markets (that is, buying or selling foreign money).

       In practice, however, since the principal "Reserve currency" would be the U.S. dollar,

this meant that other countries would peg their currencies to the U.S. dollar, and—once

convertibility was restored—would buy and sell U.S. dollars to keep market exchange rates

within plus or minus 1% of parity. Thus, the U.S. dollar took over the role that gold had

played under the gold standard in the international financial system.

       Meanwhile, in order to bolster faith in the dollar, the U.S. agreed separately to link the

dollar to gold at the rate of $35 per ounce of gold. At this rate, foreign governments and

central banks were able to exchange dollars for gold. Bretton Woods established a system of

payments based on the dollar, in which all currencies were defined in relation to the dollar,

itself convertible into gold, and above all, "as good as gold." The U.S. currency was now

effectively the world currency, the standard to which every other currency was pegged. As the

world's key currency, most international transactions were denominated in dollars.

       The U.S. dollar was the currency with the most purchasing power and it was the only

currency that was backed by gold. Additionally, all European nations that had been involved

in World War II were highly in debt and transferred large amounts of gold into the United

States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was

strongly appreciated in the rest of the world and therefore became the key currency of the

Bretton Woods system.

       Member countries could only change their par value with IMF approval, which was

contingent on IMF determination that its balance of payments was in a "fundamental


Formal Regimes

       The Bretton Woods Conference led to the establishment of the IMF and the IBRD

(now the World Bank), which still remain powerful forces in the world economy.

       As mentioned, a major point of common ground at the Conference was the goal to

avoid a recurrence of the closed markets and economic warfare that had characterized the

1930s. Thus, negotiators at Bretton Woods also agreed that there was a need for an

institutional forum for international cooperation on monetary matters. Already in 1944 the

British economist John Maynard Keynes emphasized "the importance of rule-based regimes

to stabilize business expectations"—something he accepted in the Bretton Woods system of

fixed exchange rates. Currency troubles in the interwar years, it was felt, had been greatly

exacerbated by the absence of any established procedure or machinery for intergovernmental


       As a result of the establishment of agreed upon structures and rules of international

economic interaction, conflict over economic issues was minimized, and the significance of

the economic aspect of international relations seemed to recede.

       We conclude that the international monetary system establishes the rules by which

countries value and exchange their currencies. It also provides a mechanism for correcting

imbalance between a country‘s international payments and its receipts. The accounting system

that governs the international system is the balance of payment (BOP). The BOP records

international transactions and supplies vital informational economy and likely changes in its

fiscal and monetary policies.


       The World Bank (WB) is international supported bank that give financial and

technical assistance to developing countries to developing programs with attention to reduce

poverty. The World Bank is one of the two Bretton Woods Institutions which were created in

1944 to rebuild a war-torn Europe after World War II. Later, largely due to the contributions

of the Marshall Plan, the World Bank was forced to find a new area in which to focus its

efforts. Subsequently, it began attempting to rebuild the infrastructure of Europe's former

colonies. Since then it has made a variety of changes regarding its focus and goals. From

1968-1981 it focused largely on poverty alleviation. From the '80s and into the 1990s its main

focus was both debt management and structural adjustment.

       The World Bank was formally established on December 27, 1945, following the

ratification of the Bretton Woods agreement. The concept was originally conceived in July

1944 at the United Nations Monetary and Financial Conference. Two years later, the Bank

issued its first loan: $250 million to France for post-war reconstruction, the main focus of the

Bank's work in the early post-World War II years. Over time, the "development" side of the

Bank's work has assumed a larger share of its lending, although it is still involved in post-

conflict reconstruction, together with reconstruction after natural disasters, response to

humanitarian emergencies and post-conflict rehabilitation needs affecting developing and

transition economies. There are some criticisms of the results of the World Bank's

"development schemes" leading to corruption and widespread exploitation of the corporations

who are given monopolies of developing nations' resources.

       The World Bank focuses on achievement of Millennium Developing Goals. Their

mission is helping the developing countries and their people to work together with their

partner to prevent poverty. The way is practicing by building the climate of jobs, investment

and sustainable growth. By build the climate of investment make the increasing in investment

and the poor people can involved in development process. The developing countries have

determined themselves that in order to make their economy growth and attract business and

job they have to:

           i.   Build capacity

          ii.   Create infrastructure

         iii.   Develop financial system

         iv.    Combat corruption

The World Bank is active in the following areas

      Agriculture and Rural Development                  Law and Justice
      Conflict and Development                           Macroeconomic       and    Economic
      Development Operations and Activities               Growth
      Economic Policy                                    Mining
      Education                                          Poverty Reduction
      Energy                                             Poverty
      Environment                                        Private Sector
      Financial Sector                                   Public Sector Governance
      Gender                                             Rural Development
      Governance                                         Social Development
      Health, Nutrition and Population                   Social Protection
      Industry                                           Trade
      Information and communication                      Transport
       technology                                         Urban Development
      Information, Computing and                         Water Resources
       Telecommunications                                 Water Supply and Sanitation
      International Economics and Trade
      Labor and Social Protections

       The World Bank's two closely affiliated entities—the International Bank for

Reconstruction and Development (IBRD)and the International Development Association

(IDA)—provide low or no interest loans and grants to countries that have unfavorable or no

access to international credit markets. Unlike other financial institutions, they do not operate

for profit. The IBRD is market-based, and use high credit rating to pass the low interest pay

for money on to borrowers—developing countries. They pay for operating costs, since they

don‘t look to outside sources to furnish funds for overhead.

So, where does the money come from to operate the World Bank, and how do the funds use to

carry out our mission?

           1. Fund Generation

              IBRD lending to developing countries is primarily financed by selling AAA-

       rated bonds in the world's financial markets. While IBRD earns a small margin on this

       lending, the greater proportion of its income comes from lending out its own capital.

       This capital consists of reserves built up over the years and money paid in from the

       Bank's 185 member country shareholders. IBRD‘s income also pays for World Bank

       operating expenses and has contributed to IDA and debt relief.

              IDA, the world's largest source of interest-free loans and grant assistance to the

       poorest countries, is replenished every three years by 40 donor countries. Additional

       funds are regenerated through repayments of loan principal on 35 to 40 year, no

       interest loans, which are then available for re-lending. IDA accounts for nearly 40% of

       our lending.

   2. Loans

         Through the IBRD and IDA, WB offers two basic types of loans and credits:

investment loans and development policy loans. Investment loans are made to

countries for goods, works and services in support of economic and social

development projects in a broad range of economic and social sectors. Development

policy loans formerly known as adjustment loans provide quick-disbursing financing

to support countries‘ policy and institutional reforms. IDA loans are interest free.

         Each borrower‘s project proposal is assessed to ensure that the project is

economically, financially, socially and environmentally sound. During loan

negotiations, the Bank and borrower agree on the development objectives, outputs,

performance indicators and implementation plan, as well as a loan disbursement

schedule. While the implementation of each loan and evaluate its results, the borrower

implements the project or program according to the agreed terms. As nearly 30% of

the staff is based in some 100 country offices worldwide, three-fourths of outstanding

loans are managed by country directors located away from the World Bank offices in


         IDA long term loans (credits) are interest free but do carry a small service

charge of 0.75 percent on funds paid out. IDA commitment fees range from zero to 0.5

percent on un-disbursed credit balances; for Fiscal Year 2006 commitment fees have

been set at 0.30 percent. Treasury is at the heart of IBRD's borrowing and lending

operations and also performs treasury functions for other members of the World Bank


   3. Grants

   Grants are designed to facilitate development projects by encouraging innovation,

co-operation between organizations and local stakeholders‘ participation in projects.

In recent years, IDA grants—which are either funded directly or managed through

partnerships—have been used to:

           a. Relieve the debt burden of heavily indebted poor countries.

           b. Improve sanitation and water supplies.

           c. Support vaccination and immunization programs to reduce the

               incidence of communicable diseases like malaria.

           d. Combat the HIV/AIDS pandemic.

           e. Support civil society organizations.

           f. Create initiatives to cut the emission of greenhouse gasses.

   4. Analytic and Advisory Services

       While we are best known as a financier, another of our roles is to provide

analysis, advice and information to our member countries so they can deliver the

lasting economic and social improvements their people need. We do this in several

ways: through research on broad issues such as the environment, poverty, trade and

globalization and through country-specific economic and sector work, where we

evaluate a country's economic prospects by examining its banking systems and

financial markets, as well as trade, infrastructure, poverty and social safety net issues.

       The World Bank Group (WBG) is a family of five international organizations

responsible for providing finance and advice to countries for the purposes of economic

development and eliminating poverty. The Bank came into formal existence on 27 December

1945 following international ratification of the Bretton Woods agreements, which emerged

from the United Nations Monetary and Financial Conference (1 July – 22 July 1944). It also

provided the foundation of the Osiander-Committee in 1951, responsible for the preparation

and evaluation of the World Development Report. Commencing operations on 25 June 1946,

it approved its first loan on 9 May 1947 ($250m to France for postwar reconstruction, in real

terms the largest loan issued by the Bank to date). Its five agencies are:

         i.    International Bank for Reconstruction and Development (IBRD)

        ii.    International Development Association (IDA)

       iii.    International Finance Corporation (IFC)

        iv.    Multilateral Investment Guarantee Agency (MIGA)

        v.     International Centre for Settlement of Investment Disputes (ICSID)

       The term "World Bank" generally refers to the IBRD and IDA, whereas the World

Bank Group is used to refer to the institutions collectively. The World Bank's (i.e. the IBRD

and IDA's) activities are focused on developing countries, in fields such as human

development (e.g. education, health), agriculture and rural development (e.g. irrigation, rural

services), environmental protection (e.g. pollution reduction, establishing and enforcing

regulations), infrastructure (e.g. roads, urban regeneration, electricity), and governance (e.g.

anti-corruption, legal institutions development).

       The IBRD and IDA provide loans at preferential rates to member countries, as well as

grants to the poorest countries. Loans or grants for specific projects are often linked to wider

policy changes in the sector or the economy.

          The International Finance Corporation (IFC) is a member of the World Bank

Group. The vision is that people should have the opportunity to escape poverty and improve

their lives. The values are excellence, commitment, integrity, and teamwork. The purpose is


         Promote open and competitive markets in developing countries.

         Support companies and other private sector partners.

         Generate productive jobs and deliver basic services.

         Create opportunity for people to escape poverty and improve their lives.

         IFC, as the private sector arm of the World Bank Group, shares its mission.

         To fight poverty with passion and professionalism for lasting results. To help people

          help themselves and their environment by providing resources, sharing knowledge,

          building capacity and forging partnerships in the public and private sector.

          The ownership and governance of IFC that contain 179 member countries provide its

authorized share capital of $2.4 billion, collectively determine its policies, and approve

investments. IFC's corporate powers are vested in a Board of Governors, to which member

countries appoint representatives, generally the minister of finance or an equivalent. The

Board of Governors delegates many of its powers to the Board of Directors, which represents

IFC's member countries. They also review all proposed investments.

       IFC is a dynamic organization, constantly adjusting to the evolving needs of our

clients in emerging markets. We are no longer defined predominantly by our role in providing

project finance to companies in developing countries. We have also:

      Developed innovative financial products.

      Broadened our capacity to provide advisory services.

      Deepened our corporate governance, environmental and social expertise.

       The Multilateral Investment Guarantee Agency (MIGA) is a member of the World

Bank group. It was established to promote foreign direct investment into developing

countries. MIGA was founded in 1988 with a capital base of $1 billion and is headquartered

in Washington, D.C. MIGA promotes foreign direct investment into developing countries by

insuring investors against political risk, advising governments on attracting investment,

sharing information through on-line investment information services, and mediating disputes

between investors and governments. MIGA's strength compared to private providers of

political risk insurance is its membership of the World Bank Group, which allows it to

intervene with host governments to resolve claims before they are filed.

       MIGA provides guarantees against noncommercial risks to protect cross-border

investment in developing member countries. Guarantees protect investors against the risks of

Transfer Restriction, Expropriation, War and Civil Disturbance, and Breach of Contract (for

contracts between the investor/project enterprise and the authorities of the host country).

       These overages may be purchased individually or in combination. MIGA can cover

only new investments. These include:

             i.   New, Greenfield investments.

         ii.      New investment contributions associated with the expansion, modernization, or

                  financial restructuring of existing projects.

        iii.      Acquisitions involving privatization of state enterprises.

Unlike other insurers, MIGA is backed by the World Bank Group and its member countries.

       MIGA's President is Bob Zoellick, in his capacity as President of the World Bank

Group. James Bond occupies the position of Chief Operating Officer; Srilal Perera is the

Chief Counsel; Kevin Lu is CFO; Frank Lysy is Director of Economics; and Edie Quintrell is

Director of Operations. MIGA issued $2.1 billion of new investment guarantees in fiscal year

2008, a record.

       The International Centre for Settlement of Investment Disputes (ICSID), an

institution of the World Bank group based in Washington, D.C., was established in 1966. As

of May 2005, 155 countries had signed the ICSID Convention. ICSID has an Administrative

Council, chaired by the World Bank's President, and a Secretariat. It provides facilities for the

conciliation and arbitration of investment disputes between member countries and individual


       During the first decade of the twenty-first century, with the proliferation of bilateral

investment treaties (BITs), most of which refer present and future investment disputes to the

ICSID, the caseload of the ICSID substantially increased. As of March 30, 2007, ICSID had

registered 263 cases more than 30 of which were pending against Argentina – Argentina's

economic crisis in the late 1990s and subsequent Argentine government measures led several

foreign investors to file cases against Argentina. Bolivia, Nicaragua, Ecuador and Venezuela

have announced their intention to withdraw from the ICSID

       ICSID provides facilities for the conciliation and arbitration of disputes between

member countries and investors who qualify as nationals of other member countries. Recourse

to ICSID conciliation and arbitration is entirely voluntary. However, once the parties have

consented to arbitration under the ICSID Convention, neither can unilaterally withdraw its

consent. Moreover, all ICSID Contracting States whether or not parties to the dispute, are

required by the Convention to recognize and enforce ICSID arbitral awards.

       The Centre has since 1978 had a set of Additional Facility Rules authorizing the

ICSID Secretariat to administer certain types of proceedings between States and foreign

nationals which fall outside the scope of the Convention. These include conciliation and

arbitration proceedings where either the State party or the home State of the foreign national

is not a member of ICSID. Additional Facility conciliation and arbitration are also available

for cases where the dispute is not an investment dispute provided it relates to a transaction

which has "features that distinguishes it from an ordinary commercial transaction." The

Additional Facility Rules further allow ICSID to administer a type of proceedings not

provided for in the Convention, namely fact-finding proceedings to which any State and

foreign national may have recourse if they wish to institute an inquiry "to examine and report

on facts."

       The field of the settlement of disputes has consisted in the Secretary-General of ICSID

accepting to act as the appointing authority of arbitrators for ad hoc (i.e., non-institutional)

arbitration proceedings. This is most commonly done in the context of arrangements for

arbitration under the Arbitration Rules of the United Nations Commission on International

Trade Law (UNCITRAL), which are specially designed for ad hoc proceedings.

       ICSID arbitration is commonly found in investment contracts between governments of

member countries and investors from other member countries. Advance consents by

governments to submit investment disputes to ICSID arbitration can also be found in about

twenty investment laws and in over 900 bilateral investment treaties. Arbitration under the

auspices of ICSID is similarly one of the main mechanisms for the settlement of investment

disputes under four recent multilateral trade and investment treaties

       ICSID also carries on advisory and research activities, publishing Investment Laws of

the World and of Investment Treaties, and collaborates with other World Bank Group units.

Since April 1986, the Centre has published a semi-annual law journal entitled ICSID Review-

Foreign Investment Law Journal. ICSID proceedings do not necessarily take place in

Washington, D.C. Others possible locations include the Permanent Court of Arbitration at The

Hague, the Regional Arbitration Centre of the Asian-African Legal Consultative Committee

at Cairo and Kuala Lumpur, the Australian Centre for International Commercial Arbitration at

Melbourne, the Australian Commercial Disputes Centre at Sydney, the Singapore

International Arbitration Centre, the GCC Commercial Arbitration Centre at Bahrain and the

German Institution of Arbitration (DIS).


       The International Monetary Fund (IMF) is an international organization that oversees

the global financial system by following the macroeconomic policies of its member countries,

in particular those with an impact on exchange rates and the balance of payments. It also

offers financial and technical assistance to its members, making it an international lender of

last resort. It has been created by the Bretton Woods conference and has been given the task

of maintaining order in the international monetary system.

            The IMF resulted from lengthy discussions of separate American, British,

Canadian, and French proposals drafted during World War II. The British "Keynes Plan"

envisaged an international clearing union that would create an international means of payment

called "bancor." Each country's central bank would accept payments in bancor without limit

from other central banks. Debtor countries could obtain bancor by using automatic overdraft

facilities with the clearing union. The limits to these overdrafts would be generous and would

grow automatically with each member country's total of imports and exports. Charges of 1 or

2 percent a year would be levied on both creditor and debtor positions in excess of specified

limits. This slight discouragement to unbalanced positions did not rule out the possibility of

large imbalances covered by automatic American credits to the rest of the world, perhaps

amounting to many billions of dollars. Part of the credits might eventually turn out to be gifts

because of the provision for canceling creditor-country claims not used in international trade

within a specified time period.

        The rival American plan took its name from Harry Dexter White of the U.S. Treasury.

White rejected the overdraft principle and the possibility of automatic American credits in

vast and only loosely limited amounts. Instead, he proposed a currency pool to which

members would make definite contributions only and from which countries might borrow to

tide themselves over short-term balance of payments deficits.

        Both plans looked forward to a world substantially free of controls imposed for

balance of payments purposes. Both sought exchange-rate stability without restoring an

international gold standard and without destroying national independence in monetary and

fiscal policies. According to the usual interpretation, the British plan put more emphasis on

national independence and the American plan on exchange-rate stability reminiscent of the

gold standard. The compromise finally reached resembled the American proposal more than

the British.

               To join the IMF, countries must pay a deposit, called quota. Quota are important

because they determine a country‘s voting power within the organization, serves as part of

nation‘s official reserves and determine a country‘s borrowing power from IMF. Besides that,

a country is allowed to borrow up to 25% of its quota from the IMF. An additional borrowing

requires that countries agree to IMF conditionality. The IMF would create a stable climate for

international trade by harmonizing its members' monetary policies, and maintaining exchange

stability. It would be able to provide temporary financial assistance to countries encountering

difficulties with their balance of payments.

In 1997 and 1998, IMF helped several Asian countries, deal with the dramatic decline in the

value of their currencies that occurred during the Asian financial crisis that started in 1997. In

2002, the IMF stepped in to help Brazil weather a financial crisis and support the value of its

currency on the foreign exchange markets. By 2004, the IMF had programs in 49 countries,

the majority in the developing world, and had committed some $97 billion in loans to these


           However, debate is growing about the role of the IMF and to a lesser extent the World

Bank and the appropriateness of their policies for many developing nations. Several

prominent critics claim that in some cases, IMF policies make things worse, not better. The

debate over the role of the IMF took on new urgency given the institution‘s extensive

involvement in the economies of developing countries during the late 1990s and early 2000s.

The Roles / Functions of The IMF

        The IMF Articles of Agreement were heavily influenced by the worldwide financial

collapse, competitive devaluations, trade wars, high unemployment, hyperinflation in

Germany and elsewhere, and general economic disintegration that incurred between the two

world wars. The aim of Bretton Woods‘s agreement, of which the IMF was the main

custodian, was to try to avoid a repetition of that chaos through a combination of discipline

and flexibility.

             A fixed exchange rate regime imposes discipline in two ways. First, the need to

maintain a fixed exchange rate puts a brake on competitive evaluations and brings stability to

the world trade environment. Second, a fixed exchange rate regime imposes monetary

discipline on countries, thereby curtailing price inflation. Besides that, fixed exchange rates

are seen as a mechanism for controlling inflation and imposing economic discipline on


             Although monetary discipline was central objective of the Bretton Woods

Agreement, it was recognized that a rigid policy of fixed exchange rates would be too

inflexible. In some cases, a country‘s attempts to reduce its money supply growth and correct

a persistent balance-of-payments deficit could force the country into recession and create high


        The architects of Bretton Woods‘s agreement wanted to avoid high unemployment, so

they built limited flexibility into the system. Two major features of the IMF Articles of

Agreement fostered this flexibility into the system which is IMF lending facilities and

adjustable parities.

       The IMF lends money to member countries faced with balance of payments problems,

for example; when a country fails to earn sufficient foreign currency - through exports or

provision of services - to pay for its imports. In return for financial assistance from the IMF,

borrower countries must implement a set of economic reforms aimed at overcoming their

balance of payments problems. Loans are disbursed in installments and payment is tied to the

countries' compliance with the structural adjustment policies.

            The IMF provides various types of loans to member governments. Concessional

loans are granted to low-income countries at a concessional interest rate through the Poverty

Reduction and Growth Facility (PRGF) while non-concessional loans are provided with a

market-based interest rate.

            The inter-war experience taught the IMF‘s founders that countries would be

unwilling to maintain fixed exchange rates and a free trade regime at the expense of domestic

unemployment. So the founders built flexibility into the system in various ways. One

important aspect of flexibility involves establishing a pool of currencies member countries

can use to help them with adjustments they have to make to restore balance of payments

equilibrium. In order to fulfill this function, the IMF must obtain resources. The primary

method for gaining resources is through the member‘s quota subscriptions, although the IMF

Articles allow the IMF to borrow in order to fulfill the balance of payments needs of its

members. Each member‘s quota subscription is determined by the size of the member‘s

economy and the importance of its currency worldwide that is likely the bigger and more

powerful the country‘s economy, the bigger the quota. Generally, a member is required to pay

up to 25% of its subscription in Special Drawing Rights (SDRs), an international reserve asset

created by the IMF, or in currencies accepted by the IMF; 75% of its quota subscription can

be paid in its own currency.

            Quotas relate importantly to other aspects of the IMF. For example, quotas

determine a member country‘s voting power. Instead of conducting its business based on a

one-vote-per-country rule, the IMF uses a formula that gives a wealthy member country with

a large quota like the United States more voting power and influence than a small, poor

country. Quotas also determine the allocation of SDRs and each member country‘s access to

the IMF‘s financial resources.

            Although the IMF‘s assistance is usually referred to as "lending" or "loans," a

member country actually "purchases" SDRs or other currencies from the Fund in exchange for

its own currency and agrees to "repurchase" (buy back) its own currency at a later date.

Because the member is charged for this transaction, the purchase or "drawing" looks like a

loan, which is what we will call the transaction for the sake of simplicity.

            The loans from the Fund‘s General Resources Account can be used for any

purpose relating to general balance-of-payments support, such as restoring reserves in the

country‘s central bank or selling the acquired currency in the foreign exchange markets to

stabilize exchange rates. Member countries have automatic access to a portion of the Fund‘s

resources, called the "reserve tranche."

            Member countries seeking an IMF loan beyond the reserve tranche must convince

the Fund they have a balance of payments need. As the amount of the loan increases beyond

the reserve tranche which is technically, moving into the "first credit" followed by "upper

credit" tranches, the IMF imposes conditions on the use of the funds that are also known

around the world as "conditionality."

       Conditionality refers to the explicit commitment by the member country to implement

remedial measures in return for IMF assistance. Conditions may range from general

commitments to cooperate with the IMF with respect to establishing domestic economic

policy to presenting the Fund with specific measures the country intends to implement at

specific points in time. Those measures typically have related to the domestic money supply,

budget deficits, international reserves, external debt, exchange rates, and interest rates.

However, in other sections of the E-Book, the IMF‘s conditionality has spread into other

areas. Drawings in the upper credit tranches typically are associated with 12-18 month "stand-

by arrangements" that is similar to pre-approved lines of credit or "extended arrangements"

under the Extended Fund Facility, which provide assistance for longer periods of time ; 3-4

years and for larger amounts than stand-by arrangements in order to address structural

problems in the economy. Upper credit tranche drawings are usually made in installments and

released only after economic performance targets have been met. The country‘s specific plans

are set forth in a "Letter of Intent" presented to the IMF. Although formally the member

country formulates and "presents" the Letter of Intent to the Fund, practically speaking the

Fund wields a great deal of influence regarding the content of the letter.

            In addition to drawings from the General Resources Account, the Fund has

established a number of other lending "facilities" designed for specific problems, such as the

Enhanced Structural Adjustment Facility which is concessional loans for poor countries

experiencing protracted balance of payments problems and now called the Poverty Reduction

and Growth Facility, the Compensatory and Contingency Financing Facility (shortfall in

export earnings or rise in costs of cereal imports), and the Supplemental Reserve Facility

(exceptional balance of payments difficulties because of sudden and disruptive loss of market


            Except for the Supplemental Reserve Facility, the IMF uses quotas to determine

how much a member country may borrow under a facility. The Fund‘s Executive Board

reviews the access limits periodically, taking into account payment problems of its members,

the need to safeguard IMF resources, and developments in the Fund‘s liquidity.

            Besides that, the IMF charter originally set up a system of fixed exchange rates in

order to address the problems of the inter-war period. All members declared a "par value" in

terms of the dollar, and the value of the dollar was fixed to the price of gold—$35 an ounce.

Member countries held reserves in dollars and gold and they had the right to sell dollars to the

U.S. Federal Reserve (a central bank) for gold.

            Thus, the system has been referred to as a gold exchange standard. The founders

believed this system would impose monetary discipline on member countries. For example, if

the central bank, say, of Brazil, decided to unduly expand its money supply, it would start

losing its reserves and become unable to maintain its fixed exchange rate—the currency‘s par

value. In theory, the United States would also be constrained because an expansion of its

money supply would result in central banks holding more dollars, which they could present to

the Federal Reserve for gold.

           The Bretton Woods fixed exchange rate system worked reasonably well through

the 1960s—even though its rules were occasionally violated. The system, however, placed

great strains on countries as they tried to defend the par values. The late 1960s witnessed

considerable financial and economic turbulence, which resulted in the collapse of the fixed

exchange rate system in the early 1970s. Today the IMF charter implicitly endorses a system

of floating exchange rates— rates governed primarily by market forces of supply and demand.

The Structure of The IMF

There are two primary organs within the IMF: the Board of Governors and the Executive

Board. Each member country has one representative, typically its finance minister or the head

of its central bank, on the Board of Governors, which meets once annually. Members of the

Board of Governors also serve on two important committees. The International Monetary and

Financial Committee consider key monetary system policies. The Development Committee—

a joint committee with the World Bank—advises the Board on policies and matters

concerning developing countries.

            The IMF‘s day-to-day operations are managed by the Executive Board, which

consists of twenty-four Executive Directors, eight of whom represent individual countries

(China, France, Germany, Japan, Russia, Saudi Arabia, the United Kingdom, and the United

States). The remaining sixteen Executive Directors represent constituencies—groups of

similarly situated (for example, geographically or linguistically) member nations. The

Executive Board meets three days each week, and more often as needed. Each Director has a

weighted number of votes tied to the constituency‘s combined IMF quota. In practice,

however, decisions rarely are made by formal vote, but by general consensus.

            Additionally, IMF staff is subdivided into a number of regional and functional

departments. Five regional departments cover operations for the entire world. Functional

departments include Finance, Fiscal Affairs, the IMF institute, which trains national finance

officers, and various administrative departments like Legal, Policy Development, Research,

External Relations, etc. In 2001, the Executive Board also established the Independent

Evaluation Office, which operates independently to evaluate the efficacy of IMF operations

and policies.

High Vote

       Membership in the IMF is available to any country willing to agree to its rules and

regulation. At present, 184 countries were members. To join, a country must pay a deposit,

called a Quota, partly in gold and partly in the country‘s own currency. The quota‘s size

primarily reflects the global importance of the country‘s economy, although political

consideration may also have some effect. The size of a quota is important for several reasons

such as (1) Determines its voting power within the IMF. (2) Serves as part of its official

reserves. (3) Determines the country borrowing power from the IMF.

       Currently, the United States controls 17 percent of the votes in the IMF which once for

all be the largest and highest votes for the IMF followed by Germany and Japan which

control each with 6 percent followed by France 5 percent, United Kingdom 5 percent, and

Saudi Arabia with 3 percent.

          Director                                       Votes by       Total
                                 Casting Votes of                                 of Fund
          Alternate                                      Country       Votes1
 Meg Lundsager                 United States              371,743      371,743      16.77
 Daniel Heath
 Daisuke Kotegawa              Japan                      133,378      133,378        6.02
 Hiromi Yamaoka
 Klaus D. Stein                Germany                    130,332      130,332        5.88
 Stephan von Stenglin
 Ambroise Fayolle              France                     107,635      107,635        4.86
 Benoit Claveranne
 Alex Gibbs                    United Kingdom             107,635      107,635        4.86
 Jens Larsen

       In this paper we investigate the voting power implications of this change in structure,

involving a simultaneous reduction in voting weight and a move to bloc voting, which are

complex. First, a European bloc vote comparable in size to that of the USA will create a

bipolar voting body in which the powers of the two rival blocs will be limited and those of the

other members enhanced. Second, redistributing European voting weight will increase the

relative voting weight of each of the other countries. This will affect their voting power in non

obvious ways. Third, we must also consider how the change affects the powers of the

individual EU members, which would no longer be directly represented. They will not

necessarily lose power since they will have indirect voting influence and may actually gain

power if either the power of the bloc or their voting power within it (or both) is sufficient.

They would be unwilling to give up their separate seats otherwise.

       We consider some of the implications of a proposed reform of the voting system of the

IMF in which EU countries cease to be separately represented and are replaced by a single

combined representative of the European bloc. The voting weight of the EU bloc is reduced

accordingly. We analyze two cases: the Eurozone of 12 countries and the European Union of

25. Using voting power analysis we show that the reform could be very beneficial for the

governance of the IMF, enhancing the voting power of individual member countries as a

consequence of two large countervailing voting blocs. Specifically we analyze a range of EU

voting weights and find the following for ordinary decisions requiring a simple majority: (1)

All countries other than those of the EU and USA unambiguously gain power (measured

absolutely or relatively); (2) The sum of powers of the EU bloc and USA is minimized when

they have voting parity; (3) The power of every other non-EU member is maximized when the

EU and USA have parity; (4) Each EU member could gain power - despite losing its seat and

the reduction in EU voting weight - depending on the EU voting system that is adopted;

(5)The USA loses voting power (both absolutely and relatively) over ordinary decisions but

retains its unilateral veto over special majority (85%) decisions (as does the EU bloc).

       A key issue in the discussions surrounding the reform of the governance of the IMF is

the representation of the European Union member countries. At present each EU country is an

IMF member with its own seat on the governing body but the suggestion has been made that

greater economic and monetary cooperation among European countries, particularly

following the introduction of a common currency, makes that unnecessary and that, moreover

there would be advantages in a unified European representation. If all EU members decided to

adopt a common policy on all matters concerning the IMF and agreed to vote together as a

single EU bloc, they would become a very powerful force. However, as Van Houtven (2004)

has pointed out, the fact that the EU does not act as a bloc makes the USA more powerful. In

fact it is obvious that if they retained their present voting weight they would become dominant

with much greater voting power than the USA.

       The case for separate representation to be replaced by a single seat for the EU

therefore has considerable force and has been made on two distinct arguments. On the one

hand the EU would be entitled to a much smaller share of the votes and that would increase

the voting share of the other IMF members. The logical way to do this is by treating the EU

bloc as a single country which would mean eliminating intra-EU trade from the formula

which determines quotas and hence voting weights. On the other hand European advocates of

a single seat at the IMF see it as a logical corollary of greater cooperation over economic,

monetary and foreign policy among EU member countries.

        A single seat would be very powerful because the voting weight of all the members

would be combined. The result would be that the formal voting structure of the IMF would be

transformed, from being dominated by the large weight of one country, to having two

powerful voting blocs, the EU and USA.

       The method of voting power analysis can be used to address these issues

simultaneously. We use the approach, originally due to Coleman (1973), described in Leech

and Leech (2004b), that we have previously used to analyze voting power in the IMF (Leech

and Leech, 2004a) before and after the proposed reform.

       The governing body of the IMF is its board of governors, corresponding to the

shareholders of a corporation, which is made up of representatives of all the 184 member

countries. Normally governors are ministers of finance of the member countries and their

alternates their central bank governors. As the body to which the Fund is ultimately

accountable, the functions of the board of governors are largely formal and ceremonial, but it

also makes decisions on essentially political questions. It controls, but does not manage, the

IMF, analogously to the way that a company‘s shareholders as a group control their

corporation2. The board of governors‘ uses a system of weighted voting, in which the number

of votes possessed by each member is determined by its quota. Unlike shares in a joint stock

company, quotas cannot be traded, each member‘s quota being fixed by decisions of the board

of governors itself. The most powerful member is the USA with over 17.09 percent of the

votes, followed by Japan with 6.13 and Germany with 5.99 percent.

       The main function of the board of governors is to receive reports and

recommendations from the executive board which manages the organization as a board of

directors does a corporation. The executive is a much smaller body, comprising 24 directors

who are either directly appointed by certain member countries or elected by groupings of

members arranged in constituencies. Executive directors are officials from member countries

rather than politicians and the work of the executive is technical rather than political. The

executive meets very frequently, unlike the board of governors that meets bi-annually.

However, unlike the board of a company, whenever it has to take an important vote the IMF

executive uses a system of weighted voting based on that of the governors.

        This reflects the fact that its members have different lines of accountability, to their

respective country or constituency, rather than the board of governors, whereas elected

company directors are all accountable to the same shareholders meeting.

        Eight directors are appointed by their governments and the other 16 are elected by

constituencies. The eight appointed directors are those of the USA, Japan, Germany, France,

the UK, Saudi Arabia, Russia and China; each of the elected directors represents a

constituency that is constructed on a more-or-less geographical basis. Thus there are two

African constituencies, three Latin American, one south Asian, one mainly south-east Asian,

and so on. One of the implications of the constituency system is that a director who is elected

by a constituency casts all the votes of all its members. Moreover, he must cast them as a bloc

regardless of any differences of view there may be among his constituents. A constituency

may not split its vote although it can instruct is director to abstain.

        Procedures used internally by constituencies are therefore a very important part of the

system of governance of the Fund. But they are not covered in the Articles of Agreement

since constituencies are regarded as strictly informal groupings which can change from time

to time and are not part of the constitution of the IMF. Constituencies are not well defined by

the Articles, being formally just the group of members who voted for their director.

        Moreover the voting power approach might not apply as well to the executive where

the different constituencies have different decision rules; for example some might reasonably

be modeled on the assumption that they use majority voting, for example to elect directors,

while others have a permanent representation, in the sense that their director is always from

the same country, and still others have a rotating system of choosing directors from a different

country in turn.

        Furthermore, many of them are mixed constituencies, comprising both industrial

countries and developing or transition countries, and it is argued that in such a case it would

be wrong to assume that the elected director simply votes always on behalf of the majority

within the constituency.

        The director has a responsibility to represent all constituency members and therefore

developing countries have a voice even if they have a minority of votes. This is a point

however on which there are differences of opinion between industrialized and developing


        It is important to be clear what voting power analysis is and what it is not. At the base

of the approach is the assumption that all members of a voting body are sovereign in the sense

that they decide how to cast their votes on any issue independently of what others do and that

they are just as likely to vote for it as against.

        This is an idealization that is suitable for some purposes, most importantly when the

focus is on the general properties of a system of voting rules - such as fairness and

decisiveness - where voters‘ individual preferences are held to be completely irrelevant. This

kind of voting power analysis has been called constitutional voting power in contrast to

behavioral voting power which takes account of voters‘ preferences or voting histories and

therefore treats some voting outcomes as more likely than others.

        The power indices used here do have an interpretation in behavioral terms. Instead of

assuming each voter to be equally likely to vote for and against a motion, we can make the

weaker assumption that each voter‘s probability of voting for a motion is chosen at random.

Then, as long as the voters are independent, the Penrose and Banzhaf indices are suitable

measures of behavioral power.

       In the context of the IMF this amounts to the assumption that the voting system is a

means of deciding questions about the provision of global public goods in which the interests

of different countries are likely vary by issue. Voting power indices measure power in relation

to an average issue and therefore preferences do not matter. If this model fits approximately

then the voting power indices will be a reasonable measure of behavioural power in this sense

as well as being measures of constitutional power.

        On the other hand power indices cannot give information about the likely results of

voting on any particular issue, taking account of the preferences of particular voters. The

model cannot be used to predict in this sense.

       The power indices we report can be taken as measuring power in general.

Furthermore, the voting power approach is a way of gaining insights into the properties of a

voting body that cannot be obtained by verbal reasoning alone although the arguments are

often (at least implicitly) put in verbal terms. It is a useful quantification that enables verbal

arguments about voting power to be taken further.

       An interesting feature of these proposed changes is that they do not appear to require

extensive changes to the Articles and therefore the formal agreement of the USA. The primary

requirement is that the countries of the EU agree among themselves to coordinate their actions

and reduce their quotas. We do not assume that there would be any consequent change to the

quotas of countries outside the EU; however it is obvious that there would be a redistribution

of voting weight in relative terms. It would clearly be desirable to consider other

redistribution schemes based on changes to the quota formula but they would be much more

radical, and we do not consider them in the present paper. Nor do we consider in detail the

implications of a single EU seat, and associated changes in voting weights, for the structure of

the executive board.

          Our analysis is confined solely to the board of governors where the scenarios can be

simply defined. In order to make a power analysis of the executive, by contrast, the scenarios

required would involve other assumptions about changes to the composition of constituencies

as well as the size of the board and the analysis would be overly speculative.

          A member‘s voting power depends not only on its own weight but also those of all

other members, as well as the level of the majority threshold for a decision.

          A member with 20 percent of the votes might be very powerful or not very powerful

depending on how the other 80 percent is distributed. If, for example, in a voting body where

a threshold of 51 per cent is required for a majority decision, there are 80 other members with

1 percent of the votes each, then the 20-percent member has virtual control (its Penrose index

is equal to 97%11) and its share of the voting power, measured by the Banzhaf index at 62%,

is much greater than its share of the votes. On the other hand, if there is another member that

also possesses 20 percent, and 60 members each with 1 percent, its power is significantly

lower (Penrose index 50%) and its power share much less than its vote share (Banzhaf index


          Comparing the power indices for the 1-percent members shows an interesting

phenomenon. In the first case (a single dominant 20-percent voter) the Penrose index is 0.73%

(Banzhaf index 0.47%) while in the second case (two voters with 20 percent weight), the

Penrose index increases to 5.04% (Banzhaf 1.27%). Thus the small voters gain considerably

in power where there are two large countervailing blocs, a bipolar situation, in comparison

with a situation of a single dominant power; in this case their power is greater than their


       It is useful to compare power indices of different members under the status quo and a

single Euro12 bloc. Such comparisons can reveal changes in power rankings. For example, let

us assume Euro12 voting using IMF weights. Germany becomes more powerful than Japan:

Japan‘s power index increases from 0.169 to 0.23 while Germany‘s increases from 0.165

to0.286. France and UK have the same power under the status quo, 0.138, but France

becomes more powerful by being a member of a Euro bloc: its power index increases to

0.208, which of the UK increases to 0.18. There are many

       We conclude that moving to a single European seat could improve the governance of

the IMF by increasing both the absolute and relative voting power of all members except the

USA - which currently enjoys more power than its voting weight. The EU member countries

could also all benefit if an appropriate EU internal voting rule were adopted. These results are

for ordinary decisions of the IMF requiring only a simple majority. For decisions requiring an

85% supermajority, the USA would retain its veto, but the EU would also have a veto.

Low Vote

        Inequality in the distribution of votes in the IFIs has worsened as the significant of

basis vote allocated to all members has declined in proportion to the number of votes

allocated according to a country economic strength. The failure to maintain the value of the

basic vote has shifted the balance of power further to industrialized countries. As the equity

factor has diminished in significance, the allocation of votes has moved much closer to one

dollar for one vote. The IMF‘s quota formula is open to manipulation to the advantage of

industrialized countries. Moreover, the quota formula is not applied as a fair and transparent

means of determining a country vote. Instead, it‘s more generally used as a negotiating

guideline. Thus, despite the increase in developing countries share the world GDP and the

decline of that of Europeans countries, the allocation of votes has altered little. It has failure

the vote in Asia country to grow the economic power. It also has decreased the credibility of

the industrial countries argument with the allocation of votes is fair on the basis of economic


        The lack of any substantive recommendations to improve the fairness of the quota

formula in the report that produced by IMF Quota Formula Review Group. It has reflects the

parameter of their terms of references and the unwillingness of powerful shareholders to

address the equality issue. Its conclusions are offering nothing more than options to retro-fit

the quota formula better to the existing distribution of votes.

        Moreover the decisions at the boards continue to be taken when a majority of votes is

achieved, not a majority of executive directors. It even more important, the weight of a

country‘s voice, judge by its voting power has brought the critical situation which is

determining which the specific and potential loans are actually brought the table for

discussion. The underlying voting power profoundly influences decisions. Voting allocation is

therefore crucial to a country‘s influence.

       In my scope will be focused on low vote country which is Arab Saudi, China and

Russian Federation. Arab Saudi, China and Russia are having a same voting in IMF which is

3 percent.

       The unequal allocation of votes is magnified by the system of allocating seats on the

IMF and World Bank boards and on the Development Committee and IMFC. Seats on these

bodies are due on the basis of one per constituency with the five largest vote holders due one

seat each (the US, UK, France, Germany and Japan). A further three countries are in single

country constituencies and therefore have guaranteed seats on the boards which is China,

Russia and Saudi Arabia. The remaining 176 member countries share just 16 seats between

them. In several total votes, the executive director is appointed by the country with the largest

number of votes. For example, Canada, Australia, the Netherlands, Switzerland, Italy and

Belgium head up their total vote. In the rest, which group together mostly developing

countries that typically hold similar numbers of votes, the ED appointment is rotated amongst

the members. Effectively, those countries with the greatest voting power also have a louder

‗voice‘ since they can assume permanent membership of the board. Those countries most

affected by IMF decisions are also most distanced from decision-making. These 6 inequalities

are replicated in the oversight committees of the executive boards, the Development

Committee and the IMFC.

       Although the seats on both countries and misunderstanding committees are allocated

more or less, it has divided equally between high-income countries and developing countries.

       The high-income countries usually known as creditor countries and developing

countries can be known as debtor countries. Practice high-income countries represent only 19

per cent of all member countries. If seats were allocated proportionately between high-,

middle- and low-income countries, then high-income countries would head up only five


       The under-representation of non-industrialized countries is seen even more starkly if

one examines the ratio in terms of population. Low- and middle-income countries as a group

comprise 84 per cent of the world‘s population, yet they have only 30 per cent of IFI votes

and less than half the seats on the executive boards.

       Every country that have voting rights, are binding with the ―acquired rights‖. For

example, the ad hoc quota increase in 1983, which are chosen doubled the quotas of major oil

exporting countries in the light of the 1970s oil price increases, and the decisions to allow

Saudi Arabia, China and Russia, though not entitled to appointed Executive Directors, to form

constituencies in their own right, and thus have their own "elected" Directors.

       The quota system, and in particular the level of maturity available to the Executive

Board and the use of one-sided votes in the setting of quotas, is central to this inertia, as the

Executive Board exercises a considerable degree of discretion in setting new quotas. Despite

the use of formulae in quota reviews, their outcome is less the product of a technical exercise

than of a political bargaining process among the major members. Thus, for example, the last

change in quotas, in 2003, resulted in the UK and France each having exactly 107,635 votes,

and Canada and China exactly 63,942 votes, while the Ninth General Quota Review in 1990

gave Germany and Japan equal votes.

        These are not merely the coincidental results of a set of objective calculations, but

rather the carefully managed result of political negotiations between the governments

concerned, none of which was willing to accept a result which gave it fewer votes than

another member with which its government felt it should have similarity.

To increase the voting vote, the International Foreign Investor (IFI) system has established

between one country with one vote and one dollar with one vote. With the decline in the basic

vote the system has moved much closer to the end. If the country using method one vote for

one country, while the arrangement in basic vote allocated to all members has increased.

        This can lead to the helping in poorer country like Africa and Eutophia. Within that

context, one proposal is to increase the basic vote to 18.3 per cent, giving each member

country a minimum 0.1 per cent of the vote. This would result in a combined vote for

developing countries (including votes linked to quotas) of 53 per cent, which would give them

a slight overall majority. It would also reduce the US share to 14.74 per cent of total voting

power and therefore remove its veto.

        Kuwait economy in Arab Saudi strengthened further in the past 3 years; with the real

GDP growth in 6.4 percent in 2004 growing fast to 8.5 percent in 2005. The growing

economies are related to the higher oil productions and optimistic non-oil activity. Thus, it has

brought the overall fiscal surplus to increased to 24 percent of GDP in 2004 and 2005.

However, fiscal policy was expanding as the non-oil primary deficit increased to 61 percent of

non-oil GDP. This is because of higher subsidies, transfer, and capital outlays. As result, these

activities have affected the dinar depreciation against euro and yen currency. The inflation

also has edged up to almost 4 percent in 2005. The IMF Executive Board much-admired the

power in Kuwait economy. Kuwait has a strong macroeconomics position and their

constructive role in support of oil price stability.

       Kuwait have suggested by the IMF director to improved the structure of the budget by

gradually increasing capital expenditure and achieving a better balance between productive

expenditure and fiscal savings, and to develop a comprehensive and transparent medium term

strategy to manage fiscal surplus. From this, Kuwait has taken a step to further strengthen

banking supervision and open the sector to foreign bank and continuing in the stock price

index as its important potential on the financial sector.

       How to reforming the quota formula? The use of the quota formula to determine

amounts the IMF, voting allocations and borrowing limits are no longer used. The practice

reflects a time when all members were expected both to contribute and borrow from the IFIs.

       To improve this, there should separate mechanism to determine the IFI contributions.

These contributions show that the IFI resources should be based on its ability to pay. The

borrowing limits also can helps to reforming the quota formula. These steps are the resources

should determine o the basis of need, with an upper limit established to ensure enough

resources remain for the use of other members.

       Voting allocations are made when the system of one country for one vote has

introduced. These steps can help the IMF to build the quota formula by determine according

to a transparent formula based on economic size and population size. The GDP should be

calculated in relation to purchasing power parity rather than the market exchange rates, in

order to more accurately represent the real size of developing countries economics. Whether a

country is a borrowed or a creditor to the IFIs could also be taken into account with the

former receiving a higher weighting.

       The increasing and reallocating the seats in also helping to increased the voting

numbers in IMF. There has been some discussion about increasing the number of seats on the

board. Logically, this is appropriate since membership of the institutions has grown

considerably more than the board, forcing constituency sizes to grow.

       Since 1944, the number of members has increased from 39 to 184 countries, while the

number of EDs has only risen from 12 to 24. However, not even this proposal fundamentally

addresses the imbalance of power between developed and developing countries and fails to

acknowledge the growing influence of Asian countries.

       The conservatism of these proposals reflects the argument of industrialized countries

that expanding the board will impede the decision-making process. Clearly this would not be

desirable. But it should not be assumed that the marginalization of developing-country

interests in the current process achieves equitable or appropriate decisions.

       Limited board size need not be an impediment to democratic representation if seats

were reallocated in favors of developing countries and constituencies reconfigured to achieve

an equal number of constituents. It is tacitly accepted that the countries with most votes, that

is the industrialized countries, should be represented on the boards of the IFIs. This tends to

reinforce the existing voting inequalities. IFIs have negligible policy influence over these

countries; as a group, they tend to hold similar positions and are at similar stages of

development. Given the importance of the IFIs in developing countries, and their diversity, it

is arguable that the majority of seats should be allocated to them. This would go some way to

achieving a better balance of power and introduce a wider range of views into discussions.

       The obvious candidates for a reduction in seats are the European countries which have

the largest number of representatives on the boards (holding 8/9 seats out of 24), particularly

since five of these countries in Europe which is Belgium, Netherlands, France, Germany and

Italy are taking part in the Euro currency system.

       Finally, it has desirable to move to a structure where there are no single members‘

constituencies and there are not more than eight countries per vote numbers. They are also no

permanent representations by any one country of number per vote. It has fixed for a maximum

three years.

       The voters can be reallocated in a number in a different way. This can cause an

improvement in IMF and a country. The voters can be grouped into an equal numbers of low

income, middle income and industrialized country voters. From this, the voters can includes

an even spread of countries at different stages of economic development. The voters also can

be reallocated according to the different stages of economics development, population size

and by the region in the country.

       In addition, since the executive boards are supposed to oversee the management and

staff of the IFIs, it is inappropriate that the chairs of the boards are the managing director and

president. This leads to the perverse position that the board tends to be dominated by the staff.

It would be more appropriate if the chairs were rotated amongst the EDs with each serving a

six month or one year term. This would ensure that the executive board rather than the

managing director or president set the board‘s agenda.


       The flexible exchange rate system instituted in 1973 was immediately put to a severe

test. In response to the Israeli victory in the Arab-Israeli war of 1973, Arab nations imposed

an embargo on oil shipments to countries such as the United States and the Netherlands which

had supported the Israeli cause. As a result, the Organization of Petroleum Exporting

Countries (OPEC) succeeded in quadrupling world oil prices from $3 a barrel in October

1973 to $12 a barrel by March 1974. This rapid increase in oil prices caused inflation rose

from oil-importing countries. For example, in the United Stated inflation rose from 6.1

percent in 1973 to 11.1 percent in 1974.

       In 1974 alone $60 billion in wealth was transferred from oil-importing countries to oil-

exporting countries. The new international monetary arrangements absorbed some of the

shock caused by this upheaval in the oil market, as exchange rates adjusted to account for

changes in the value of each country‘s oil exports or imports. The currencies of the oil

exporters strengthened, while those of the oil importers weakened. Banks recycled the

petrodollar in the firm of loans to countries that were damaged by the rise in oil prices.

However, many countries borrowed more than they could repay.

       Various approaches were used to resolve the crisis. The 1985 Baker Plan stressed the

importance of debt rescheduling, tight IMF-imposed controls over domestic fiscal and

monetary policies, and continued lending to debtor countries hoping that economic growth

would allow than to repay their creditors. The 1989 Brady Plan focused on the need to reduce

the debts of the troubled countries by writing off parts of the debt or providing countries with

funds to buy back their loan notes at face value.

       The Asian currency crisis erupted in July 1997, when Thailand, which had pegged its

currency to a dollar-dominated basket of currencies, was forced to unpaged its currency to

unpaged its currency, the baht, after investors began to distrust the abilities of Thai borrowers

to repay their foreign loans and of the Thai government to maintain the bath‘s value. Not

wanting to hold a currency likely to be devalued, foreign and domestic investors converted

their baths to dollars and other currencies. The Thai central bank spent much of its official

reserves desperately trying to maintain the pegged value of the baht. After Thailand was

forced to abandon the peg on July 2, the baht promptly fell 20 percent in value. As investors

realized that other countries in the region shared Thailand‘s overdependence on foreign short-

term capital, their currencies also came under attack and their stock markets were devastated.


       There are several advantages of the IMF which is: (1) IMF help to promote

international monetary co-operation and global financial stability. (2) It provides temporary

financial help to countries in debt-particularly those with balance of payments problems. (3) It

is also encourage in the economic growth. (4) It gives financial advice to countries about how

to run their economies. There are also several disadvantages of the IMF which is: (1)

Decisions about which countries may borrow money are made by rich countries. Poor

countries have title say about loans and the conditions attached to them. (2) The IMF will only

lend money to countries if they agree to certain conditions increase in poverty. (3) The

livelihoods of people in poorer countries are destroyed by unfair competition from foreign

goods and services. (4) The IMF does not give good financial advice. It is because many

countries have suffered by following it.


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