Chapter 18, Problem 13P

To determine

The objectives, functions and policy issues of the World Bank and IMF

Concept introduction:

World Bank − The multilateral institution was created in 1944 as the International Bank for Reconstruction and Development (IBRD) as the development bank to reconstruct the World War II damaged European Economies. It is presently headquartered at Washington along with its twin sister IMF headquarters. Presently, the World Bank consists of two organizations-

1. The International Bank for Reconstruction and Development (IBRD)- To develop the middle-income and creditworthy low-income countries to bolster their economic growth and development.
2. The International Development Association (IDA) - To provide credits and grants to the poorest countries. These credits/grants are the interest free loans to provide financial aid to these countries.

International Monetary Fund (IMF) − It is the twin sister multilateral institution of the World Bank with its origin dating back to 1930s, while its structure and operational formalization was done in 1944 along with IBRD. To correct the international chaos triggered by the Second World War, it provides regulatory, financial and consultative functions. These include credit grants to correct the BoP deficits, surveillance over the monetary and exchange rate polices of the member countries for mutual gain and development. It works towards the establishment of the multilateral system of payments and alleviate the disequilibrium in the international balance of payments. Overall it aims at balanced growth across the member countries to increase employment, real income and optimal utilization of the productive resources across the globe.

Financial Intermediation- The productive economic activity in the financial market whereby an institutional unit engages in financial transactions in the market to acquire financial assets and in the process incurs liabilities in its own account. Transaction costs and economies of large scale, asymmetric information types like adverse selection (hidden information) and Moral Hazard (hidden action) are the rationales of financial intermediation.