Assignment

On

International Marketing

AJAY KUMAR GARG INSTITUTE OF MANAGEMENT

Submitted to: Submitted by:

Prof. (Mr.) TR Pandey Niharika Jaiswal

The World Bank's Role: Different Definitions, Conflicting Expectations

The lack of consensus about the World Bank's specific role (and how it should be translated into
an operational mission, measurable objectives, and policies) has burdened the institution for
years. Differences of opinion about the fundamental role of the Bank go beyond the fact that
some shareholding countries borrow from the Bank while others provide the funds.

While there are many expectations and definitions of the fundamental role of the Bank, four
different models or perspectives are the most common. The first is the view that the World Bank
is a financial intermediary, the Bank-as-a-bank model. A second perspective or model is the view
of the Bank as an evangelical agent in charge of changing the behavior of governments in
developing countries. The fourth is the view that the World Bank is a mechanism to transfer
financial resources from richer to poorer countries.

From the Bank-as-bank perspective the World Bank's role is, quite simply, to be a bank.
Therefore, maintaining the institution's long-term financial integrity is a crucial purpose on
which all other goals depend. The second model views the Bank as an instrument for the
advancement of the national interest of the countries with more influence on its decisions. Such
national interest is expressed in their policies towards other countries, in procurement goals for
their companies in projects financed by the Bank, or even in expanding employment
opportunities at the Bank for their nationals. The third is the evangelical model. A growing
constituency sees the Bank's combination of money, access, knowledge, and expertise as a
powerful instrument to convert the souls of governments implementing misguided public
policies. This is, in fact, a more concrete manifestation of the expectation that the Bank's main
role is to support a liberal (or market-based) economic system, as expressed in the promotion of
liberal trade and investment regimes.

Another version of this approach sees the Bank as an instrument for the promotion of values not
readily accepted by the traditional power structures within developing countries. Increasing
investment in and attention to women, environmental protection and better governance in terms
of respect for human rights or accountability and transparency in government decisions are the
prime examples of the sort of objectives that flow from this perspective of the Bank's role.

Still others maintain that the advisory and "imprimatur" roles of the bank will grow even faster in
the future, as economic and institutional constraints will increasingly limit its role to act as a
financial intermediary. The argument is that the Bank's accumulated developmental expertise and
its capacity to generate and disseminate policy-relevant knowledge have been gradually
replacing its financial resources as its main assets. As donor countries face increasing fiscal
constraints and aid budgets cannot cope with mounting demands, the Bank's capital will not
grow as fast as the needs of the borrowers. This trend will presumably accelerate in the future,
pushing the Bank towards its knowledge-intermediary, research-center, consulting-company
role.

Finally, the fourth widely held view is that the Bank exists to transfer resources to poor
countries. It is impossible, according to this view, for an institution that has the promotion of
development at the core of its existence, not to have the supply of capital to developing countries
as its basic function. This perspective stands in sharp contrast with the first model, which takes
the view that the Bank is a financial intermediary.

The assumption that the Bank is, first and foremost, a bank leads naturally to the assumption that
it is an institution that has a fiduciary responsibility to its depositors and has to administer its
loan portfolio accordingly. The Bank raises funds in the capital markets at premium interest rates
thanks to the guarantees provided by its shareholding governments and government guarantees it
secures for the loans it makes. It then lends these funds to developing countries at lower interest
rates that those they would normally secure on their own.

But for those who assume that the Bank exists to transfer badly needed resources to poor
countries, having its essential purpose defined as that of a financial intermediary is confusing
means and ends. For the resource-transfer model, development is the objective and finance the
instrument. Therefore, it assumes that the bank is a developmental institution first and a financial
intermediary second. The Bank-as-bank perspective responds that while this may be true, in
practice, if the capacity of the Bank to raise cheaper funds from international financial markets is
impaired, money for all the other developmental objectives will be less readily available.

The resource-transfer perspective counters by stressing the need for the industrialized countries
to do more for developing countries. In its more extreme formulation, the resource transfer
model of the Bank leads to a view that expects the institution to resemble less a bank than a fund
that must be periodically replenished by its richer shareholder-donors. In fact, this is the role
played by the Ban's concessionary credit arm, the International Developmental Association
(IDA), which instead of loans gives "credits" to the poorest countries (defined as those with per
capita incomes of less than $1200 per year), charging only a small "service fee" and no interest
rate. But according to the resource-transfer perspective, IDA's geographical and financial scope
is too narrow. It argues that more money to more countries should be transferred if the
developing world is going to have a serious chance to overcome its immense obstacles.
Furthermore, in recent years this "resource transfer" role has been declining. The Bank's net
disbursements have tended to decrease substantially and, in some developing regions, the Bank
often extracts more funds that it transfers. The "negative net transfers" of the Bank to the
developing worlds have thus become the focal point of most of the speeches of the Governors of
the Bank representing borrowing countries at their annual meetings.
But, for those assuming that the World Bank is a bank, negative transfers should not be a cause
of alarm.

Q.2. What are the various crises of exchange rate the world has faced so for? Elaborate.

The Mexican Peso Crisis of 1994-1995

Whereas the financial crisis in Mexico in 1982 had to do with external debt and took a long time
for recovery the peso crisis of 1994 had little to do with external but instead was due to a short-
term foreign exchange problem that was handled relatively quickly. In part, this quick recovery
was due to the quick response of the U.S. government and the IMF in providing loans or loan
guarantees. Some of the financial aid packages were prepared even before the peso crisis
occurred as part of the structure associated with the North American Free Trade Alliance
(NAFTA).
At the time NAFTA was approved in 1993 the economic future of Mexico looked bright.

As a result of the recovery program from the 1982 financial crisis the Government of Mexico
had reduced its deficit even though it had also undertaken many program to alleviate problems of
public health and education. Although conditions looked good for Mexico in 1993, 1994 was a
very bad year for Mexico in many ways. On New Year's Day a radical activist from Mexico City
launched the rebellion in the State of Chiapas which he and his associates had been organizing
for a number of years. Chiapas has many problems and many legitimate complains against the
central government in Mexico City but probably the last thing the people of Chiapas needed was
a leftist rebellion. The more complete story of Chiapas is told elsewhere.

Asian currency crisis (1997-1998)

For years, East-Asian countries were held up as economic Icons. Their typical blend of high
savings and Investment rates, autocratic political systems, export-oriented businesses, restricted
domestic markets, government capital allocation, and controlled financial systems were hailed as
the Ideal recipe for strong economic growth of developing counties (Shapiro, 1999). However, in
July 1997, a currency turmoil erupted In Thailand. This currency crisis spread from there to
Indonesia and Korea, then to Russia, then to Latin America. Few countries have not been
touched by the global forces that this crisis--some accounts the worst since the 1980s debt
crisis--have unleashed.

The 1997 Asian crisis is the 4th international financial crisis. The first major blow to the
international financial system took place in August 1982, when Mexico announced that it could
not meet its regularly scheduled payments to international creditors. Shortly thereafter, Brazil
and Argentina were in the same situation. By Spring 1983, about 25 developing countries could
not make regularly scheduled payments and negotiated rescheduling with creditor banks. These
countries accounted for two-thirds of the total debt owed by non-oil developing countries to
private banks at the time.

Argentina peso crisis (1999-2002)

The Argentine economic crisis was a financial situation that
affected Argentina's economy during the late 1990s and early 2000s. Macroeconomically
speaking, the critical period started with the decrease of real GDP in 1999 and ended
in 2002 with the return to GDP growth, but the origins of the collapse of Argentina's economy,
and their effects on the population, can be found in action before. As of 2005, arguably the crisis
was over, though many challenges remain for the country.

In July 1989, Argentina's inflation reached 200% that month alone, topping 5,000% for the year.
During the Alfonsin years, unemployment did not substantially increase; but, real wages fell by
almost half (to the lowest level in fifty years).

Subprime crisis (2008)

In 2008, a series of bank and insurance company failures triggered a financial crisis that
effectively halted global credit markets and required unprecedented government
intervention.Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the
government. Lehman Brothers declared bankruptcy on September 14th after failing to find a
buyer. Bank of America agreed to purchase Merrill Lynch (MER), and American International
Group (AIG)was saved by an $85 billion capital injection by the federal government.[1] Shortly
after, on September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington
Mutual (WM) in what was the biggest bank failure in history.[2] In fact, by September 17, 2008,
more public corporations had filed for bankruptcy in the U.S. than in all of 2007.[3] These failures
caused a crisis of confidence that made banks reluctant to lend money amongst themselves, or
for that matter, to anyone.

The crisis has its roots in real estate and the subprime lending crisis. Commercial and residential
properties saw their values increase precipitously in a real estate boom that began in the 1990s
and increased uninterrupted for nearly a decade. Increases in housing prices coincided with a
period of government deregulation that not only allowed unqualified buyers to take
out mortgages but also helped blend the lines between traditional investment banks and mortgage
lenders. Real estate loans were spread throughout the financial system in the form of CDOs and
other complexderivatives in order to disperse risk; however, when home values failed to rise and
home owners failed to keep up with their payments, banks were forced to acknowledge
huge write downs and write offs on these products. These write downs found several institutions
at the brink of insolvency with many being forced to raise capital or go bankrupt.