Multilateral financial institutions were established with two main objectives. On one hand, to coordinate the economic and financial policies of each individual member and to understand one another in these matters. On the other hand, to use public resources in order to help the least developed countries to approach the levels of development of the first world and to offer some help in moments of economic difficulty and financial instability.
“Most international financial institutions are aimed to coordinate the economic policies in different countries as well as to help the least developed countries”
The main international financial institutions are those established at the conference of Bretton Woods in USA in July 1944, as studied in most of the Masters of Science in Finance and Banking.
International Bank for Reconstruction and Development
From Bretton Woods came out the International Bank for Reconstruction and Development, alsoknown as the World Bank and the International Monetary Fund. At the beginning they both had compatible roles, but quite different at the same time. Another common element is that they only dealt directly with the United States, meaning that they didn’t deal directly with the private sector.
Apart from its important work of helping to rebuild the countries that were emerging from World War II, the World Bank was established to help less developed countries boost their economic development. Its work was, and still is, to reach agreements with governments of developing countries to help them design development programs and projects as well as to fund these projects. Some examples of these projects are large infrastructure plans such as electricity, telecommunications, transport, health and so on.
The International Monetary Fund (IMF)
The International Monetary Fund (IMF) was established at the same time as the World Bank, and its aim is to take care of the solvency of finance and accounts of the least developed countries. It is focused much more on liquidity on the short term. This includes helping to finance the balance of payments, imports and exports of countries and the public deficit.
As part of its assistance to overcome liquidity problems, the IMF comes to analyze the economic policies of governments that led them to suffer these difficulties and propose changes to these policies, as a condition of getting the necessary help. They analyze the economic policies in many areas, such as monetary policy, management of interests, the state budget (revenues and expenses) and more.
These conditions are the main reasons why the IMF has been criticized over its history, especially by governments. On the one hand, they saw it as an encroachment on the sovereignty of their country, on the other, it forced them to take some difficult decisions they didn’t want to take. Moreover, the IMF has also been criticized for promoting incorrect economic policies.
“The International Monetary Fund has been heavily criticized for promoting and imposing incorrect policies in the countries that need their help”
International Finance Corporation (IFC)
A few years after Bretton Woods, in 1956 the creation of the International Finance Corporation (IFC)was decided as part of the World Bankwith two important differences. First, investing in business capital, and second, allowing to deal directly with the private sector.The principal work of IFC is to promote private enterprise and business projects through its investment and financial support.
Within the World Bank Group other economic entities were also established, each with different dedication but all with the aim to help the economic development of less developed countries. Some examples are The International Development Association (IDA) aiming to help environmental projects, The Multilateral Investment Guarantee Agency (MIGA) that guarantees foreign investments in less developed countries or The International Centre for Settlement of Investment Disputes (ICSID) that mediates disputes between different participants in business projects.