International Organizations Politics, Law, Practice

The two international financial institutions created after World War II provide a similar service to countries but in very different contexts and for different purposes. Both pool the resources of their members and use that capital to fund lending to members in need. The IMF can only lend to countries with immediate balance-of-payments problems. It makes short-term loans of foreign currencies that the borrowing country must use to finance the stabilization of its own currency or monetary system. As a precondition to the loan, the Fund generally requires that the borrower change its policies in ways that enable future monetary stability. The World Bank makes longer-term loans to pay for specific projects related to development or poverty reduction. Most Bank loans are tied to a particular project undertaken by the borrowing government.

The World Bank and the International Monetary Fund are twinned institutions with a common origin and many shared structural features. Their practices and their purposes are, however, very different, and the contrast that they display helps to show how very different outcomes can arise out of similar legal structures. The two organizations originate in the explosion of institutionmaking at the end of World War II, where the Bretton Woods conference of 1944 was used as a forum for negotiating among the capitalist powers of the day a new institutional architecture for international economics. They were both founded by inter-state treaties, known as the Articles of Agreement of each respective institution, agreed on at Bretton Woods.

The International Monetary Fund (IMF) was intended to be a central coordinating mechanism for exchange rates among countries. It was normal at that time for currency values to be fixed relative to each other and to the price of gold, and managed by national governments. The Fund was given authority over exchange-rate changes. Much like the Security Council centralized the decision to go to war and took away from governments a measure of independence, the IMF became the central authority on currency values. Governments had to request permission to change their currency value, and the Fund would assess whether the underlying economic conditions merited the change. To avoid frequent or dramatic changes, it was also given control over the pool of foreign currency that countries could borrow to stabilize extreme balance-of-payments deficits.