Cambridge International as and a level Economics Ebook

1 
Analyse what eff ect an excess of inward FDI over 
outward FDI will have on a country’s balance of 
payments.
2
Discuss whether China is likely to invest more in 
the Caribbean in the future.
SELF-ASSESSMENT TASK 
9.18
260
Cambridge International A Level Economics

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Th
ese activities have been central to the development of 
global trade since a stable system of international payments 
and exchange rates is necessary for trade to take place 
between two countries. In carrying out its responsibilities, 
the IMF has three main functions that are known as 
surveillance, technical assistance and lending. Th
e fi rst two 
are in line with its mission of promoting global growth 
and economic stability by encouraging countries to adopt 
sound economic policies. Th
e third function is used where 
member countries experience diffi
culties in fi nancing their 
balance of payments.
The World Bank
Like the IMF, the World Bank was established at the 
Bretton Woods Conference. Its function is to provide 
fi nancial support for internal investment payments such 
as building new roads, improving infrastructure and 
constructing new health facilities.
It is best described as the World Bank Group through 
the activities of its fi ve constituent agencies. Th
ese are:
■ 
International Bank for Reconstruction and Development 
(IBRD)
■ 
International Finance Corporation (IFC)
■ 
International Development Association (IDA)
■ 
Multilateral Investment Guarantee Agency (MIGA)
■ 
International Centre for Settlement of Investment 
Disputes (ICSID).
Th
e IBRD and IDA provide low- or no-interest loans and 
grants to countries that do not have favourable access 
to international credit markets. Th
erefore, the focus of 
activities is very much on developing economies. Grants 
are only provided to the world’s poorest economies. Loans 
cover areas such as:
■ 
health and education – in order to enhance human 
development in a country for improving sanitation and 
combating AIDS
■ 
agriculture and rural development – for irrigation 
programmes and water supply projects
■ 
environmental protection – for reducing pollution and for 
ensuring that there is compliance and pollution regulation
■ 
infrastructure – roads, railways, electricity
■ 
governance – for anti-corruption reasons.
Loans tend to be linked to conditions that involve wider-
reaching changes being made to the economic policies of the 
recipient economies. But the IMF and World Bank have been 
criticised for imposing the so-called ‘Washington Consensus’ 
on developing economies. Th
e Washington Consensus 
was devised by a US economist, who proposed ten economic 
policy prescriptions. Th
ese policy prescriptions, which 
include privatisation, deregulation and trade liberalisation, 
are based on increasing the role of market forces. Such an 
approach may increase effi
ciency, which would increase 
productive potential. It may, however, increase income 
inequality and may not work if the problem that is holding 
back development is not too much government intervention 
but market failure such as a lack of fi nancial markets.
The headquarters of the IMF