The IMF, World Bank and WTO: What Each One Actually Does

The International Monetary Fund, the World Bank and the World Trade Organization are built for three different problems. One is for a country that cannot meet payments falling due abroad right now. One is for a country funding something over decades. One is for countries that want a trade rule to be enforceable rather than merely agreed. All three are international, and that is nearly the only thing they share.

Underneath that sentence sit two ideas already established, and neither of them is extended here. The first is that trade is a flow: onions leaving one country and machines arriving in it, counted over a stretch of time rather than held as a stock. The second is that money crosses borders on its own account, for reasons of its own, and can turn around a great deal faster than any cargo can. The economics is already in place. What is new is not a mechanism at all. Three institutions are new, and so is the discipline of knowing which problem each was built for before asking it for anything.

What three different problems are these three bodies answering?

A household has the identical shape, and nothing about a household is intimidating. Start there.

A household running on one salary can be in three completely different kinds of trouble. In the first, the rent falls due on Friday and the salary lands on Monday. There is no question about whether the household can afford the rent over the year. The household simply cannot lay hands on the money in the next four days, and what it needs is a bridge that lasts days. In the second, the household wants to add a room. A room takes two years to build and fifteen to pay for, and it needs a lender who will ask an entirely different question: not whether the household can get through this week, but whether the room will still be standing and worth having in fifteen years. In the third, every household in the lane signed an agreement that nobody would park across a gate. The neighbour has begun doing exactly that. Here money is not the difficulty at all. The household needs the agreed rule applied to somebody who is ignoring it.

The three helpers are met in different buildings and look nothing alike, so nobody confuses them. Put all three in the same city, give each a set of initials, and let all three be discussed in the same argument by people who are really arguing about something else, and the confusion becomes easy. The three international bodies are in exactly that position.

The three names all sound like the same kind of thing, while the three problems have almost nothing in common. Hold the problems rather than the names, and the three bodies stop being confusable.

Problem one is a country that cannot meet payments falling due abroad right now. The horizon is weeks and months. The body built for that problem is the International Monetary Fund. Problem two is a country that wants to fund something taking decades to build and decades to pay for itself: a water system, a rail link, an inspection service, a trained workforce. The body built for that problem is the World Bank. Problem three has no money in it anywhere. Countries want a rule about each other's trade to be enforceable rather than merely agreed. Enforceable means somewhere to take the rule when a member says it was broken. The body built for that problem is the World Trade Organization.

What does the International Monetary Fund actually do?

The International Monetary Fund is a multilateralInvolving many countries at once rather than two. A multilateral body is one that a large number of countries join together, working under rules the members set among themselves rather than rules imposed from outside. institution whose members put resources into a common pool, and where a member in difficulty may draw on that pool under conditions the two sides agree. Everything structural about the Fund sits in that one arrangement, and the weight is carried by the last three words.

To see why conditions exist at all, look at what an ordinary lender relies on and then take it away. A shopkeeper borrowing against the shop gives the lender collateralSomething a borrower pledges that the lender can take and sell if the loan is not repaid. A shop, a plot of land, a machine. The word describes property rather than a promise.. If the loan goes unpaid, the lender can take the shop and sell it, and a court will order that to happen. The lender's comfort is a thing, and the thing exists whether or not the borrower cooperates.

A country cannot do that. There is no plot to pledge, no court above it that can hand a country over, and nothing that could be taken and sold in any ordinary sense. So a body lending to a country in difficulty has to find its comfort somewhere else entirely, and what it finds is behaviour. The borrower agrees to do certain things while the money is outstanding, and those agreed things are the security.

A lender that cannot take property has to buy its comfort somewhere else, and conditions are what it buys instead: an ordinary loan is secured on a thing, and lending of this kind is secured on what the borrower agrees to do.

Notice a second consequence of the word multilateral. The pool exists because the members built it, and the same members who contributed are the ones who may draw on it. A bank and its customers are not arranged that way. The pool is closer to a group of neighbouring households each putting money into a common box every month, on the understanding that any of them may take from it when a bad month comes, and that the group will attach terms when it happens. Nobody in that arrangement is the bank and nobody is only the borrower.

What does the World Bank do, and how is it different?

The World Bank is a lender for development. The Bank funds things built over long horizons: physical systems, institutions, capacity, the kind of thing that takes years to construct and then works for decades. Both it and the International Monetary Fund lend money to countries, and that single shared verb is responsible for most of the confusion between them. Push past the verb and the two are not two sizes of the same business. The two are different businesses that happen to use the same word.

Three things separate them, and it is worth naming all three rather than settling for the obvious one.

The first is the horizon. Bridging a payments gap is a matter of weeks and months. Funding a water system is a matter of years, and the money does not even arrive all at once. A long project is paid out in stages as the work is done, and each stage payment is a disbursementMoney actually paid out under a loan, as against money merely committed to it. A long project is normally paid out in stages as the work gets done, so committed and disbursed are two different amounts.. Before the work starts there is nothing to pay out against.

The second is where the repayment comes from. A bridge is repaid out of the position steadying: the crunch passes, receipts come in, the borrower is back on its feet. A project is repaid out of what the thing built earns or saves across its own working life. A project that never works is therefore a different kind of failure from a bridge that ran out.

The third is the question the lender asks, and this is the one that really separates them. A body bridging a payments gap asks whether the borrower can get through this stretch. A body funding a fifteen year project asks whether the thing will still be there in fifteen years and whether it will actually work. The two questions have almost no overlap. A borrower can pass either one and fail the other flat.

A body built to bridge a payments gap and a body built to fund a fifteen year project run on different horizons, are repaid out of different things, and ask the borrower a completely different question. The two are not two sizes of the same business.

The household version again. The person who tides a household over until payday and the housing loan both hand over money and both want it back, and nobody would put them in the same category. One is underwritten on the next salary arriving. The other is underwritten on a house standing for thirty years. Same verb, different trade entirely.

What does the World Trade Organization do?

The World Trade Organization has no money to lend anybody, and that one fact separates it from the other two more cleanly than anything else could. The Organization is a forum where its members agree rules about each other's trade, tell each other in an agreed form about the measures they take, and can bring a matter through a process when one of them says another has broken a rule they both signed.

Three stages, and the order of them is the whole teaching point.

Stage one is agreement. Members negotiate and settle on rules that will govern how they treat each other's goods and services. Stage two is notificationA formal telling. One member informing the others, in an agreed form and through the body's own records, of a measure it has taken. The measure is then on the record rather than discovered by accident later.: a member that takes a measure tells the others about it in the agreed way, so that what has been done is on the record instead of being found out by surprise. Stage three is the one people forget, and it is the only one that makes the first two worth anything. There is a process. When a member says another member has broken an agreed rule, there is somewhere to take that, and something happens.

A rule that nobody can bring anywhere is a statement of good intent. A rule with a process attached is a fact that a plan can rest on, and the third stage is the whole of the difference.

The difference between a commitment that binds and one that does not was worked through when trade agreements came up, and exactly the same idea is doing the work here. The third stage adds a place to go. The standing staff who keep the records and run the machinery between meetings of the members, sometimes called a secretariatThe standing staff of an international body, who keep its records and run its work in between the meetings of the members. The staff do not decide what the members decide; they make it possible for the members to decide anything at all., are what makes a place to go into something more than an address.

Return to the lane with the parking agreement. Every household signs the rule: that is stage one. Anybody putting up a new gate tells the association: that is stage two. Then somebody parks across a gate anyway. If the agreement has no third stage, the household is left with a signed agreement and a neighbour who is not moving. If it has a third stage, the household has somewhere to take it. Nothing about the first two stages changed, except whether they mean anything.

Note what the third stage still is not. Having somewhere to take a matter is not the same as having a bailiff. Who adjudicatesTo decide, as a judge does, which of two sides is right under a rule that both are subject to. The word says nothing about who makes the decision stick afterwards, and making it stick is a separate question. a matter and who makes the outcome stick are two different questions.

Which of the three is Sankhya's difficulty actually for?

Now put one difficulty in front of all three doors and watch what happens. Sankhya, an invented country, is the one standing at them, and every figure attached to it reconciles only against itself.

The single product pair worked earlier runs as follows. Sankhya sells 50,00,000 quintals of onions abroad at Rs 2,000/- a quintal, so the sales come to Rs 1,000 crore. Sankhya buys 2,50,000 machines at Rs 50,000/- each, so the purchases come to Rs 1,250 crore. On that pair alone, Rs 250 crore more of value goes out than comes in. One product pair is not the whole of Sankhya's trade with anybody. The full record of a country's dealings with the outside is the balance of payments, set out separately.

Now add the second ingredient, the one that turns an awkward arithmetic into an actual difficulty. A capital-flow reversalMoney that had been arriving from outside a country stops arriving, and some of what already arrived turns around and goes back out. Why it happens and how fast it moves was taken up separately under capital flows. hits Sankhya. Money that had been coming in from outside stops coming, and some of what was already there leaves. Sankhya now has payments falling due abroad inside the quarter that it cannot meet out of what it can lay hands on. The difficulty is not an argument or a plan. The difficulty is a date, and the date is close.

Door one, the International Monetary Fund. The Fund was built for precisely this problem: a member in difficulty, a short horizon, and a pool the member has contributed to and may draw on under conditions. Whether any particular arrangement would follow, and on what terms, is settled between the Fund and the member rather than by the shape of the difficulty.

Door two, the World Bank. The difficulty is exactly as real standing here as it was standing at door one, and this body lends. The Bank also funds things built over years and pays out in stages as the work is done, and Sankhya has no thing being built. There is nothing to disburse against, and no way to compress fifteen years of a project into ten weeks. A real lender, a real borrower, a real difficulty, and no instrument that reaches it.

Door three, the World Trade Organization. The Organization holds no money at all. Suppose the payments squeeze traces back to a restriction somebody put on Sankhya's onions, and suppose that restriction broke a rule both countries had agreed. A process about a rule still does not produce cash inside a quarter. The process might, eventually, deal with the restriction. No process can deal with the date.

The difficulty is exactly as real at all three doors, and two of the three have no instrument that reaches it. Knowing what a body was built for is therefore worth more than knowing what it is called.

Why are the three so often confused?

Three reasons, and none of them is that people are careless.

The first is that all three were set up in the same broad stretch of history, out of the same argument about how countries ought to deal with one another. The dates matter less than the fact that they arrived together, so they are filed together in most people's heads.

The second is that their memberships overlap enormously. The great majority of countries belong to all three. Sorting the world by who belongs to what produces almost the same list three times over, and a reader who notices that reasonably concludes the three must be closely related.

The third is that all three get named in the same arguments, often in the same sentence, usually by someone whose real subject is neither trade rules nor development funding nor payments difficulties, but the general question of how much say outsiders should have in what a country does. Once three names habitually travel together in speech, they stop being three names.

Overlapping membership is not overlapping function, and almost all confusion about the three is a category error rather than a gap in anybody's facts.

A category error is the mistake of treating one kind of thing as though it were another kind of thing. Asking the electricity supplier to fix a leaking tap is a category error. Both are utilities, both send a bill every month, both have a call centre, and none of that gives one of them a plumber. Nobody making that call is short of information. The caller has put a thing in the wrong category, and no amount of further detail about electricity tariffs will help.

What can none of the three do?

Most disappointment with international bodies is disappointment that they did not do something none of them was ever built to do.

None of the three can make a country solventAble to meet what is owed across the whole of the time it is owed over, rather than merely able to find the cash due this week. Being short today and being unable to pay at all are different troubles with different answers.. Money bridged across a squeeze is money that has to be paid back. A bridge changes when a payment is met; it does not change whether the underlying position adds up over years. Meeting a payment and adding up over years are two different troubles, and only the first has a body built for it.

None of the three can make trade happen. A rule can make a restriction contestable, and funding can build the road the lorries use, and neither makes a single buyer buy a single thing. Trade is what people and businesses decide to do. No forum decides it for them.

None of the three can enforce anything against a member that leaves. Every one of the three is something its members joined, built out of what those members put in and agreed to. A member that stops being a member stops being reachable. Leaving looks like a design flaw and is in fact the design, and people find that harder to accept than anything else about the three.

None of the three can substitute for a decision that belongs at home. Whether to build the road first or the school first, what to tax, what to teach, what to grow: no international body settles that, and none claims to.

Each of the three is a mechanism its members built and can leave, and that single fact is what bounds every one of the four limits above.

What happens when a complaint is aimed at the wrong one of the three?

Which door does a difficulty belong at?

What does an analyst actually take from all this?

One thing, and it is narrower than the subject looks: which body's rules bind a decision, and which do not.

Take a lender in Sankhya being asked to fund an onion exporter. The margin on that business dies if the buying country restricts onions. The useful question is not whether the three international bodies exist, and it is certainly not what anybody thinks of them. The useful question is this: is the restriction that would kill the margin one that the buying country agreed not to impose, under a rule with a process attached, or is it a measure nobody promised anything about? The two situations look identical on a risk register and behave nothing alike. The first is a risk with somewhere to go. The second is a risk with nowhere to go.

A commitment enforced through a process is a fact a plan can rest on, and a statement issued after a meeting is not, and telling the two apart is most of what an analyst gets out of knowing which body is which.

There is a second, smaller habit worth building. When a note arrives saying that an international body has said something, the questions to ask are which body and what kind of statement. A commitment lodged under an agreed rule is one thing. An opinion in a published research paper is a different thing entirely, and it binds nobody, including the body that published it. Both arrive in the same font. Each body keeps its own record of both.

Where is the record of what any of the three has actually done?

At each of the three, and nowhere better. Each of the three bodies is its own issuer: each states its purpose in its own words, each maintains its own membership, and each keeps the record of what it has actually done. Reading the body's own record is a considerable advantage and it is worth using. Nobody has to depend on somebody's summary when the body itself publishes the thing being summarised.

Where a record about any of the three bodies is kept. A figure attached to an arrangement, a facility or a proceeding is a maintained record: correct on the morning it is typed and quietly wrong some months later, with nothing to signal the drift. Each of the three bodies publishes its own record itself, dated by the body that holds it, and that is the only place a record of that sort belongs.

The Republic of Sankhya, its trading partner Marut, the lane with the parking agreement, the household waiting for Monday's salary and the electricity supplier with no plumber are invented.
Educational material. Not advice on any investment, tax, budget or market position.