Economy: October 2021 Current Affairs | Indian Economy for State PSC Exams - BPSC (Bihar) PDF Download

 Page 1


 
19                                                                                                                                                                       
About Bretton Woods Conference 
• It was conceived in July 1944, when delegates from forty-four nations 
(met at Bretton Woods, New Hampshire) agreed on a framework for 
international economic cooperation, to be established after the 
Second World War.  
• Aim was to agree on a system of economic order and international 
cooperation that would help countries recover from the devastation 
of the war and foster long-term global growth. 
• This system advocated the adoption of an exchange standard that 
included both gold and foreign exchanges.  
• At its conclusion, the conference attendees produced the Articles of 
Agreement for the International Bank for Reconstruction and 
Development (IBRD) and IMF. 
3. ECONOMY 
3.1. REFORMS IN WORLD BANK AN D INTERNATIONAL MONETARY FUND 
(IMF) 
Why in News? 
Recently, in the backdrop of the 2021 annual meetings of the World Bank Group and IMF, leading experts have 
suggested reforms in these institutions. 
More on News 
• Experts have suggested the need to review 
the role of IMF amid changing dynamics of 
developed and emerging economies 
including India.  
• They also called for completing quota 
reforms and maintaining data integrity 
amid the World Bank discontinuing its 
Ease of Doing Business (EoDB) reports. 
• It was alleged that the EoDB rankings were 
tweaked to inflate the ranks for China (in 
EoDB 2018) and Saudi Arabia, UAE and Azerbaijan (EoDB 2020). 
About IMF and World Bank 
• Founded at the Bretton Woods conference in 1944, the two institutions have complementary missions.  
o Countries must first join the IMF to be eligible to join the World Bank Group. 
• They sit at the heart of intergovernmental cooperation conducting consultations on exchange rate policy; lending to 
countries in financial crisis; providing assistance after conflict and natural disasters; and setting standards, offering 
advice and providing development assistance. 
 
Page 2


 
19                                                                                                                                                                       
About Bretton Woods Conference 
• It was conceived in July 1944, when delegates from forty-four nations 
(met at Bretton Woods, New Hampshire) agreed on a framework for 
international economic cooperation, to be established after the 
Second World War.  
• Aim was to agree on a system of economic order and international 
cooperation that would help countries recover from the devastation 
of the war and foster long-term global growth. 
• This system advocated the adoption of an exchange standard that 
included both gold and foreign exchanges.  
• At its conclusion, the conference attendees produced the Articles of 
Agreement for the International Bank for Reconstruction and 
Development (IBRD) and IMF. 
3. ECONOMY 
3.1. REFORMS IN WORLD BANK AN D INTERNATIONAL MONETARY FUND 
(IMF) 
Why in News? 
Recently, in the backdrop of the 2021 annual meetings of the World Bank Group and IMF, leading experts have 
suggested reforms in these institutions. 
More on News 
• Experts have suggested the need to review 
the role of IMF amid changing dynamics of 
developed and emerging economies 
including India.  
• They also called for completing quota 
reforms and maintaining data integrity 
amid the World Bank discontinuing its 
Ease of Doing Business (EoDB) reports. 
• It was alleged that the EoDB rankings were 
tweaked to inflate the ranks for China (in 
EoDB 2018) and Saudi Arabia, UAE and Azerbaijan (EoDB 2020). 
About IMF and World Bank 
• Founded at the Bretton Woods conference in 1944, the two institutions have complementary missions.  
o Countries must first join the IMF to be eligible to join the World Bank Group. 
• They sit at the heart of intergovernmental cooperation conducting consultations on exchange rate policy; lending to 
countries in financial crisis; providing assistance after conflict and natural disasters; and setting standards, offering 
advice and providing development assistance. 
 
 
20                                                                                                                                                                       
Reforms needed in both institutions 
Reforms in IMF 
Reform area About Concerns Suggestions 
IMF Quota’s • Each member’s quota 
determines its voting power 
as well as its borrowing 
capacity. 
• Current formula emphasises 
economic size and openness 
and consists of four 
elements: GDP (50%), 
openness (30%), economic 
variability (15%) and 
international reserves (5%). 
• Quotas are denominated in 
Special Drawing Rights 
(SDRs). 
• Quota reviews are mandated 
to be undertaken at intervals 
not exceeding five years. 
• Despite Fourteenth General Review of 
Quotas (2010), European nations still 
retain over 30% of overall 
shareholding, despite collectively 
representing less than 20% of the 
global economy. 
• The voting and quota structure cannot 
be changed without an affirmative 
vote from US since such a vote requires 
a super majority in the IMF, which gives 
US an effective veto. 
• Share of the 
European Union 
countries will have 
to reduce 
significantly. 
• Share of BRICS 
countries would 
have to increase 
significantly. 
o After 2010 
review India’s 
share increased 
to 2.75 % (from 
2.44%), making 
it the 8th 
largest quota 
holding country 
in the IMF 
Article IV 
consultations 
• It is through these 
consultations that IMF is 
expected to keep track of the 
behaviour of the economy of 
the member countries. 
• Under this, IMF holds bilateral 
discussions with its members 
usually every year and their 
staffs prepare a report. 
• Reports are utilised by credit 
rating agencies, impacting the 
fund-raising capacity of 
countries like India. 
• IMF could never pinpoint an incipient 
crisis. It failed, for instance, to see the 
signs of the Asian currency crisis. 
• Developing countries are subjected to 
far more rigorous Article IV 
consultation process and scrutiny than 
the more developed countries, and the 
most curious example is, that in Spain 
and Greece. 
• IMF should focus on 
lower income 
countries and 
support other 
developing 
countries’ market 
funds raising 
activities. 
Governance 
Reforms 
• Board of Governors is the 
highest decision-making body 
of the IMF.  
• Board is advised by two 
ministerial committees, 
the International Monetary 
and Financial Committee 
(IMFC) and the Development 
Committee. 
• Governance structure continues to be 
disproportionately dominated by 
advanced economies. 
• These countries choose the leadership 
and senior management, and so their 
interests dominate, despite the fact 
that the main borrowers are 
developing countries. 
• Many of the economic reforms IMF 
required as conditions for its lending 
(fiscal austerity, trade liberalization 
etc.) have often been 
counterproductive for target 
economies. 
• Need to shift the 
focus from the 
needs of the USA 
and European 
countries to those of 
developing 
countries by 
reforming the voting 
structure. 
 
Reforms in World Bank 
Governance 
related 
• Dominance of US and other members of the G7 in voting and administration do not take into account 
significant changes in the profiles of major economic actors such as India and China. 
• Critics see the World Bank together with the other global economic institutions as an imperialism tool 
which protect the interests and ideas of the western rich countries and expands their dominance in the 
rest of the world. 
Page 3


 
19                                                                                                                                                                       
About Bretton Woods Conference 
• It was conceived in July 1944, when delegates from forty-four nations 
(met at Bretton Woods, New Hampshire) agreed on a framework for 
international economic cooperation, to be established after the 
Second World War.  
• Aim was to agree on a system of economic order and international 
cooperation that would help countries recover from the devastation 
of the war and foster long-term global growth. 
• This system advocated the adoption of an exchange standard that 
included both gold and foreign exchanges.  
• At its conclusion, the conference attendees produced the Articles of 
Agreement for the International Bank for Reconstruction and 
Development (IBRD) and IMF. 
3. ECONOMY 
3.1. REFORMS IN WORLD BANK AN D INTERNATIONAL MONETARY FUND 
(IMF) 
Why in News? 
Recently, in the backdrop of the 2021 annual meetings of the World Bank Group and IMF, leading experts have 
suggested reforms in these institutions. 
More on News 
• Experts have suggested the need to review 
the role of IMF amid changing dynamics of 
developed and emerging economies 
including India.  
• They also called for completing quota 
reforms and maintaining data integrity 
amid the World Bank discontinuing its 
Ease of Doing Business (EoDB) reports. 
• It was alleged that the EoDB rankings were 
tweaked to inflate the ranks for China (in 
EoDB 2018) and Saudi Arabia, UAE and Azerbaijan (EoDB 2020). 
About IMF and World Bank 
• Founded at the Bretton Woods conference in 1944, the two institutions have complementary missions.  
o Countries must first join the IMF to be eligible to join the World Bank Group. 
• They sit at the heart of intergovernmental cooperation conducting consultations on exchange rate policy; lending to 
countries in financial crisis; providing assistance after conflict and natural disasters; and setting standards, offering 
advice and providing development assistance. 
 
 
20                                                                                                                                                                       
Reforms needed in both institutions 
Reforms in IMF 
Reform area About Concerns Suggestions 
IMF Quota’s • Each member’s quota 
determines its voting power 
as well as its borrowing 
capacity. 
• Current formula emphasises 
economic size and openness 
and consists of four 
elements: GDP (50%), 
openness (30%), economic 
variability (15%) and 
international reserves (5%). 
• Quotas are denominated in 
Special Drawing Rights 
(SDRs). 
• Quota reviews are mandated 
to be undertaken at intervals 
not exceeding five years. 
• Despite Fourteenth General Review of 
Quotas (2010), European nations still 
retain over 30% of overall 
shareholding, despite collectively 
representing less than 20% of the 
global economy. 
• The voting and quota structure cannot 
be changed without an affirmative 
vote from US since such a vote requires 
a super majority in the IMF, which gives 
US an effective veto. 
• Share of the 
European Union 
countries will have 
to reduce 
significantly. 
• Share of BRICS 
countries would 
have to increase 
significantly. 
o After 2010 
review India’s 
share increased 
to 2.75 % (from 
2.44%), making 
it the 8th 
largest quota 
holding country 
in the IMF 
Article IV 
consultations 
• It is through these 
consultations that IMF is 
expected to keep track of the 
behaviour of the economy of 
the member countries. 
• Under this, IMF holds bilateral 
discussions with its members 
usually every year and their 
staffs prepare a report. 
• Reports are utilised by credit 
rating agencies, impacting the 
fund-raising capacity of 
countries like India. 
• IMF could never pinpoint an incipient 
crisis. It failed, for instance, to see the 
signs of the Asian currency crisis. 
• Developing countries are subjected to 
far more rigorous Article IV 
consultation process and scrutiny than 
the more developed countries, and the 
most curious example is, that in Spain 
and Greece. 
• IMF should focus on 
lower income 
countries and 
support other 
developing 
countries’ market 
funds raising 
activities. 
Governance 
Reforms 
• Board of Governors is the 
highest decision-making body 
of the IMF.  
• Board is advised by two 
ministerial committees, 
the International Monetary 
and Financial Committee 
(IMFC) and the Development 
Committee. 
• Governance structure continues to be 
disproportionately dominated by 
advanced economies. 
• These countries choose the leadership 
and senior management, and so their 
interests dominate, despite the fact 
that the main borrowers are 
developing countries. 
• Many of the economic reforms IMF 
required as conditions for its lending 
(fiscal austerity, trade liberalization 
etc.) have often been 
counterproductive for target 
economies. 
• Need to shift the 
focus from the 
needs of the USA 
and European 
countries to those of 
developing 
countries by 
reforming the voting 
structure. 
 
Reforms in World Bank 
Governance 
related 
• Dominance of US and other members of the G7 in voting and administration do not take into account 
significant changes in the profiles of major economic actors such as India and China. 
• Critics see the World Bank together with the other global economic institutions as an imperialism tool 
which protect the interests and ideas of the western rich countries and expands their dominance in the 
rest of the world. 
 
21                                                                                                                                                                       
Structural 
Adjustment 
Programs 
(SAP) 
• SAPs imposed by both IMF and the World Bank severely affected the developing countries. 
• SAPs enforced privatization of industries, cuts in government spending and imposition of user fees, 
market-based pricing, higher interest rates and trade liberalization. 
o This has resulted in slow growth, higher poverty, lower incomes, increased debt burdens, low human 
development indicators and deteriorating social services in many developing countries. 
Redefining 
purpose 
• World Bank has not been able to redefine its purpose as a lending and developmental institution in light 
of the emergence of non-traditional lenders such as China. 
o Asia Infrastructure Investment Bank (AIIB), established by China, is a multilateral development bank 
that focuses on infrastructure financing, exactly the sort of work the World Bank does. 
Transparency 
in functioning 
• Both the World Bank and IMF are obscure and have little to open to the world in terms of documents and 
information. 
• The reliability of World Bank reports, and its predictions on economic performances have been 
questioned. 
Conclusion 
Deep reforms of the World Bank and IMF are necessary as part of rethinking the current world order, and giving rising 
powers and developing countries a meaningful voice in this institution. 
Failure to adapt to the changing world order could see rising powers going their own way. Such a development would 
signify the emergence of multipolarity without multilateralism and create a climate of conflicting interests and values 
among a diverse group of countries. 
These institutions have an important role to play in the developing world. It could do much more if the western nations 
relaxed its grip on the institution. 
Related News 
A new global economic consensus: Cornwall Consensus 
• In a report, the G7 Economic Resilience Panel demands a radically different relationship between the public and private 
sectors, to create a sustainable, equitable and resilient economy.  
• Since 1989, Washington Consensus (WC) defined the rules of the game for the global economy. The alternative is the 
recently proposed “Cornwall Consensus.”  
o Whereas the Washington Consensus minimized the state’s role in the economy and pushed an aggressive free-market 
agenda of deregulation, privatisation and trade liberalisation. 
? However, having narrowly avoided a global economic crisis twice (first in 2008 and then in 2020 COVID crisis), WC 
has proven to be incapable of responding effectively to economic, ecological, and epidemiological shocks. 
o The Cornwall Consensus (reflecting commitments voiced at the G7 summit in Cornwall, England, last June) would try to 
invert these imperatives. 
• Key features of Cornwall Consensus 
o Accelerate reform of global economic governance to promote the common good. 
o Establish collective mechanisms to monitor, assess and invest in addressing emergent economic, environmental or geo-
political risks;  
o Accelerate investment in the Sustainable Development Goals, promote digital inclusion, eliminate tax evasion, and 
facilitate full access for developing countries to global markets. 
3.2. WIDENING ECONOMIC INEQUALITIES 
Why in News? 
Recently, China started a ‘common prosperity’ program to narrow the widening wealth gap between people with 
stringent measures on how business and society should function. 
About Economic Inequality (or Wealth Gap) 
• Economic inequality is the unequal distribution of income or opportunity in a population or groups of a society. E.g., 
If we talk of income inequality, i.e., how unevenly income is distributed throughout a population, income inequality 
between the richest 10% and poorest 10% in OECD countries increased from 7.2 times of mid-1980s to 9.6 times in 
2013. 
Page 4


 
19                                                                                                                                                                       
About Bretton Woods Conference 
• It was conceived in July 1944, when delegates from forty-four nations 
(met at Bretton Woods, New Hampshire) agreed on a framework for 
international economic cooperation, to be established after the 
Second World War.  
• Aim was to agree on a system of economic order and international 
cooperation that would help countries recover from the devastation 
of the war and foster long-term global growth. 
• This system advocated the adoption of an exchange standard that 
included both gold and foreign exchanges.  
• At its conclusion, the conference attendees produced the Articles of 
Agreement for the International Bank for Reconstruction and 
Development (IBRD) and IMF. 
3. ECONOMY 
3.1. REFORMS IN WORLD BANK AN D INTERNATIONAL MONETARY FUND 
(IMF) 
Why in News? 
Recently, in the backdrop of the 2021 annual meetings of the World Bank Group and IMF, leading experts have 
suggested reforms in these institutions. 
More on News 
• Experts have suggested the need to review 
the role of IMF amid changing dynamics of 
developed and emerging economies 
including India.  
• They also called for completing quota 
reforms and maintaining data integrity 
amid the World Bank discontinuing its 
Ease of Doing Business (EoDB) reports. 
• It was alleged that the EoDB rankings were 
tweaked to inflate the ranks for China (in 
EoDB 2018) and Saudi Arabia, UAE and Azerbaijan (EoDB 2020). 
About IMF and World Bank 
• Founded at the Bretton Woods conference in 1944, the two institutions have complementary missions.  
o Countries must first join the IMF to be eligible to join the World Bank Group. 
• They sit at the heart of intergovernmental cooperation conducting consultations on exchange rate policy; lending to 
countries in financial crisis; providing assistance after conflict and natural disasters; and setting standards, offering 
advice and providing development assistance. 
 
 
20                                                                                                                                                                       
Reforms needed in both institutions 
Reforms in IMF 
Reform area About Concerns Suggestions 
IMF Quota’s • Each member’s quota 
determines its voting power 
as well as its borrowing 
capacity. 
• Current formula emphasises 
economic size and openness 
and consists of four 
elements: GDP (50%), 
openness (30%), economic 
variability (15%) and 
international reserves (5%). 
• Quotas are denominated in 
Special Drawing Rights 
(SDRs). 
• Quota reviews are mandated 
to be undertaken at intervals 
not exceeding five years. 
• Despite Fourteenth General Review of 
Quotas (2010), European nations still 
retain over 30% of overall 
shareholding, despite collectively 
representing less than 20% of the 
global economy. 
• The voting and quota structure cannot 
be changed without an affirmative 
vote from US since such a vote requires 
a super majority in the IMF, which gives 
US an effective veto. 
• Share of the 
European Union 
countries will have 
to reduce 
significantly. 
• Share of BRICS 
countries would 
have to increase 
significantly. 
o After 2010 
review India’s 
share increased 
to 2.75 % (from 
2.44%), making 
it the 8th 
largest quota 
holding country 
in the IMF 
Article IV 
consultations 
• It is through these 
consultations that IMF is 
expected to keep track of the 
behaviour of the economy of 
the member countries. 
• Under this, IMF holds bilateral 
discussions with its members 
usually every year and their 
staffs prepare a report. 
• Reports are utilised by credit 
rating agencies, impacting the 
fund-raising capacity of 
countries like India. 
• IMF could never pinpoint an incipient 
crisis. It failed, for instance, to see the 
signs of the Asian currency crisis. 
• Developing countries are subjected to 
far more rigorous Article IV 
consultation process and scrutiny than 
the more developed countries, and the 
most curious example is, that in Spain 
and Greece. 
• IMF should focus on 
lower income 
countries and 
support other 
developing 
countries’ market 
funds raising 
activities. 
Governance 
Reforms 
• Board of Governors is the 
highest decision-making body 
of the IMF.  
• Board is advised by two 
ministerial committees, 
the International Monetary 
and Financial Committee 
(IMFC) and the Development 
Committee. 
• Governance structure continues to be 
disproportionately dominated by 
advanced economies. 
• These countries choose the leadership 
and senior management, and so their 
interests dominate, despite the fact 
that the main borrowers are 
developing countries. 
• Many of the economic reforms IMF 
required as conditions for its lending 
(fiscal austerity, trade liberalization 
etc.) have often been 
counterproductive for target 
economies. 
• Need to shift the 
focus from the 
needs of the USA 
and European 
countries to those of 
developing 
countries by 
reforming the voting 
structure. 
 
Reforms in World Bank 
Governance 
related 
• Dominance of US and other members of the G7 in voting and administration do not take into account 
significant changes in the profiles of major economic actors such as India and China. 
• Critics see the World Bank together with the other global economic institutions as an imperialism tool 
which protect the interests and ideas of the western rich countries and expands their dominance in the 
rest of the world. 
 
21                                                                                                                                                                       
Structural 
Adjustment 
Programs 
(SAP) 
• SAPs imposed by both IMF and the World Bank severely affected the developing countries. 
• SAPs enforced privatization of industries, cuts in government spending and imposition of user fees, 
market-based pricing, higher interest rates and trade liberalization. 
o This has resulted in slow growth, higher poverty, lower incomes, increased debt burdens, low human 
development indicators and deteriorating social services in many developing countries. 
Redefining 
purpose 
• World Bank has not been able to redefine its purpose as a lending and developmental institution in light 
of the emergence of non-traditional lenders such as China. 
o Asia Infrastructure Investment Bank (AIIB), established by China, is a multilateral development bank 
that focuses on infrastructure financing, exactly the sort of work the World Bank does. 
Transparency 
in functioning 
• Both the World Bank and IMF are obscure and have little to open to the world in terms of documents and 
information. 
• The reliability of World Bank reports, and its predictions on economic performances have been 
questioned. 
Conclusion 
Deep reforms of the World Bank and IMF are necessary as part of rethinking the current world order, and giving rising 
powers and developing countries a meaningful voice in this institution. 
Failure to adapt to the changing world order could see rising powers going their own way. Such a development would 
signify the emergence of multipolarity without multilateralism and create a climate of conflicting interests and values 
among a diverse group of countries. 
These institutions have an important role to play in the developing world. It could do much more if the western nations 
relaxed its grip on the institution. 
Related News 
A new global economic consensus: Cornwall Consensus 
• In a report, the G7 Economic Resilience Panel demands a radically different relationship between the public and private 
sectors, to create a sustainable, equitable and resilient economy.  
• Since 1989, Washington Consensus (WC) defined the rules of the game for the global economy. The alternative is the 
recently proposed “Cornwall Consensus.”  
o Whereas the Washington Consensus minimized the state’s role in the economy and pushed an aggressive free-market 
agenda of deregulation, privatisation and trade liberalisation. 
? However, having narrowly avoided a global economic crisis twice (first in 2008 and then in 2020 COVID crisis), WC 
has proven to be incapable of responding effectively to economic, ecological, and epidemiological shocks. 
o The Cornwall Consensus (reflecting commitments voiced at the G7 summit in Cornwall, England, last June) would try to 
invert these imperatives. 
• Key features of Cornwall Consensus 
o Accelerate reform of global economic governance to promote the common good. 
o Establish collective mechanisms to monitor, assess and invest in addressing emergent economic, environmental or geo-
political risks;  
o Accelerate investment in the Sustainable Development Goals, promote digital inclusion, eliminate tax evasion, and 
facilitate full access for developing countries to global markets. 
3.2. WIDENING ECONOMIC INEQUALITIES 
Why in News? 
Recently, China started a ‘common prosperity’ program to narrow the widening wealth gap between people with 
stringent measures on how business and society should function. 
About Economic Inequality (or Wealth Gap) 
• Economic inequality is the unequal distribution of income or opportunity in a population or groups of a society. E.g., 
If we talk of income inequality, i.e., how unevenly income is distributed throughout a population, income inequality 
between the richest 10% and poorest 10% in OECD countries increased from 7.2 times of mid-1980s to 9.6 times in 
2013. 
 
22                                                                                                                                                                       
Related Reports: 
The Changing Wealth of Nations 2021: World Bank 
• Report tracks wealth of 146 countries between 1995 and 2018, by 
measuring economic value of renewable natural capital, non-renewable 
natural capital, human capital, produced capital, and net foreign assets.  
• Key finding 
o Global wealth grew significantly between 1995 and 2018, but the 
risks faced (from unsustainable exploitation, lack of collective action 
etc.) have also increased. 
? While total wealth has increased everywhere, albeit with a 
widening gap between nations, per capita wealth has not. 
World Inequality Report 2022: The World Inequality Lab 
• Key Findings 
o Top 10% of the global population owns 76% of total household 
wealth and captured 52% of total income in 2021. 
o Bottom 50% of the global population owns just 2% of wealth and 8% 
of income. 
o Women make just a third of global labour incomes, which has seen 
very limited change since 1990. 
o A very moderate wealth tax for global billionaires can generate 1.6% 
of global income. 
? The Gini index, or Gini coefficient, is used as a popular tool to measure income distribution inequalities 
globally. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 
representing perfect inequality. Values over 1 are theoretically possible due to negative income or wealth. 
• Changes in global inequality: Inequality across all individuals in the world declined for the first time in the 1990s 
since the 1820s as the developing world started to grow faster than developed countries. 
o But the pandemic threatens to undo those gains, widening the gap between rich and poor nations once again 
by slowing the growth of developing countries. 
• Inequality within nations: Within 
developing nations, the inequalities 
have increased significantly. E.g., In 
India, the top 10% holds 77% of 
national wealth. In comparison, the 
poorest 67 million Indians saw only 
1% increase in wealth. 
Impact of persistent Economic Inequality 
• Increased Social Polarizations: Due to 
stagnant or reduced social mobilities 
due to widening economic inequality 
the polarization in society increases. 
For India, with an already fractured 
society over religion, region, gender, 
or caste, it adds another fracture 
point. 
? Growing income inequality may 
increase social segmentation. 
Also, the safety and wellbeing of 
vulnerable sections gets 
jeopardized due to lack of quality health and education 
facilities. 
• Economic Risks: High economic inequalities are a drag on long 
term economic growth and equality of opportunities, leading 
to risks of-  
? mass poverty with higher number of young population 
experiencing poverty,  
? reduced state’s ability to protect their poor and vulnerable 
sections, and 
? increased demands for Deglobalization and 
Nationalization. 
• Political Risks: Economic inequalities between people lead to 
marginalization of segments of population in policy decisions, 
ability to question policies and processes. 
• Security Risks: Globally, the economic inequalities lead to 
widening of power gap between nations, enhancing risks of war among nations. E.g., the recent India-China border 
issues. 
• Environment Risk: Economic inequalities lead to inequitable and unjust development with risks of damaging 
wetlands, increased river pollution etc. 
 
 
 
Page 5


 
19                                                                                                                                                                       
About Bretton Woods Conference 
• It was conceived in July 1944, when delegates from forty-four nations 
(met at Bretton Woods, New Hampshire) agreed on a framework for 
international economic cooperation, to be established after the 
Second World War.  
• Aim was to agree on a system of economic order and international 
cooperation that would help countries recover from the devastation 
of the war and foster long-term global growth. 
• This system advocated the adoption of an exchange standard that 
included both gold and foreign exchanges.  
• At its conclusion, the conference attendees produced the Articles of 
Agreement for the International Bank for Reconstruction and 
Development (IBRD) and IMF. 
3. ECONOMY 
3.1. REFORMS IN WORLD BANK AN D INTERNATIONAL MONETARY FUND 
(IMF) 
Why in News? 
Recently, in the backdrop of the 2021 annual meetings of the World Bank Group and IMF, leading experts have 
suggested reforms in these institutions. 
More on News 
• Experts have suggested the need to review 
the role of IMF amid changing dynamics of 
developed and emerging economies 
including India.  
• They also called for completing quota 
reforms and maintaining data integrity 
amid the World Bank discontinuing its 
Ease of Doing Business (EoDB) reports. 
• It was alleged that the EoDB rankings were 
tweaked to inflate the ranks for China (in 
EoDB 2018) and Saudi Arabia, UAE and Azerbaijan (EoDB 2020). 
About IMF and World Bank 
• Founded at the Bretton Woods conference in 1944, the two institutions have complementary missions.  
o Countries must first join the IMF to be eligible to join the World Bank Group. 
• They sit at the heart of intergovernmental cooperation conducting consultations on exchange rate policy; lending to 
countries in financial crisis; providing assistance after conflict and natural disasters; and setting standards, offering 
advice and providing development assistance. 
 
 
20                                                                                                                                                                       
Reforms needed in both institutions 
Reforms in IMF 
Reform area About Concerns Suggestions 
IMF Quota’s • Each member’s quota 
determines its voting power 
as well as its borrowing 
capacity. 
• Current formula emphasises 
economic size and openness 
and consists of four 
elements: GDP (50%), 
openness (30%), economic 
variability (15%) and 
international reserves (5%). 
• Quotas are denominated in 
Special Drawing Rights 
(SDRs). 
• Quota reviews are mandated 
to be undertaken at intervals 
not exceeding five years. 
• Despite Fourteenth General Review of 
Quotas (2010), European nations still 
retain over 30% of overall 
shareholding, despite collectively 
representing less than 20% of the 
global economy. 
• The voting and quota structure cannot 
be changed without an affirmative 
vote from US since such a vote requires 
a super majority in the IMF, which gives 
US an effective veto. 
• Share of the 
European Union 
countries will have 
to reduce 
significantly. 
• Share of BRICS 
countries would 
have to increase 
significantly. 
o After 2010 
review India’s 
share increased 
to 2.75 % (from 
2.44%), making 
it the 8th 
largest quota 
holding country 
in the IMF 
Article IV 
consultations 
• It is through these 
consultations that IMF is 
expected to keep track of the 
behaviour of the economy of 
the member countries. 
• Under this, IMF holds bilateral 
discussions with its members 
usually every year and their 
staffs prepare a report. 
• Reports are utilised by credit 
rating agencies, impacting the 
fund-raising capacity of 
countries like India. 
• IMF could never pinpoint an incipient 
crisis. It failed, for instance, to see the 
signs of the Asian currency crisis. 
• Developing countries are subjected to 
far more rigorous Article IV 
consultation process and scrutiny than 
the more developed countries, and the 
most curious example is, that in Spain 
and Greece. 
• IMF should focus on 
lower income 
countries and 
support other 
developing 
countries’ market 
funds raising 
activities. 
Governance 
Reforms 
• Board of Governors is the 
highest decision-making body 
of the IMF.  
• Board is advised by two 
ministerial committees, 
the International Monetary 
and Financial Committee 
(IMFC) and the Development 
Committee. 
• Governance structure continues to be 
disproportionately dominated by 
advanced economies. 
• These countries choose the leadership 
and senior management, and so their 
interests dominate, despite the fact 
that the main borrowers are 
developing countries. 
• Many of the economic reforms IMF 
required as conditions for its lending 
(fiscal austerity, trade liberalization 
etc.) have often been 
counterproductive for target 
economies. 
• Need to shift the 
focus from the 
needs of the USA 
and European 
countries to those of 
developing 
countries by 
reforming the voting 
structure. 
 
Reforms in World Bank 
Governance 
related 
• Dominance of US and other members of the G7 in voting and administration do not take into account 
significant changes in the profiles of major economic actors such as India and China. 
• Critics see the World Bank together with the other global economic institutions as an imperialism tool 
which protect the interests and ideas of the western rich countries and expands their dominance in the 
rest of the world. 
 
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Structural 
Adjustment 
Programs 
(SAP) 
• SAPs imposed by both IMF and the World Bank severely affected the developing countries. 
• SAPs enforced privatization of industries, cuts in government spending and imposition of user fees, 
market-based pricing, higher interest rates and trade liberalization. 
o This has resulted in slow growth, higher poverty, lower incomes, increased debt burdens, low human 
development indicators and deteriorating social services in many developing countries. 
Redefining 
purpose 
• World Bank has not been able to redefine its purpose as a lending and developmental institution in light 
of the emergence of non-traditional lenders such as China. 
o Asia Infrastructure Investment Bank (AIIB), established by China, is a multilateral development bank 
that focuses on infrastructure financing, exactly the sort of work the World Bank does. 
Transparency 
in functioning 
• Both the World Bank and IMF are obscure and have little to open to the world in terms of documents and 
information. 
• The reliability of World Bank reports, and its predictions on economic performances have been 
questioned. 
Conclusion 
Deep reforms of the World Bank and IMF are necessary as part of rethinking the current world order, and giving rising 
powers and developing countries a meaningful voice in this institution. 
Failure to adapt to the changing world order could see rising powers going their own way. Such a development would 
signify the emergence of multipolarity without multilateralism and create a climate of conflicting interests and values 
among a diverse group of countries. 
These institutions have an important role to play in the developing world. It could do much more if the western nations 
relaxed its grip on the institution. 
Related News 
A new global economic consensus: Cornwall Consensus 
• In a report, the G7 Economic Resilience Panel demands a radically different relationship between the public and private 
sectors, to create a sustainable, equitable and resilient economy.  
• Since 1989, Washington Consensus (WC) defined the rules of the game for the global economy. The alternative is the 
recently proposed “Cornwall Consensus.”  
o Whereas the Washington Consensus minimized the state’s role in the economy and pushed an aggressive free-market 
agenda of deregulation, privatisation and trade liberalisation. 
? However, having narrowly avoided a global economic crisis twice (first in 2008 and then in 2020 COVID crisis), WC 
has proven to be incapable of responding effectively to economic, ecological, and epidemiological shocks. 
o The Cornwall Consensus (reflecting commitments voiced at the G7 summit in Cornwall, England, last June) would try to 
invert these imperatives. 
• Key features of Cornwall Consensus 
o Accelerate reform of global economic governance to promote the common good. 
o Establish collective mechanisms to monitor, assess and invest in addressing emergent economic, environmental or geo-
political risks;  
o Accelerate investment in the Sustainable Development Goals, promote digital inclusion, eliminate tax evasion, and 
facilitate full access for developing countries to global markets. 
3.2. WIDENING ECONOMIC INEQUALITIES 
Why in News? 
Recently, China started a ‘common prosperity’ program to narrow the widening wealth gap between people with 
stringent measures on how business and society should function. 
About Economic Inequality (or Wealth Gap) 
• Economic inequality is the unequal distribution of income or opportunity in a population or groups of a society. E.g., 
If we talk of income inequality, i.e., how unevenly income is distributed throughout a population, income inequality 
between the richest 10% and poorest 10% in OECD countries increased from 7.2 times of mid-1980s to 9.6 times in 
2013. 
 
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Related Reports: 
The Changing Wealth of Nations 2021: World Bank 
• Report tracks wealth of 146 countries between 1995 and 2018, by 
measuring economic value of renewable natural capital, non-renewable 
natural capital, human capital, produced capital, and net foreign assets.  
• Key finding 
o Global wealth grew significantly between 1995 and 2018, but the 
risks faced (from unsustainable exploitation, lack of collective action 
etc.) have also increased. 
? While total wealth has increased everywhere, albeit with a 
widening gap between nations, per capita wealth has not. 
World Inequality Report 2022: The World Inequality Lab 
• Key Findings 
o Top 10% of the global population owns 76% of total household 
wealth and captured 52% of total income in 2021. 
o Bottom 50% of the global population owns just 2% of wealth and 8% 
of income. 
o Women make just a third of global labour incomes, which has seen 
very limited change since 1990. 
o A very moderate wealth tax for global billionaires can generate 1.6% 
of global income. 
? The Gini index, or Gini coefficient, is used as a popular tool to measure income distribution inequalities 
globally. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 
representing perfect inequality. Values over 1 are theoretically possible due to negative income or wealth. 
• Changes in global inequality: Inequality across all individuals in the world declined for the first time in the 1990s 
since the 1820s as the developing world started to grow faster than developed countries. 
o But the pandemic threatens to undo those gains, widening the gap between rich and poor nations once again 
by slowing the growth of developing countries. 
• Inequality within nations: Within 
developing nations, the inequalities 
have increased significantly. E.g., In 
India, the top 10% holds 77% of 
national wealth. In comparison, the 
poorest 67 million Indians saw only 
1% increase in wealth. 
Impact of persistent Economic Inequality 
• Increased Social Polarizations: Due to 
stagnant or reduced social mobilities 
due to widening economic inequality 
the polarization in society increases. 
For India, with an already fractured 
society over religion, region, gender, 
or caste, it adds another fracture 
point. 
? Growing income inequality may 
increase social segmentation. 
Also, the safety and wellbeing of 
vulnerable sections gets 
jeopardized due to lack of quality health and education 
facilities. 
• Economic Risks: High economic inequalities are a drag on long 
term economic growth and equality of opportunities, leading 
to risks of-  
? mass poverty with higher number of young population 
experiencing poverty,  
? reduced state’s ability to protect their poor and vulnerable 
sections, and 
? increased demands for Deglobalization and 
Nationalization. 
• Political Risks: Economic inequalities between people lead to 
marginalization of segments of population in policy decisions, 
ability to question policies and processes. 
• Security Risks: Globally, the economic inequalities lead to 
widening of power gap between nations, enhancing risks of war among nations. E.g., the recent India-China border 
issues. 
• Environment Risk: Economic inequalities lead to inequitable and unjust development with risks of damaging 
wetlands, increased river pollution etc. 
 
 
 
 
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Initiatives to reduce Economic Inequality 
 
Challenges in removing economic inequalities 
• Income differences reflect individual efforts: The recent rise of startups highlight money as an incentive of 
knowledge. State redistributive policies could curb individual incentives, reducing wealth generation in an economy. 
• Income differences are accumulated by generations: The economic inequalities are significant reflections of 
differences between their parents and previous generations. Whether it is the number of children, expenditure on 
education, health etc. varies even within people under the same income group. 
• Historical differences: Usually, high income inequality regions or nations tend to have low intergenerational 
mobility. As these regions fail to offer adequate opportunities for socio-economic mobility.   
• Monetary Resource Constraints: Economic inequalities lead to issues of informal economy, presence of parallel 
economy (Black Money), tax evasions, small tax base etc., limiting public finances and resources available for 
redistributive policies from state. 
• Human Capital Constraints: Higher inequality decreases human capital accumulation as well, it leads to a vicious 
cycle of low income, low productivity, low taxes, and low human capital. 
• Wealth Redistribution Challenges: How to redistribute wealth for best outcome is a challenge. Whether it should 
focus on disparities between top versus bottom or greater focus should be on the middle class to leverage the rise 
in economic activities for higher tax base is a difficult question to answer. 
Way Forward 
Open and fair competition is an essential ingredient for any reform to tackle inequalities and promote equal 
opportunities for long-term sustainability. It becomes even more significant when national security is linked to it. 
Therefore, instead of using pressure we should promote a reward-based approach to equalize outcomes and 
opportunities via. 
• Improved information on inequalities and policy outcomes through high-quality capture of information about 
inequality. It can help not just in sound policies but change perceptions which lead to a divided public opinion. 
• Formulation of policies or introducing reforms based on wider public support through increased awareness among 
people and approval of efforts to tackle inequality of both- outcomes and opportunities. 
? E.g., policies that foster equality of opportunity like incentivizing human capital investments and productive 
effort can help in promotion of greater intergenerational mobility 
• Promote an equitable society where companies are happy to give back rather than just to take or give due to force. 
• Rationalization of subsidies and better targeting of beneficiaries through alternatives like direct benefit transfers 
over existing inefficient mechanisms. 
• Promote Entrepreneurship which leads to Quality Jobs and increasing the Labour Force Participation Rate, 
especially of women.