Difference between the IMF and the World Bank

Teaching external debt and the role of IMF and World Bank which is part of Unit 4 of CIE A2 syllabus. This is area where students get confused as to the role of each organisation.

The International Monetary Fund (IMF) (http://www.imf.org) promotes international financial stability of the world’s monetary system. Lends to countries with balance of payments problems and aims to promote development by restoring short run stability and by supporting long term adjustment and reform

The World Bank (http://www.worldbank.org) promotes institutional, structural and social development by providing low interest loans and technical assistance for domestic investment projects. It’s goal is to reduce poverty by offering assistance to middle-income and low-income countries. It aims to help countries meet the UN Millennium Development Goals.

Below is a useful video from CNBC on the differences.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on developing economies and the IMF/World Bank. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Global poverty rates down but challenges still remain

The world attained the first Millennium Development Goal target—to cut the 1990 poverty rate in half by 2015—five years ahead of schedule, in 2010. Despite the progress made in reducing poverty, the number of people living in extreme poverty globally remains unacceptably high. And given global growth forecasts, poverty reduction may not be fast enough to reach the target of ending extreme poverty by 2030.

According to the most recent estimates:

  • 1990 – 36% of the world’s population lived on less than US$1.90 a day
  • 2013 – 11 % of the world’s population lived on less than US$1.90 a day
  • 2015 – 10 % of the world’s population lived on less than US$1.90 a day

Nearly 1.1 billion fewer people are living in extreme poverty than in 1990. In 2015, 736 million people lived on less than $1.90 a day, down from 1.85 billion in 1990.

While poverty rates have declined in all regions, progress has been uneven:

  • East Asia and Pacific (47 million extreme poor)
  • Europe and Central Asia (7 million) have reduced extreme poverty to below 3 percent, achieving the 2030 target.
  • More than half of the extreme poor live in Sub-Saharan Africa. In fact, the number of poor in the region increased by 9 million, with 413 million people living on less than US$1.90 a day in 2015, more than all the other regions combined. If the trend continues, by 2030, nearly 9 out of 10 extreme poor will be in Sub-Saharan Africa.
  • The majority of the global poor live in rural areas, are poorly educated, employed in the agricultural sector, and under 18 years of age.


One of the main challenges is that it is becoming very difficult too reach those that are in extreme poverty as they often live in countries that are remote or have internal strife amongst its population. Furthermore access to good schools, health care, electricity, safe water, and other critical services remains elusive for many people, often determined by socioeconomic status, gender, ethnicity, and geography.

Even those that seem to be able to move out of poverty can only do it for a certain period of time as economic shocks, food insecurity and climate change can be their undoing and revert them back into poverty.


The book ‘The End of Poverty: How we can make it happen in our lifetime’ by Jeffrey Sachs (2005) looks policies to overcome poverty. Although it is an old publication it does have some valid points. However what is imperative is that a one-size fits all policy doesn’t work as all countries have some unique variables that requires a customised approach.

At the most basic level, the key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development. The development ladder hovers overhead, and the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung. The extreme poor lack six major kinds of capital:

  • Human capital: health, nutrition, and skills needed for each person to be economically productive
  • Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services
  • Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical in-puts into business productivity
  • Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society
  • Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor
  • Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital

Source: The Economist – Espresso

Interview with Shamubeel Eaqub – Generation Rent

bwbtextcoverwebhighresgeneration-rentawBelow is a link to an interview with Shamubeel Eaqub on National Radio’s Sunday Morning programme. NZ Institute of Economic Research principal economist on the the country’s evolving rental market, the basis of his new book ‘Generation Rent – Rethinking New Zealand’s Priorities’.

House prices may boom or bust but the long-term trend is clear: for more New Zealanders than ever, home ownership is out of reach. Incomes simply have not kept pace with skyrocketing property prices.‘Generation Rent’ calls into question priorities at the heart of New Zealand’s identity.

In this BWB Text, Shamubeel and Selena Eaqub investigate how we ended up here, and what can be done to ensure all New Zealanders – home owners and renters alike – live in affordable and secure housing.

RNZ Interview – Shamubeel Eaqub

Welfare benefits the wealthy – #GlobalPOV Project

It is time for America to reconsider who is dependent on welfare. Poverty is not only the lack of income and wealth but also the poverty of power. A key part of the poverty of power is to be defined as dependent: dependent on charity, handouts, welfare. Yet, it is the wealthy, not the poor, who are dependent on government subsidies. To transform dependency into self-determination is the work of poor people’s movements. To demonstrate the dependency of the wealthy on welfare as well as on the labour of the poor must be our collective work.

The #GlobalPOV Project is a program of the Global Poverty and Practice (GPP) Minor. Based at the Blum Center for Developing Economies, University of California, Berkeley, the GPP Minor creates new ways of thinking about poverty, inequality and undertaking poverty action.

Planet Money makes a T-Shirt

From National Public Radio (NPR) in the US. Part of their website has a section called “Planet Money – The Economy Explained”. In the clip below they talk about the whole process of making a T shirt.

The Planet Money men’s T-shirt was made in Bangladesh, by workers who make about $3 a day, with overtime. The Planet Money women’s T-shirt was made in Colombia, by workers who make roughly $13 a day, without overtime. The wages in both places are remarkably low by U.S. standards. But the gap between them is huge. Workers in Colombia make more than four times what their counterparts make in Bangladesh. In our reporting, we saw that the workers in Colombia have a much higher standard of living than the workers in Bangladesh.

You can view the Interactive documentary by clicking the link below:

Planet Money Makes A T-Shirt – The world behind a simple shirt, in five chapters.

US Inequality – a concern for all

PBS Newshour Economics correspondent Paul Solman talks to Robert Reich about “Inequality for All,” a documentary about the former labour secretary’s personal crusade to explain to Americans why everyone should care about the nation’s growing economic disparity and divisiveness. Here is part of the interview in which Reich states what is bad about inequality.

Well it’s a bad thing in two regards, even if you don’t particularly worry about issues of fairness or public morality. It’s bad, number one, because no economy can continue to function when the vast middle class and everybody else don’t have enough purchasing power to buy what the economy is capable of producing without going deeper and deeper into debt. Seventy percent of the entire economy is basically consumer spending. And if consumers don’t have the wherewithal to spend because all the money’s going to the top, and the people at the top only spend a very small fraction of what they earn, then the economy is almost inevitably destined to slow.

What does Poverty mean in the 21st Century?

Here is a trailer to a new series from the BBC World Debate programme on poverty.

Why is that despite all our advancements, technological progress and increasing wealth, the twin scourges of extreme poverty and inequality still blight the lives of vast numbers of people in the 21st Century?

Joined by the former British prime minister Tony Blair, Oby Ezekwesili, a former Nigerian government minister, Vandana Shiva, a scientist and grassroots activist from India and the South African author Moeletsi Mbeki, Zeinab Badawi hosts the BBC World Debate from Johannesburg.

There are 5 parts to the series which cover the following:

Part 1 The causes of poverty
Part 2 The need for opportunity
Part 3 The prospects for Africa
Part 4 The importance of agriculture
Part 5 Possible solutions

Click the link below to go to the BBC webpage and view the debate.

BBC World Debate – Why Poverty?

A2 – Development Economics: District Economic Development Strategies

Here is the first of a four part documentary that showcases the District Economic Development Strategies for the cities of Multan and Bahawalpur in Pakistan, developed by the USAID FIRMS Project. It highlights the many sectors identified by the strategies and presents a roadmap which, when implemented, can open up new avenues of economic growth and prosperity for these districts. While bringing out the crux of the strategies — the tremendous potential of the region — the documentary touches upon each individual sector, highlighting its advantages. In doing so, it reveals the untapped potential for economic opportunities and presents the two districts as being poised on the brink of a journey to progress and development, where the possibilities are endless and the destinations, unlimited!

A2 – Developing Economies and the Global Financial Crisis.

Just completing the Unit 6 of the A2 course and updating my notes on the current issue of debt hangover from the Global Financial Crisis. The FT recently reported that there are worrying signs of private sector credit in emerging economies.

Turkey Brazil Russia – private sector credit in year to April 2012 up 20%.
China – private sector credit in year to April 2012 up 15%.
Poland – private sector credit to GDP 49%

This is seen as inevitable if an economy is going to grow but there needs to be investment in capital which will ultimately increase a country’s productive capacity and long-term development. However a lot of this borrowing has gone into consumer goods rather than capital infrastructure projects. This is especially worrying in Brazil as the transport system needs a major overhaul if it is going to cope with the demands of the Olympic Games in 2016. According to the FT misdirected credit can produce two damaging consequences:

1. When too much money is directed into the housing market bubbles can occur – subprime for instance and more recently China.
2. Poor credit allocation can harm economic growth, both in the short and in the long term.

Although China and Brazil has loosened monetary policy this needs to be accompanied by a process that ensures it is directed to where it is most needed. Jeffrey Sachs in his book “End of Poverty” talked about how a country needs six major kinds of capital:

1. Human capital: health, nutrition, and skills needed for each person to be economically productive

2. Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services

3. Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical in-puts into business productivity

4. Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society

5. Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor

6. Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital

Figure 1 shows the basic mechanics of saving, capital accumulation, and growth. We start on the left-hand side with a typical household. The household divides its income into consumption, taxation, and household savings. The government, in turn, divides its tax revenues into current spending and government investment. The economy’s capital stock is raised by both household savings and by government investment. A higher capital stock leads to economic growth, which in turn raises household income through the feedback arrow from growth to income. We show in the figure that population growth and depreciation also negatively affect the accumulation of capital. In a “normal” economy, things proceed smoothly toward rising incomes, as household savings and government investments are able to keep ahead of depreciation and population growth.
Source: The End of Poverty: How we can make it happen in our lifetime by Jeffrey Sachs (2005).

Measuring Poverty

I got this video on Poverty from Ben White on Twitter – very useful for Unit 6 of the Cambridge International A2 Economics course. Produced by the World Bank it asks the following questions:
Do you wonder how we measure poverty?
Do you know how we do it, but have a hard time putting it into simple words?

This 3 minute video explains the methodology that we used, how it works and why it is important. Click here to go to their website.

Top 1% to blame for the financial crisis?

Former IMF Chief Economist and the person who saw the financial crisis coming, Raghuram Rajan, has argued that inequality caused the crisis and the US government helped in the process. Since the days of the Reagan Administration wages of the working class American have been falling behind. Reagan, as with Thatcher in the UK, introduced pro market reforms in the 1980’s but recent presidents have addressed the problem of stagnant wages by making access to mortgage finance a lot easier.

In 2007 – 23.5% of all American income went to the top 1% of earners – the highest percentage since 1929. Research has shown that the behaviour of the richest 20% has affected the spending of the bottom 80% – the more the rich spend the more the lower incomes want to keep up with them. It is commonly know as ‘trickle-down consumption’.

Less equitable distribution of wealth can boost demand for government borrowing to provide for the lower income. In the last decade this borrowing would have occurred with financial globalisation that allowed many governments to rack up debt cheaply. It seems that the ease of credit drives inequality.

2010 – US Poverty 15.1%

Many thanks to A2 student Jay Kim for this article in the Huffington Post. It shows that 42.6 million Americans (15.1%) are now below the poverty line. The official definition of poverty in the country is when a family of 4 earns less than $22,314 a year. An interesting point from the article was the difference between races. The median white household income was cited as $113,000; black household income $5700; while Latinos were recorded $6300. The article states that the wealth gap exists mainly because much of white household wealth is inherited.

Ultimately the economic downturn over since 2008 has caused people of all races and ethnicities to lose wealth because of a loss or reduction in the value of their homes etc. The huge contrast in median household wealth also help explain why black and Latino poverty rates are more than two times higher than that of white families.

Click here for Huffingotn Post article.

Policies for Developing Economies

On the final stretch with my A2 class and doing some last minute revision before they go on exam leave. Here is something we covered in Developing Economies which might be of interest – there is usually an essay question on this topic.

The solution is shown in the figure below, where foreign help, in the form of official development assistance (ODA), helps to jump-start the process of capital accumulation, economic growth, and rising household incomes. The foreign aid feeds into three channels. A little bit goes directly to households, mainly for humanitarian emergencies such as food aid in the midst of a drought. Much more goes directly to the budget to finance public investments, and some is also directed toward private businesses (for example, farmers) through microfinance programs and other schemes in which external assistance directly finances private small businesses and farm improvements. If the foreign assistance is substantial enough, and lasts long enough, the capital stock rises sufficiently to lift households above subsistence. At that point, the poverty trap is broken, and the figure comes into its own. Growth becomes self-sustaining through household savings and public investments supported by taxation of households. In this sense, foreign assistance is not a welfare handout, but is actually an investment that breaks the poverty trap once and for all. Adapted from Jeff Sachs – The End of Poverty.

The Role of ODA in Breaking the Poverty Trap

Hans Rosling – TED Talks

From the TED site – Hans Rosling gives his usual passionate presentation using some great statistics on the progress of the MDG’s. Watch out for him ripping out a page from the UN Report on “Levels and Trends in Child Mortality”. For some reason it stated that Singapore, South Korea, Qatar as developing countries. However, there has been great progress in child mortality rates – see his last graphic.

Poor People or Poor Countries?

Just completed 3 enjoyable days of A2 revision at UNITEC. Today we looked at Developing Economies which is major topic in the course. It was very apt that on the Tutor2u blog and in this week’s Economist there was an article on the presumption that poor people live in poor countries. In 1990 over 90% of the world’s poor lived in the poorest countries. However, according to Andy Sumner, 75% of the 1.3 billion people that live below the $1.25 a day poverty line now live in middle-income countries and only 25% live in the poorest nations of which the majority are in Africa. The World Bank produced the following statistics showing the success of developing countries:

1998 – 61 countries out of 203 were classified as low-income*
2009 – 39 countries out of 220 were classified as low-income

*annual income per head less than $760, in money of that era

Therefore, should aid go to poor people or poor countries? As most countries charities tend to support poorer countries it seems that to neglect aid to middle-income countries is missing the point of reducing poverty. Click here to read the full article.

US Poverty – 1960’s levels

The number of people in the US who are in poverty is approaching the levels of the 1960’s. The anticipated poverty rate is expected to increase to 15% from 13.2% which means that 45 million people in the US were poor – this is more than 1 in 7.

The most common measure of poverty in the United States is the “poverty threshold” set by the U.S. government. This measure recognizes poverty as a lack of those goods and services commonly taken for granted by members of mainstream society. The official threshold is adjusted for inflation using the consumer price index. In 2008, the poverty level stood at US$22,025 (NZ$30,174) for a family of four, based on an official government calculation that includes only cash income before tax deductions. Wikipedia

Analysts suggest that the upcoming report on poverty will show:

* Child poverty increased from 19 per cent to more than 20 per cent.
* Blacks and Latinos were disproportionately hit, based on their higher rates of unemployment.
* Metropolitan areas that posted the largest gains in poverty included Modesto, California; Detroit; Cape Coral-Fort Myers, Florida; Los Angeles and Las Vegas.

From the graph below:
Highest poverty rate – 1959 = 22.4%
Lowest poverty rate – 1973 = 11.1%*

*this was as a consequence of President Johnson’s war on poverty.