International Finance Institutions


International finance institutions are aimed at providing financial support to developing economies to enable them to achieve higher levels of growth. Some of these financial institutions include the IMF which is the international monetary fund organisation and these institutions acts as the render of last resort to the member states, the World Bank and the world trade organisation. These are some of the institutions that offer financial aid to developing countries.

Foreign aid offered to developing countries can either be inform of grants or loans, grants are usually monetary aid which need not be paid back while loans are monetary funds given and need to be repaid with interest, further there are two forms of loans, soft loans which are loan advanced in concession rates or given and need to be rapid below market interest rates. Hard loans which are loans given under the prevailing market interest rate level.

Foreign aid given to developing countries is either tied aid or untied aid. Tied aid means that there are conditions while untied aid has no conditions attached to them. This paper however discusses the important and the role that international monetary institutions have played in improving the current states of the developing countries.

International Finance Institutions

Role of International finance institutions

Developing countries are faced with the problem of low levels of economic development, high levels of poverty, low capital accumulation and high population growth. Foreign aid is one way in which the developing countries are able to come out of the current state, aid offered by the international institutions therefore play a major role in the improvement of the economic performance of developing countries.

Developing countries are faced with low levels of savings and therefore low levels of investment, international institutions give aid to the developing countries to help reduce the shortage of domestic saving through the provision of capital and equipment which supplement the capital formation in these countries. Because capital accumulation is one form of achieving higher economic growth, the international institutions give aid to developing countries to encourage capital formation and accumulation in their economies. The diagram below shows the relationship that exists between savings and investment, when there is low savings then there is low investment, and bearing in mind that investment is a source of economic development then the level of economic growth will be low if there is low savings.

Foreign aid is a means by which the less developing countries are able to advance in terms of technology, through aid the developing countries are in a position to achieve technological advancement as they are able to purchase machinery with the funds they receive, the less developed countries are faced by low levels of adopting modern technology which helps increase productivity in an economy, foreign aid however has enabled the improvement of technology adoption by these countries.

The international institutions also offer aid to developing countries for overhead capital development, the developing countries are characterised by low social overhead capital development and funds received aid in the development of these resources which include roads, railways, air strips, dams and other developmental projects, the developing countries do not have enough funds to undertake such expensive developmental projects and therefore

International Finance Institutions

loans and grants are offered to enable development.

The funds offered helps the developing countries to overcome the problem of balance of payment, when funds are offered they aid in improving the export levels of a developing countries and there is an increase in production levels in an economy, as a result there is improved balance of payment for the country.

Most developing countries are faced with the problem of running deficit budgets which are financed by internal public debts, foreign aid helps improve these situations by financing the deficit budgets and also help resolve the problem of internal debts by governments of the day.

Foreign financial institutions also tend to assist the developing countries to tap resources and utilise them, developing countries are faced with the inability to explore and make a breakthrough to discovery of economic resources, the aid provided helps aid the tapping of new resources in the countries which enable the mobilisation of resources to achieve high levels of growth.

Most developing countries depend on agriculture, when funding is given it aids in the increasing of agricultural production and also diversification of agricultural production. The purchase of modern machines and inputs with the funds offered has helped in increasing agricultural production. Most of the exports in developing countries are agricultural products and if the level of agricultural production increases and diversifies then the exports will increase and as a result there will be improved balance of payment.

The poverty vicious cycle is evident in the developing countries; this can be explained using the diagram below:

International Finance Institutions

The international funds offered to the developing countries help in the breaking of the poverty vicious circle which is represented above. Increased capital will improve the capital deficiency problem and as a result the inverse of the circle is true where there will be increased productivity, increased income, increased demand and increased investment.


The foreign aid given to developing countries aids in the mobilisation of resources to achieve higher levels of growth in these countries, this include the improvement of the capital accumulation process, improved social overhead capital, improved infrastructure, technological advancement and solving the balance of payment problem the developing countries face.

Despite the numerous developmental perspectives of foreign aid and grants, the highest levels of funds channelled to the developing countries are usually in terms of loans and which earn interest rates, these funds have contributed to other problems which include the debt problem that the developing countries are facing. High interest rates on the loans that are offered has resulted to the high levels of international debts that the developing countries are facing, for this reason the developing countries are forced to spend high levels of their GDP to service this debts and for this reason it is impossible to achieve high levels of economic development.


International Finance Institutions

Todaro M.P (2004) Economics for a Developing World, McGraw Hill Publishers, New York

Todaro M. P (2002) Economics for Development, McGraw Hill Publishers, New York

Philip Hardwick Et Al (2004) Introduction to Modern Economics, Pearson Education Press, Lond on