success and failures of imf
TRANSCRIPT
EASTERN MEDITTERENEAN
UNIVERSITY
PROJECT ASSIGNMENT FOR
INTERNATIONAL BUSINESS 550
NAME: OLUWABUNMI ROSEMARY AFUWAPE
STUDENT NUMBER: 135115
DEPARTMENT: MARKETING MANAGEMENT
TOPIC: SUCCESSES AND FALILURES OF THE
“IMF”
DATE: 19/12/2013
TABLE OF CONTENT
Definition of “IMF”…………………………….1
History of IMF………………………………….2
Policies of IMF……………………………….....3
SUCCESSES and FAILURES of IMF………..4
Reforms………………………………………….5
Conclusion………………………………………6
References…........................................................7
Definition of IMF
IMF is first of all an acronym but its full meaning is “International Monetary Fund”. Is
an international organization that promotes global monetary stability and monetary exchange, it also
facilitates the balance, growth and expansion of international trade and assists in the establishment of
multilateral agreements, multilateral systems of payments and lend funds to countries with balance of
payment deficits.
HISTORY OF THE “IMF”
International Monetary Fund was established in “1944” under the “Bretton woods
system” and was created formally in “1945” by 29 member countries, just after the World
War II which was due to the reconstruction of the international payment system. Although,
the quota from each member country was more like contributed, through a quota system from
which countries with payment imbalance deficits can borrow money or funds temporarily to
pay countries they owe as well as to stabilize their economy and through this means they
were able to achieve financial stability of member countries, foster global monetary
cooperation, facilitate international trade and reduce poverty thereby improving sustainable
economic growths of other countries, which was there initial goals as to why they were
created and formed in the first place. The quota from each member country contributed was
too much even though it was depended on the economy strength of each member country.
Furthermore, over the years IMF grew stronger due to the “fall of Berlin in 1989”,
the “Soviet Union” also collapsing in 1991, IMF became a “Universal Institution” and
member countries grew from 29 to 172. It was understood before that the role of the IMF was
to oversee the fixed exchange rates arrangement between countries, thus helping countries to
facilitate and national government can manage exchange rates and economic crises in their
own countries, but then it grew more active and policies were made which were guidelines,
as to ensuring an economic recovery in both countries and member countries. However the
funds that were borrowed were to ensure such after the “Great Depression” and “World
War II”, were used to boost the economy of countries and interest rates at a point were not
included so that payment by such countries will be paid easier, but then when capital outcome
became much and massive by middle income earners countries, interest rates were introduced
but at a lower cost and with time when countries couldn’t pay back the loans after the time
constraint given to them had elapsed, IMF gave room for debts to be forgiven and cleared but
still yet ensured that their economy was stable and had recovered.
Again as IMF was to ensure economic stability and monitor financial crises which
were known as “Surveillance”, it gave way still to International cooperation within
countries. So apart from helping countries that were in economic shambles, the policies
which was created by the IMF also helped to reduce poverty and corruption even though
there were not much change made initially as to why the IMF was created in the first place.
Although, due to their help to member countries in maintaining their economic status one can
say that member countries had transitional and massive economy growth after several years
of reforms and technical assistance. As it was their goal to pursue successful liberalization in
international trade and capital flows as it would necessitate the re-evaluation of fiscal policy
and countries will be able to adjust to financial crisis that they will face in future events and
yet be able to stop or reduce such crises, thereby precipitating the sudden increase in their
cash inflows by markets and as such there will not be a contraction in their economic activity,
and both domestic and international markets will not suffer loss, so attention was much given
to countries that their banking sectors had weaker macro-economy stability.
Some of the objectives of the IMF which was considered as a more focused goals and
what their intent was in achieving success in member countries can be seen below:
To promote international economic co-operation,
To reinstate and promote international trade,
Reduce unemployment,
Exchange rate stability; including making financial resources were available to
member countries so that their needing to meet balance of payments was considered
and attended to and its headquarters presently is in Washington, D.C., United States.
Likewise to become a member of the IMF, one has to undergo legal procedures in
their respective countries and upon membership each member country is given a yearly quota
to pay depending on the financial importance (status) relatively to the countries national
income and importance in its currency to world trade and the international market inclusive.
Apart from quotas been paid as seen as a subscription fee, after been accepted and now
countries are now members, the policies laid down by the IMF has to be in accordance with
the member countries economy and financial goals which is to be economically empowered
and stable, thereby increasing their economic growth as well as their voting power although
adherent to that, the population of that member country is not considered but instead on the
member country’s economic power in the world trade and international market.
IMF since 1945 has since grown in their members from “29” to the present year of
2012 to “188”, and it is considered like a “Credit Union” that contributes to the economic
strengths of its members and cuts down control on wages and gives rise to the building of
foreign exchange reserves, payments of deficits, and stabilization of foreign currency. It is
said currently that about “300 billion Dollars” is contributed by its members based on the
quota set, though depending on the member’s economic strength and growth over the years.
These interactions creates a new global power system, where sovereignty is
globalized, taking power and constitutional authority away from nations and giving it to
international bodies, thereby trying to create a more global markets and because of
globalization three institutions were created namely: Global Financial Market, Transitional
Companies and National Governments which was linked to each other in the economic and
alliances which was led by the US. “Titus Alexander argued that this system
institutionalizes global inequality between countries and the Majority World in a form
of Global apartheid in which the IMF is a key pillar” 1(e.wikipedia.org/wiki/international_Monetary_Fund).
So because of these global institutes it now created stimulus for globalization and multilateral
trade for dominance of each state and international affairs.
In addition, the IMF acts as a negotiator on conditions of lending and loans under
what they call “Policy of Conditionality”. This Policy of Conditionality was established in
the 1950s and as such low-income countries could borrow on concessional terms, which
means there are period of time where no interest rates, through the Extended Credit Facility
(ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF) give member
countries in dire need of financial and economic help. Non-concessional loans, which include
interest rates, that are provided mainly through Stand-By Arrangements (SBA), the Flexible
Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund
Facility which the IMF provides, is more like an emergency assistance via the newly
introduced Rapid Financing Instrument (RFI) to all its members facing urgent balance of
payments needs.
In regards to the above, there was a data dissemination standard process that began in
1995 and with the view of guiding IMF member countries to disseminate in their economic
and financial data to the public, the International Monetary and Financial Committee (IMFC)
endorsed these guidelines for the dissemination standards which resulted in the splitting into
two tiers:
a. The General Data Dissemination System (GDDS)
b. The Special Data Dissemination Standard (SDDS).
The International Monetary Fund executive board approved the SDDS and GDDS in
1996 and 1997 respectively had subsequent amendments which were published in a revised
Guide to the General Data Dissemination System. This system was aimed primarily at
statisticians and aims to improve many aspects of statistical systems in a country. It then
became part of the goals for the World Bank Millennium Development. As the primary
objective of the GDDS is to encourage the IMF member countries to build a framework to
improve data quality and increase statistical capacity building. In an attempt to build a
framework, a country can evaluate statistical needs, set priorities so to improve the
timeliness, transparency, reliability and accessibility of financial and economic data.
Policies of the International Monetary Fund
The main policies that were created initially by the IMF to guide and see to the success of
each member countries economic growth yet to the benefit upon membership and world trade
were:
To encourage monetary cooperation, which then provides countries to be equipped
and give access to consultation and solutions to both domestic and international
monetary crises.
To promote economic growth, stability and increase in their financial inflows and
market output in the international market, giving rise to stable exchange rates and
arrangement, so as to avoid depreciation in competitive exchange within member
countries.
To promote multilateral agreement and system of payments between member
countries so as to eliminate foreign exchange restrictions thereby increasing world
trade, expansion of international trade, increase in employments and the productivity
of such member countries are resourceful to themselves and their economic policy are
as such able to withstand crises that might arise in future events.
To make available temporary funds and loans to member countries, thus creating
adequate opportunities to adjust their balance of payment without resulting or
suffering from poverty and economic instability and thereby causing a reactive
change of disequilibrium in their economic system.
To give rights as to how and what quotas are assigned to each member countries after
upon membership and subscription of such quotas will be determined by board of
governors which will not be more than five years of general review as to appropriate
adjustment of such quotas of each member concerned.
To ensure a sustainable economic growth, exchange of goods and services on the
international market are favorable and acceptable so as to encourage continuity in the
development of each member country and exchange rates and arrangements are
orderly and monetary system are not disrupted in any way, so that the exchange
policies are no longer compactible and balance of payment become effective and
adjustable to unfairness.
Each member countries have right to borrow or lend and pay any charge obligated to
them, provided they give sufficient reasons as to what such funds will be used for and
to what benefit their economic status change will be after such funds or loans
specified was given and to the purposed it was used which must fall under such
guidelines or policies of the IMF even though at one point “Special Drawing Rights”
are given by the IMF when payments of such loans have past and was unpaid for will
be cancelled and charges dropped as well.
Successes of the IMF
In success it shows that IMF has the power to change and improve but still yet the successes
taken into consideration are:
Mexico Case: In the 80’s Mexico suffered financial crises but then towards the 90’s
they started to pick up and had financial surpluses because investors were confident enough
to invest, believing that the land had great opportunities for investments, however because of
inflation and “Pesos’” becoming a fixed denomination, the Mexican currency became
uncompetitive and because of this fact the Peso’s rate of inflation was brought to the US
inflation thereby devaluing the Peso and attracting more foreign investment. In 1994 the
foreign reserves of the Mexican kept falling and nothing was done because at that time it
envisage to be just a temporary setback and in this effect the Mexican government went on,
in issuing bonds, to have funds paid for imports even though they didn’t have the capacity to
repay the loans and this brought instability to the country but at the end Peso was devalued
and bonds were converted to foreign currencies, which in turn worsened everything and
Mexico suffered from balance of payment crisis, bring about the IMF to come to their rescue
(Peso Package) and this approach was proven to be successful for Mexico because it helped
to stop the liquidating of their assets and trade became surplus and as a result exports
increased and imports reduced.
Finally, Mexico was able to repay the loans on time and with time a healthy economy
evolved.
Kenya’s Case: Here Kenya been beneficiaries of the IMF and IMF showing the “the
will power of change” though due to Kenya’s internal government using of the funds for
unnecessary projects and thereby wasting resources, simply shows how non-chalant their
government’s attitude was towards the wellbeing of their people and because of this,
corruption of power was predominant in Kenya, which now resulted to IMF abruptly
stopping the lending or borrowing of money to Kenyan’s government, which took it turns and
the only way out was for Kenya to make power change within, so a new government change
was created and its ways of corruption was reduced resulting to an economy change, and
Kenya’s economy became better and more productive.
India’s Case: Though India was reluctant at first in allowing the IMF to help, it still
felt the need to be helped as its was suffering from instability economically and IMF felt that
the first the government as was with Kenya had to clean up its political shreds and corruption
so as to achieve a more economical stability and growth and as a result the financial distress
that India suffer will come to an end which it did but after the change in power and
government. Now India is one of the leading markets in the world today after China and with
its much more productive state, it is now the leading country in the exporting market for their
products in World Trade markets its purchased and seen in various ways efficient and quality,
therefore IMF can boast of been successful to the contribution of India’s economy success
story.
Asian’s Case: It was clearly understood that due to both the domestic and on the
International scale of things did Asia suffer particularly because of their communist way of
life along sides with investors seeing the country as a weak ground for investing and with the
“pegged exchange rates” in some case unsustainable, the response to monetary policies
became an overheating issue which gave to more excessive borrowing and lending of foreign
exchange, a risk to both financial and corporate sectors.
From the limited availability of data and no transparency, a limited and more realistic
approach on the economy, worsen the crises thereby fueling the reluctance of foreign
creditors to roll over in on short-term bases which led to pressure on the currency as well as
the stock markets. However despite the pegged exchange rate of yen to dollar and dollar
much inflated over the yen, resulted to a great loss for it gave way to less competition with
other countries, the IMF strongly gave financial support even though uncertainties persisted
and the adjustment transition in making the economy better and the working out reforms of it
financial status and policies now made the economy of Asia today; the world leading Market
in the world. Now we can say that the rapid change in Asian countries and a stronger market
economy growth is prove to the success of the IMF.
Failures of the IMF
It was assumed that the Congress will reach a compromise, through the votes and will
agree to re-open the government into raising the debt ceiling even though it was discovered
by the IMF researchers. The reason was for this, that the US economic growth for 2013, at
the rate of 1.6%, was slow. It was the same experience in India, Mexico and Russia with
growth rate of 1.8%, 1.7% and 1.5% respectively. Closing or shutting the government down
was bad, but it will be worse if the debt ceiling is not raised. This could seriously damage the
world economy, as the developed countries are seen to be taking over the market and thereby
developing countries don’t stand a chance with the growing and rapid economic state.
As we know that IMF is an Institutions that helps in giving loans to countries to foster
and help in building their economic status the conditions of loans of the IMF to both
countries and member countries have made it impossible for countries in a way to upgrade
their financial status, how? Because the loan conditions implemented are based on some
economic policies which are:
I. Structural Adjustment like Privatization of government or public sectors, to become
private sectors, deregulations and bureaucracy.
II. Allowing failing firms to go bankrupt
III. Higher interest rates to stabilize the currency
IV. Reducing the government from borrowing thereby increasing taxation and reduce
spending
The capital market liberalization as the IMF pressures countries that petition for IMF
loans to open their markets to outside investment capital rather than helping matters, they
worsen the situation, how? By destabilizes the economy of the country as well as the global
economy and paving way for investors to invest in huge sums to a country that only pulls
investments at a moment’s notice, causing acute economic crises. In Latin America, Stiglitz
argues that many of the ideas of the “Washington Consensus” were based on the experience
with Latin America and the economic growth in these countries had not yet been sustained,
therefore governments had to let budgets run out of control and loose its monetary policy
which had now led to rampant inflation and the belief of the Washington Consensus was that
this had happened as a result of excessive government intervention in the economy. So, if
government intervention was the problem, then government intervention should be limited
but it wasn’t and the policies that were supposedly adopted by these countries made their
economy imbalanced and unproductive.
The Washington Consensus encouraged policies such as capital market liberalization and
Stiglitz notes that even in this approach which was appropriate for some Latin American
countries, it did not make sense to apply this policy blindly to other countries that had very
different economic situation and crises and as such made this kind of policy made matters
much worse.
Furthermore Stiglitz notes that even though the IMF is a public institution, funded by
money from taxpayers around the world, it is not held accountable to the interests of these
taxpayers which clearly identifies the problem of governance as one of the prime
“underlying factors” and problems with the IMF for taxation without representation. Stiglitz
says that the IMF reports to ministers of finance and central banks around the world that are
in many ways insulated from the concerns of the IMF’s ultimate constituency: the global
populace as the control of the IMF is accomplished through a complicated set of voting
arrangements based on the larger part of the economic influence of the member countries,
especially the U.S. has effective veto power over IMF decisions.
The IMF and later, the World Bank as it was reduced to a “junior partner” with the IMF
was driven by the collective will of the G-7, the governments of the seven most advanced
industrial countries, open to a democratic debate over IMF policies and procedures would
best seen as a threat to the influence of these industrial giants, which would clearly not be in
their best interests so say Stiglitz. The current drivers of IMF policies, see it in their best
interest to avoid democratic accountability and dialogues and that the IMF is dominated not
merely by wealthy, industrialized nations, but more narrowly by the commercial and financial
interests within those countries and that the fact that the IMF draws on public funds to
forward the interests of a selected few, the no effective voice in the IMF’s policies, amounts
borrowed or given out to member countries, in his words was termed as “taxation without
representation”.
There are several Case Studies and examples that one can see as been the failure of the
IMF and they are:
Russian Case: After the fall of communism, Russia was in serious need of the IMF
and yet seven consecutive years of bailing them out seemed futile, for many saw the
strategy used by the IMF as not working out, because they kept making short term
loan, renegotiating and payments that were postponed even complicated matters even
worse and with German’s support and the Clinton’s administration, put IMF on
pressure that the IMF bailout now became political instead of ensuring and
safeguarding Russia’s economy. The IMF’s intervention was questionable as to what
the use of funds became, because of collective security was now at stake and IMF
therefore announced their suspension in helping out because Russia was now
producing the state of art in nuclear powered warfare submarines and this was seen by
the IMF as a less reason to help out and in adequacy of policies, although they
resumed helping out again and the funds given were used to complete the project,
Russians had started no doubt a questionable and tricky approach as to the way IMF
could not deal with the issues of what the funds they gave were used for, because it
was above them.
Greece Case: In 2012 the Greeks’ unemployment rate had increased by 25% which is
higher than the IMF projection of 15% and by 2013 it increased to 27% and this rate
is even higher in the average Eurozone more also noticeable failures in the 30% bank
loss deposits resulting from delay of the restructuring of the nation’s debt, thereby
deepening and worsening the recession of Greece and IMF was noted to have taken
more slice of blame in the Greece’s financial conditions.
Reforms
The IMF made some moves to improve the standard of the measures through
Structural adjustments. Some of the moves brought about negative results and some,
positives.
One of the moves is making the interest rate of member countries comparable to other
countries, in real terms by allowing interest rates to increase to a level comparable to other
countries. This would help them pay external debt and increase their foreign exchange.
Another move they made in the reforms was making sure that the exports of member
countries get to a competitive stage. This, they said, could be achieved by devaluating the
currencies. This move wasn’t so favorable for many country members.
The third attempt was to kick against inflation, by reducing the rate at which money supply
was growing. Also, so as not to push off borrowers from the funds of the capital market, they
tried to curb government budget deficit.
Conclusion
In conclusion I would say in my own opinion that the IMF can improve in their
reforms as well as modify their policies and not forget what their initial policies were and
why they were created, for what purpose, more also that the IMF as Sachs 2005, argues in
The End of Poverty: "international institutions like the International Monetary Fund
(IMF) and the World Bank have the brightest lead in advising poor and developing
countries on how to break loose from poverty, but the problem causing the hindrance is the
development economics". It is in the development that economics needs the reform, not the
IMF. He furthermore noted that the IMF loan conditions needs to be conjoined with other
reforms such as trade reform, productive reforms, which already going is on in developed
nations, debt cancellation, and increased financial assistance for investments in basic
infrastructure to be effective. Finally, IMF loan conditions standing alone cannot bring about
change; they need to conjoin with other applicable reforms to member countries, to create
sufficient, efficient and effective way of stabilizing economic growth were deemed necessary
so that economic growth in such member countries can be seen visible.
References
http://www.vanguardngr.com/2013/10/imf-predicts-higher-global-economic-growth-2014/
http://rt.com/business/notable-failures-bailout-greek-302/
Sachs, Jeffrey (2005). The End of Poverty: Economic Possibilities for Our Time Penguin
Press HC ISBN 1-59420-045-9
http://www.imf.org/external/
http://www.economicshelp.org/blog/glossary/imf-criticism/
http://www.imf.org/external/about/histdebt.htm
http://www.ieo-imf.org/external/pubs/ft/fandd/1998/06/pdf/imfstaff.pdf
http://www.jstor.org/discover/10.2307/3012499?
uid=3739192&uid=2&uid=4&sid=21103271287643
http://www.pbs.org/newshour/rundown/2013/10/imf-projects-slowed-growth-for-global-
economy.html