The IMF ( International Monetary Fund) and its Implications in Argentina

First and foremost I will define the IMF ( International Monetary Fund) as being an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The IMF was founded more than 60 years ago toward the end of World War II .The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed. Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF's main purposeto provide the global public good of financial stabilityis the same today as it was when the organization was established.

1. What does it do? Overall, the IMFs main aim is to help member governments take advantage of the opportunities and manage the challenges- posed by globalization and economic development more generally. It is doing this by tracking global economic trends and performance, alerting its member countries when it sees a problem on the horizon, providing a forum for policy dialogue and passing on know-how to governments on how to tackle economic difficulties. Besides all listed above, it provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. Another very important task of the IMF is helping a country benefit from globalization while avoiding potential downsides, as globalization affects countries policy choices in many areas, including labor, trade, and tax policies being marked by massive movements of capital and abrupt shifts in comparative advantage. The IMF supports its membership by providing policy advice to governments and central banks based on analysis of economic trends and cross-country experiences; research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets; loans to help countries overcome economic difficulties; concessional loans to help fight poverty in developing countries; and

technical assistance and training to help countries improve the management of their economies.

2. How can countries adhere to the IMF? The IMF currently has a near-global membership of 188 countries. In order to adhere, a country must apply and then be accepted by a majority of the existing members. In April 2012, Republic of South Sudan joined the IMF, becoming the institution's 188th member. Upon joining, each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy (the larger a country's economy in terms of output and the larger and more variable its trade, the larger its quota tends to be. For example, the world's biggest economy, the United States, has the largest quota in the IMF). A member country's quota defines its financial and organizational relationship with the IMF, including: Subscriptions

Countries pay 25 percent of their quota subscriptions in SDRs (= an international type of monetary reserve currency, created by the IMF in 1969, which operates as a supplement to the existing reserves of member countries) or major currencies, such as U.S. dollars, euros, pounds sterling, or Japanese yen. They pay the remaining 75 percent in their own currencies. The IMF's lending resources come mainly from the money that countries pay as these quota subscriptions when they become members. Voting power

The quota largely determines a member's voting power in IMF decisions. Each IMF member's votes are comprised of basic votes plus one additional vote for each SDR 100,000 of quota. The number of basic votes attributed to each member is calculated as 5.502 percent of total votes. Accordingly, the United States has 421,965 votes (16.76 percent of the total), and Tuvalu has 759 votes (0.03 percent of the total). Acces to financing

The amount of financing a member country can obtain from the IMF is based on its quota. For instance, under Stand-By and Extended Arrangements, which are types of loans, a member country can borrow up to 200 percent of its quota annually and 600 percent cumulatively.

3. Collaborations The IMF collaborates with the World Bank, regional development banks, the World Trade Organization (WTO), UN agencies, and other international bodies. While all of these organizations are involved in global economic issues, each has its own unique areas of responsibility and specialization. The IMF also works closely with the Group of Twenty (G-20) industrialized and emerging market economies and interacts with think tanks, civil society, and the media on a daily basis. a) World Bank The IMF and the World Bank are different, but complement each other's work. While the IMF's focus is chiefly on macroeconomic and financial sector issues, the World Bank is concerned mainly with longer-term development and poverty reduction. Its loans finance infrastructure projects, the reform of particular sectors of the economy, and broader structural reforms. IMF loans assist countries in continuing to pay for imports, stabilizing their currencies, and restoring conditions for strong economic growth. Countries must join the IMF to be eligible for World Bank membership. Given the World Bank's focus on antipoverty issues, the IMF collaborates closely with the Bank in the area of poverty reduction. Other areas of collaboration include assessments of member countries' financial sectors, development of standards and codes, and improvement of the quality, availability, and coverage of data on external debt. b) Cooperating on financial stability, banking supervision, and trade The IMF is a member of the Switzerland-based Financial Stability Board, which brings together government officials responsible for financial stability in the major international financial centers, international regulatory and supervisory bodies, committees of central bank experts, and international financial institutions. It also works with standard-setting bodies such as the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors. The IMF has observer status at formal meetings of the World Trade Organization (WTO). The IMF's determination of a country's balance of payments situation plays a considerable part in the WTO's assessment of trade restrictions applied in the event of balances of payments difficulties. The IMF is also involved in the WTO-led Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries, and IMF staff contribute to the work of the WTO Working Group on Trade, Debt, and Finance. a. United Nations The IMF has a Special Representative to the United Nations, located at the UN Headquarters in New York. Collaboration between the IMF and the UN covers several areas of

mutual interest, including cooperation on tax issues and statistical services of the two organizations, as well as reciprocal attendance and participation at regular meetings and specific conferences and events. In recent years, the IMF has worked with the International Labor Office on issues related to employment, as well as social protection floors; the UN Children's Fund on fiscal issues and social policy; the UN Environment Program on the green economy; and the World Food Program on social safety nets and early assessments of vulnerability. b. G-20 First of all, The Group of Twenty (G20) is the premier forum for its members international economic cooperation and decision-making. Its membership comprises 19 countries plus the European Union. G20 leaders meet annually, additionally during the year Finance Ministers and Central Bank Governors meet regularly to discuss ways to strengthen the global economy, reform international financial institutions, improve financial regulation, and discuss the key economic reforms that are needed in each of the member countries. Underpinning these meetings is a year-long program of meetings among senior officials and of working groups coordinating policy on specific issues. Increasingly, the IMF has been working with the Group of Twenty (G-20) industrialized and emerging market economies. During the global financial crisis, collective action by the G-20 was critical for avoiding even greater economic difficulties, and in subsequent meetings the G-20 leaders have continued to reaffirm their commitment to reinvigorate economic growth. The IMF provides analysis on global economic conditions and on how G-20 members' policies fit togetherand whether, collectively, they can achieve the Group's goals. c. Working on employment issues The IMF's mandate includes contributing to the promotion and maintenance of high levels of employment and real incomes through the expansion and balanced growth of international trade. Given the importance of employment for sustainable and inclusive growth, IMF-supported programs often contain recommendations pertaining to the labor market. That said, labor market policies are not a core area of IMF expertise. For this reason, the Fund works with other international, regional, and local organizations in this important area. We have an active partnership with the International Labor Organization (ILO), with whom we have been pooling expertise to better understand the impact of macroeconomic policies on job creation. The IMF also liaises regularly with the International Trade Union Confederation, and its affiliates. Finally, IMF missions to member countries meet regularly with trade union representatives to gain a better understanding of and exchange views on national labor market dynamics.

d. Engaging with think tanks, civil society, and the media The IMF also engages on a regular basis with the academic community, civil society organizations (CSOs), and the media. IMF staff at all levels frequently meet with members of the academic community to exchange ideas and receive new input. The IMF also has an active outreach program involving CSOs. IMF management and senior staff communicate with the media on a daily basis. Additionally, a biweekly press briefing is held at the IMF headquarters, during which a spokesperson takes live questions from journalists. 4. What about Argentina? Starting with 1998, Argentina begun to pass through a very hard period in its history. After that, it was actually named the great depression period. More precisely, the 19982002 Argentine great depression was a major economic depression that began in the third quarter of 1998 and lasted till the second quarter of 2002. It almost immediately followed the great depression of 19741990 after a brief period of economic growth. The depression, which began due to the Russian and Brazilian financial crises and worsened after the dot-com bubble burst, caused widespread unemployment, riots, the fall of the government, a default on the countrys foreign debt, the rise of alternative currencies and the end of the pesos fixed exchange rate to the US dollar. The economy shrank by 28 percent. Over 50 percent of Argentines were poor, and the indigents amounted 25 percent; seven out of ten Argentine children were poor. By 2002 GDP growth had returned, surprising economists and the business media,and the economy began to grow at an average 9% per year. In 2005, Argentinas GDP exceeded precrisis level. As of 2013, the default had not been completely resolved, although the government had repaid its IMF loans in full. Why got Argentina in such a situation? Argentina's many years of military dictatorship (alternating with weak, short-lived democratic governments) caused significant economic problems. During the so-called National Reorganization Process (19761983), the country went into debt for never-finished projects, the Falklands War, and state takeover of private debts. The Neoliberal economic platform was introduced during this period. By the end of the military government the country's industries were severely affectedunemployment, calculated at 18% (though official figures claimed 5%), was at its highest point since the Great Depression. (The Great Depression was a severe worldwide economic depression in the decade preceding World War II).

In 1983, democracy was restored with the election of president Ral Alfonsn. The new government intended to stabilize the economy and create a new currency (the austral, the first of its kind without peso in its name), for which new loans were required. The state eventually became unable to service this debt and confidence collapsed. Inflation, which had stayed between 10 and 20% per month, spiraled out of control. In July 1989, Argentina saw 200% inflation for the month, peaking at 5,000% for the year. During the Alfonsin administration, unemployment did not substantially increase, but real wages fell by almost half (to the lowest level in fifty years). Prices for state-run utilities, telephone service, and gas increased substantially.[12] Amid riots, President Alfonsn resigned five months before the end of his term and President-elect Carlos Menem took office early. After a second bout of hyperinflation, Domingo Cavallo was appointed Minister of the Economy in late 1990. In 1991, he fixed the value of Argentine currency at 10,000 per U.S. dollar. Australs could be freely converted to dollars at banks. To secure this "convertibility" the Central Bank of Argentina had to keep its U.S. dollar foreign exchange reserves at the same level as the cash in circulation. The initial aim of such measures was to ensure the acceptance of domestic currency because, after the 1989 and 1990 hyperinflation, Argentines had started to demand payment in U.S. dollars. This regime was later modified by a law (Ley de Convertibilidad) which restored the Argentine peso as the national currency. The convertibility law reduced inflation sharply and thereafter preserved the value of the currency. This raised the quality of life for many citizens who could again afford to travel abroad, buy imported goods or ask for credit in dollars at traditional interest rates. Argentina still had external public debt that it needed to roll over. The fixed exchange rate reduced the cost of imports, which produced a flight of dollars from the country, as well as the progressive loss of industrial infrastructure and employment. Government spending remained too high and corruption was rampant. Argentina's public debt grew enormously during the 1990s without showing that it could service the debt. The International Monetary Fund kept lending money to Argentina and extending its payment schedules. Massive tax evasion and money laundering contributed to the movement of funds toward offshore banks. A congressional committee started investigations in 2001 over accusations that Central Bank governor and members of the board of directors had overlooked money laundering within Argentina's financial system. By 1999, newly elected President Fernando de la Ra, faced a country with critically high unemployment and economic damage due to the continued borrowing. In 1999, Argentina's GDP dropped 4% and the country entered a three-year long recession. Economic stability became economic stagnation (even deflation at times) and the economic measures taken did nothing to avert it. The government continued its predecessor's economic policies. Devaluing the peso by

abandoning the exchange peg was considered political suicide and a recipe for economic disaster. By the end of the century, complementary currencies had emerged. While the provinces had always issued complementary currency in the form of bonds and drafts to manage shortages of cash, the scale of such borrowing reached unprecedented levels during this period. This led to their being called "quasi-currencies". The strongest of them was Buenos Aires's Patacn. The national government issued its own quasi-currencythe LECOP (Letra de Cancelacin de Obligaciones Provinciales ("Letter of Cancellation of Provincial Obligations"). In a 2001 interview, journalist Peter Katel identified three factors, converging at "the worst possible time", to explain why the Argentine economy unraveled: The fixed exchange rate between Argentine peso and the US dollar (created at the start of the 1990s by the Economy Minister at the time, Domingo Cavallo). The large amounts of borrowing by former Argentine president, Carlos Menem. An increase in debt due to reduced tax revenues.

Which was the implication of the IMF in Argentinas situation? Since the early 1990s, Argentina had relied on the IMF to provide the country with reliable access to credit and to guide its economic reforms. When the recession began, the national deficit widened to 2.5% of GDP in 1999 and its external debt surpassed 50% of GDP. Seeing these levels as excessive, the IMF advised the government to balance its budget by implementing austerity measures to sustain investor confidence. The De la Ra administration implemented US$1.4 billion in cuts in its first weeks in office in late 1999. In June 2000, with unemployment at 14% and projections of 3.5% GDP growth for the year, austerity was furthered by US$938 million in spending cuts and US$2 billion in tax increases. Following vice president Carlos lvarez' resignation in October 2000 over bribery suspicions in the Upper House, the crisis accelerated.

Bibliography:
http://www.investopedia.com/terms/s/sdr.asp

http://www.g20.org/about_G20 http://www.imf.org/external/country/ARG/index.htm?type=9998