International Political Institution: International Monetary Fund

(Along with Reforms)

1) Introduction
i. Formed in 1944 at the Bretton Woods Conference, it came into
formal existence in 1945 with 29 member countries and the
goal of reconstructing the international payment system.
ii. Countries contribute funds to a pool through a quota system from
which countries with payment imbalances can borrow. As of
2010, the fund had XDR476.8 billion, about US$755.7 billion at
then- current exchange rates.
iii. Through this fund, and other activities such as statistics keeping
and analysis, surveillance of its members' economies and the
demand for self-correcting policies, the IMF works to improve
the economies of its member countries.
2) Historical Background
i. The Great Depression of the 1930s had an enormous impact on
the advanced industrialized states. In the United States and
Europe agricultural prices fell, unemployment skyrocketed,
banks closed leaving people penniless, factories stood idle, and
international trade collapsed.
ii. Indeed, the onset of the Depression was one of the main reasons
why so many ordinary Germans were willing to follow Hitler
into war in 1939.
iii. At the same time, the outbreak of war in Europe proved to be a
key factor in the United Statesí economic recovery. Increases
in the level of production needed to fight the war stimulated
economic growth, put people back to work, and money into
circulation.
iv. One of the important questions confronting American
policymakers, however, was how to maintain the new level
of economic activity after the war.
v. The purpose of the Bretton Woods Conference in 1944 was
primarily to ensure that these things did not happen. The
goals
 were to stabilize the value of money and to promote international
trade.
3) Objectives of IMF
i. promote international monetary cooperation;
ii. facilitate the expansion and balanced growth of
international trade;
iii. promote and maintain high levels of employment;
iv. promote exchange stability and avoid competitive exchange rate
depreciation;
v. eliminate foreign exchange restrictions;
vi. offer resources to countries to correct maladjustments in their
balance of payments without resorting to measures destructive
of national or international prosperity;
vii. shorten the duration and lessen the degree of disequilibrium
in the international balance of payments of its members.
4) Organization
i. The Board of Governors consists of one governor and one
alternate governor for each member country. Each member
country appoints its two governors. The Board normally meets
once a year and is responsible for electing or appointing executive
directors to the Executive Board.
ii. 24 Executive Directors make up Executive Board. The Executive
Directors represent all 188 member countries in a geographically
based roster.
iii. The IMF is led by a managing director, who is head of the
staff and serves as Chairman of the Executive Board. 5 July
2011 to present; Christine Lagarde from France.
iv. Voting power in the IMF is based on a quota system. Each
member has a number of basic votes (each member's number
of basic votes equals 5.502% of the total votes)
5) The Original Mandate of the IMF
i. The original mandate of the IMF was achieved primarily by
linking the worldís currencies to the American dollar.
ii. Members were required to fix the value of their currencies in
relation to the dollar.
 iii. Changes beyond 1 per cent had to be discussed with the other
members of the Fund and agreed to by them.
iv. Investors, manufacturers, and states benefited enormously
from what was called the par value system. Not only did it give
them a clear idea of the actual value of different currencies, it
also helped to bring a degree of predictability to the
international economy.
6) Evolution of IMF
i. The par value system lasted until the early 1970s, when the US
decided it could no longer afford to allow countries to convert
their US dollars into gold.
ii. It is customary to talk about the collapse of the Bretton
Woods system in the early 1970s. This is not quite correct.
In fact, the IMF survived because the need for monetary
stability became more crucial in the absence of fixed
exchange rates.
iii. None the less, the role of the IMF has changed since the 1970s.
True, it continues to promote monetary stability and trade, but
increasingly its role is to assist countries that are in the midst of
financial crisis.
7) Functions of IMF
i. it works to foster global growth and economic stability by
providing policy, advice and financing to members, by
working with developing nations to help them achieve
macroeconomic stability, and by reducing poverty
ii. The IMF provides alternate sources of financing.
iii. Upon initial IMF formation, its two primary functions were: to
oversee the fixed exchange rate arrangements between
countries,[9] thus helping national governments manage their
exchange rates and allowing these governments to prioritise
economic growth, and to provide short-term capital to aid
balance of payments
iv. The IMF's role was fundamentally altered after the floating
exchange rates post 1971. It shifted to examining the
economic policies of countries with IMF loan agreements to
determine if a shortage of capital was due to economic
fluctuations or economic policy.Their role became a lot more
active because the IMF now manages economic policy rather
than just exchange rates.
 v. Surveillance of the global economy
vi. Conditionality of loans; The IMF does require collateral from
countries for loans but also requires the government seeking
assistance to correct its macroeconomic imbalances in the form
of policy reform.
vii. Some of the conditions for structural adjustment can
include: Cutting expenditures, also known as austerity,
Devaluation of currencies,Trade liberalisation, or lifting import
and export restrictions etc.
8) Role of IMP in Current Times
i. It has become something of an economic crisis
management institution.
ii. It offers financial and technical assistance to countries
experiencing monetary problems and remains a lender of
last resort.
iii. This gives the IMF enormous power to determine the
economic fate of countries experiencing balance-of payment
problems.
iv. If, for example, a member country has continuing economic
problems, the IMF will initiate Structural Adjustment
Programmes (SAPs).These macroeconomic reforms can
include debt reduction strategies, privatization policies, and
cuts in public spending.
v. Unfortunately, these strategies generally impact on the poor
most severely. It is for this reason that SAPs are regarded as
particularly iniquitous by some observers.
9) Criticism
i. Today, the IMF has more critics than friends. Some
economists suggest that the world economy would function
better without it, and that many of its SAPs exacerbate crises
rather than alleviate them.
ii. Others suggest that while it is an imperfect institution, it is
better at maintaining economic stability than many
governments.
iii. Whatever the truth, there is little evidence to suggest that
the IMF is heading for the institutional scrap-heap.
 iv. There have been muted calls for a new Bretton
Woods conference, but this message has not yet
filtered up to policymakers and government
officials.
v. At the same time, it is hard to imagine how the
global economy could function effectively
without some institutional guidance.
10) Reforms
i. The challenge is to ensure that a balance is struck
between good economic management and human
needs. In striking this balance, the IMF appears to
have a long way to go.
ii. The IMF is only one of many international
organisations, and it is a generalist institution that
deals only with macroeconomic issues; its core
areas of concern in developing countries are very
narrow. One proposed reform is a movement
towards close partnership with other specialist
agencies such as UNICEF, the Food and
Agriculture Organization (FAO), and the United
Nations Development Program (UNDP).
iii. Increase and rebalancing of the quotas that
determine each countryís voting power and
financial obligation, Greater voting power to
developing countries so they have a greater say.
11) Conclusion