To What Extent the IMF Reflects the Interests of Its Members - Article Example

To what extent the IMF reflect the interests of its members' The International Monetary Fund was founded in an effort to maintain and stabilize themonetary situations in the twenty nine original member countries. As it expanded over the years to include different countries and member state its shape, objectives, and direction changed with the times and in its bid to lend assistance to those in need. Whether its policies have been effective or the extent to which its flexibility is mirrored in the development of its members is dependent on the situations that have resulted from interaction between this monetary body and those that it serves. The IMF was created out of a need for countries to help their weakened economies. According to the agreements the fund is guaranteed to help the members develop economically as well as socially. Article 1 (ii) states, "To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy." Based on this article every member state should enjoy the privileges of economic growth and development. In theory this would be a practical situation but history has show that the Fund itself has several shortcomings and weaknesses. The preliminary signatories to the International Monetary Fund were mainly countries that subscribed to capitalist policies although France was the first country to benefit from the Fund after its inception in 1947. Under the IMF agreement the countries agreed to keep their currencies convertible to the US dollar and the United States agreed to a peg system where the value of their dollar was in terms of gold. Some saw this system as unable to meet the demand of global trading. Also, speculation caused a decrease in the price of gold. There was also a subsequent devaluation of the US dollar. The par value system was discontinued in 1974 and countries were allowed to choose a system that they think was best for their exchange rate. Some saw this decision by the International Monetary Fund as a sign of weakness. "It appeared that the ability of the IMF to regulate world financial conditions was at least greatly diminished, and perhaps finished" (Devries, 1986). (Peet, Born 68). After this change of idea regarding the exchange rate the IMF added a new dimension in dealing with its member countries. It became more involved with the economic policies of the countries. Many countries especially the United States of America and countries in Western Europe had had successive terms of wealth and prosperity so the Fund did not experience a great demand from these countries. The world political situation in the 1970's, however, forced a change on the volume of lending by the Fund. Many countries, especially in the African continent became independent but their new status meant that they needed financial help. Many of these countries lacked the resources and facilities present in the countries in Western Europe. To a large extent a great number was plagued by balance of payment problems. In order to lend assistance to these struggling economies the IMF created the Structural Adjustment Facility in 1986 and replaced by the Enhanced Structural Adjustment Facility in 1987. This consists of concessionary grants drawn up in collaboration with the World Bank. To qualify for these loans a country has to be in the low-income category. There were a total of thirty five countries that benefitted from the Structural Adjustment Facility. The recipients are offered lower interest rates with a chance to repay the loan from between five and ten years. As is common with other assistance of the IMF countries benefitting from these loans are required by the IMF to adhere to certain policies. These policies are very restrictive and have forced critics to argue if the Structural Adjustment Facility will bring more harm than good. Firstly, there has to be elimination of government subsidies on food and other consumer items for basic needs. The normally high unemployment rate of these countries makes it more difficult for the bulk of the population to feed themselves and their families. Another policy that is a requirement by the IMF for recipients of this loan is that there are reductions in barriers to trade, foreign investment and ownership. This stifles the livelihood of many small, domestic, business people who are unable to compete with wealthy foreign investors. The government is also advised to curb its spending and allow for privatization of resources previously owned by government. These restrictions placed on governments can lead to political and social instability. Many of the countries that receive assistance from the International Monetary Fund in the form of the Enhanced Structural Adjustment Facility have high illiteracy rates. The uneducated and the poor will feel the full effects of such stringent policies and will easily lead to conflicts and revolts. The IMF, through the Structural Adjustment loan does not seem to care much about the interest of its members. The policies do not lead to economic growth that would benefit the wider population. Rather it is geared towards regularizing the balance of payment problems in these countries. There has been mixed reactions, however, of the economies in some African countries that were recipients to the loan. For the first year of the loan in Nigeria, there was an increase in the gross domestic product at 2.5 percent. The gross domestic product in Cote d'Ivoire also increased, this time at 4 percent. Other African countries such as Ghana, Madagascar, Zambia and Mauritania are also cases of strong recovery in their economies after initiating the structural adjustment loan (Hettige et.al. 91 ). Some countries experience high employment rates, on one hand, in some sectors of the economy, while on the other hand, there was some fluctuations and also some decrease in employment levels. Different sectors had opposing results. In Ghana, for example, there has been increase in the employment levels in industries such as food processing, tobacco, wood products, basic and fabricated metal, tires, tubes, and rubber industries. Other industries, however, did not have the same results as the ones mentioned above. These include beverages, leather goods, footwear, paper products and printing, chemicals, and non-metallic mineral products industries (29). The overall consensus, however, is that the enhanced structural program brought countries to lower poverty levels than before they went on the program. Prior to accepting the loan, governments for the most part, were able to help the greater population in the alleviation of extreme poverty. They were able to provide relief to programs such as health and help in other facilities that affected mostly women and children. Whenever they were given the loan governments had to discontinue this aid so these persons who were generally being helped were left to the mercy of the loan's performance. Another program developed by the International Monetary Fund to help low income countries is the Poverty Reduction and Growth Facility (PRGF). This was established in September of 1999. This program replaced the Enhanced Structural Adjustment Facility. This program would seem to be more facilitating to its member countries as the main objective was to use poverty reduction and growth as criteria for giving loans to these countries. A review of the program, however, in 2005 established that while per capita income remains low, there was a marked improvement in macro-economic outcomes. The eligibility for this assistance is based on the assessment by the IMF of the country's per capita income. As of August 2008, a total of seventy eight countries became eligible for the PRGF assistance. The countries ranged from Africa, Asia, Latin America to countries in the former Soviet bloc. These include countries such as Cameroon, Nigeria, Pakistan, Nepal, Nicaragua, Honduras, Armenia, and Georgia. One of the differences of this program from other structural loan program by the IMF is the principle of broad public participation and country ownership. This increased national ownership allows for focus on the Fund's core area of expertise (IMF factsheet). Some critics believe that the PRGF is a repeat of the Enhanced Structural Adjustment Facility. Economic growth is the mainstay of PRGF whilst attending to poverty problems is subsidiary (Sanchez, Cash 7). There are six key issues (Sanchez, Cash) that show the weakness of the PRGF. Firstly the lack of appropriate participatory framework has excluded many of the persons who were mandated according to the agreement to be directly affected. According to Sanchez, Cash " a key determinant of the failure to facilitate broad based participation has been the languages used for participatory processes and PRSP documents" (16). They cited countries like Cambodia and Nicaragua where the strategies were not produced in the language of the countries, therefore the common population as well as government interest were excluded from analysis and discussion. The second issue is the constraints of government and civil society to effective participation and quality content. In many countries the shortage of personnel and financial resources render the participation of the major players impossible. Again this is in direct opposition to the agreement as outlined in the PRSP. The third key issue relates to perception and willingness of the participants. Many of the local participants lacked the trust in government. This slows the growth and integration of the program that would happen at a faster rate should there be a higher level of confidence. One should note that this issue, however, is not partly to be blamed on the program itself but should understand that this unwillingness is due to the previous programs that have failed. Although the agreement as specified by the IMF promoted PRSP as based on the principle of government ownership, the fourth key issue as reported by Sanchez and Cash showed that PRSP was donor driven instead of country driven. According to these writers some partners in countries like Nicaragua and Honduras, for example, felt that the respective governments were trying to please the IMF rather than the people for whom the program was developed (21). The fifth key issue was pragmatic strategies and parallel civil society's processes. There was not full co-operating between government, participants and the promoters of the program. This lack of cooperation often led to conflicts and frustrations. The sixth key issue of increased political space and increased capacity can be seen in a more positive light. In Zambia, for example, the PRSP has been successful in its implementation (22). As the world experience the ripple effect of globalization the IMF has come into direct play in trying to be as important and as relevant as during the pre globalization period. Globalization itself has brought both financial rewards as well as displacements to their economic and financial facilities. The monetary flow between countries including countries in the developing world has resulted in high growth rate, high levels of employment, and a higher standard of living for some sectors of persons. On the other hand, some countries have also experienced low growth rate, high unemployment levels and face significant financial crises that threaten to plunge the economy into further depression. In this regard the IMF believes that globalization has great potential to contribute to the growth that is essential to achieve a sustained reduction of global poverty (IMF issues brief). The IMF is trying to alleviate the worsening conditions that are felt by some countries in the wake of globalization. To this end it has being in collaboration with countries and other international institutions in supporting the 2015 Millennium Development Goals (MDGs). The Millennium Developmental Goals focuses on eight areas. They are the eradication of extreme poverty and hunger; achieving universal primary education; promoting gender equality and empowering women; reducing child mortality, improving maternal health, combating HIV AIDS, malaria, and other diseases; ensuring environmental sustainability; and developing a global partnership for development. The IMF plays a significant role in these development goals. Its main contribution to this effort is through its advice, technical assistance and lending to countries. In conjunction with the World Bank it is also responsible for assessment of the programs through the annual Global Monitoring Report. The 2008 report shows that there have been some levels of success but areas such as Sub-Saharan Africa and some areas of South Asia are highly unlikely to experience any success by 2015. The role of the IMF in the MDGs is not a very active one. There are certain shortcomings and weaknesses that could be avoided if the IMF had decided to play a more participatory role. In order to become more relevant it needs to be more focused on programs that are long term in its outlook in reducing global poverty levels. Its focus on exclusively short-term macro-stability is outdated (Oxfam briefing paper 2003). According to the Oxfam briefing paper the IMF is lacking in three critical areas where if they were more active the outcome in 2015 could be more positive. The first area is in its economic targets. The Fund needs to show greater flexibility in this area (2). The second view of Oxfam is that the IMF needs to place greater emphasis on measuring the financing needs of the countries rather than being pessimistic and enforcing economic policies. This they feel will retard growth and prevent the reaching of the goals as outlined in the MDGs. Thirdly, it is felt that the Fund should change the role of being a monopoly in terms of the lending agency for poverty alleviation and assuming instead, one in which it views itself as a partner in fighting poverty. The third area as set out by Oxfam is not as structural in its argument as the other two areas. The IMF is perceived by countries as the one who is always coming to the rescue. This change in perception has first to take place in the international arena. Even if the IMF changes its image in this regard there will still be some elements of superiority as perceived by certain countries. In the Committees' Report to British Parliament it is stated that the IMF at present, is not optimally organized to meet the challenges it faces (3). There are many variables that are working against the Fund in recent times that could decrease the effectiveness of the IMF. For example, the different free trade agreements between some countries have made them more dependable on each other thus reducing the need to focus solely on the IMF as an agent to help them with their debt crisis or other economic misfortune. The Latin American countries, for the most part have been successful in helping each other in their free trade agreements. A news article of February 28, 2009 stated emphatically that "Venezuelan President Hugo Chavez is squeezing the International Monetary Fund out of Latin America, the region that once accounted for most of its business." (Bloomberg.com). It further stated that President Hugo Chavez of Venezuela has used financial resources gained from oil production to aid some of his neighbouring countries. Argentina received 2.5 billion dollars, Bolivia 1.5 billion, and Ecuador 500 million dollars. Consequently financial help from the International Monetary Fund has fallen to fifty million dollars or only one percent of its global portfolio. This is reported as being significantly low when compared with eighty percent in 2005. This rejection of the Fund by these countries has much implication for their political direction policies. Not only are they able to sustain themselves but they won't be under the influence of the IMF in directing their policies. Since the IMF functions on income receive from loans recent developments in Latin America would signify that that there is a loss by the Fund in this area. The IMF in this regard is becoming irrelevant and outdated. The IMF, however, in an effort of not being sidelined by the effects of globalization has designed reforms and strategies aimed at improving its ability in serving its members and in reflecting the needs of its members to some extent. Through the maintaining of its website the Fund has become more transparent in its dealings. Through the amount of information that is now available it has steered itself from an institution that was operating under secrecy and little accountability. It is taking action to strengthen economic governance. For instance, it is promoting the use of standards and codes as vehicles for sound economic and financial management and corporate governance (IMF Issues Brief). The MF is aware of the damages done to its reputation and so is working towards the stability and integrity of the international financial system. It is currently working to safeguard against money laundering in many countries such as the Financial Sector assessment Program it does jointly with the World Bank. In trying to rid itself of the stigma attached to the institution in directing the policies of its members the IMF is now encouraging true national ownership of reforms. According to the IMF, conditionality remains essential, but it is advocating for countries to be responsible for the implementation of necessary reforms. This directing policy of governments was also at the centre of early debates in the early years of the Bretton Woods agreement (Pauly 80). The International Monetary Fund like any other international agency has its advantages as well as its disadvantages in the international arena. There has been some short-sightedness on their part in many of the methods and strategies used to help countries out of their financial turmoil. Many of their strategies and implementations have brought little or no relief to the members they pledge to serve. It is in this context that the critics continue to argue against the effectiveness of this institution. Notwithstanding, its programs have also brought some reliefs to some countries in alleviating poverty to some extent. The leaders of many countries still believe in the benefits that can be gained from this institution and in this mode of thinking the Group of twenty industrialized emerging market economies has recently reaffirmed the role of the IMF as a major player in the international financial system. Pauly, L. Who Elected the Bankers : Surveillance and Control in World Economy. Ithaca: Cornell University Pres,1997. Peet, R. Born, B. Unholy Trinity. London: Zed Publishers, 2003. Hettige, H., Steel, W., Wayem, J. The Impact of Adjustment Lending on Industry in African Countries. June 1991. http://www.imf.org Reducing Poverty or Repeating Mistakes' (December 18, 2003) www.globalpolicy.org/socecon/develop/2003/12prspmistakes.pdf The IMF and the millennium goals. Oxfam briefing 54 paper .September 2003 http://www.bloomberg.com/apps/ Latin America Chavez Exploits Oil to Lend in Latin America, Pushing IMF Aside Read More