The Legitimacy of IMF - Case Study Example

Is there a legitimacy of IMF Introduction This paper investigates the legitimacy of IMF and if and if indeed it fulfilled its promises. It also examines the changes made by the fund since its establishment to date. The paper further looks at the critiques of the fund and its mission. Finally, the paper carries out a case study for the fund's relationship with Russia. The reasons for the establishment of IMF The IMF was formed after a financial and monetary conference that was held by the UN in Breton Woods, USA in July 1944. The fund was established with the aim of assisting in the institution of a multilateral payment system, boosting exchange stability, assisting in the expansion and objective growth of global trade and promoting global monetary cooperation. The fund was also charged with the responsibility of availing its resources to member states facing hardships in their balance of payments, and lessening as well as shortening the degree of imbalance in the global balance of payments to its member states (Soros, 2002: pp 116). IMF's professional expertise in financial affairs at the global level The IMF has contributed to positive change in numerous member countries since its establishment. At its inception, it undertook the daunting task of restoring economic growth and stability, especially after the world war, and the aftermath of the great global depression. The IMF adopted a simple working principle that all countries share some fundamental economic goals; that include achievement of high income and employment levels, and that countries can achieve these goals by adopting solid macroeconomic policies, collaborating to make international monetary systems work efficiently and making their economies accessible to trade (Camdessus, 1998). It has not been easy for IMF since the global economy has had its successes and challenges, especially during the fund's initial years. For all the countries that adopted the IMF principles, their employment rates rose, their national incomes grew, and their trade expanded immensely, ushering in almost fifty years of global prosperity. The global economy is much more complex than it was before the establishment of the fund. Moreover, under IMF, many countries have seen growth in the volume of their private capital flow as well as development of new technology, making private markets very agile. Also, there are now various exchange rate arrangements which have replaced the initial fixed exchange rate system, with IMF member states increasing from just forty in 1947 to 182 currently (Camdessus, 1998). During these developments, the fund has also had to change and develop itself in order to remain relevant and address the changing needs and demands. The fund now temporarily provides and advices members undergoing wide ranging circumstances and problems. The fund has also expanded its scope to incorporate other elements contributing to stability in the financial systems and economic growth. The fund now advocates for its members deregulating their domestic economies to boost private sector activities. Moreover, it has called for the member governments to reduce unfruitful government spending, spend more on basic human needs, ensure accountability in corporate and government affairs and a more efficient dialogue on economic policies with the civil society and labor (Camdessus, 1998). The IMF has helped its members in dealing with various problems and issues that were not anticipated at the institution's establishment. For instance, the fund helped in creating a mechanism to recycle the surpluses of oil exporters and helped in financing oil-related deficits in some countries during the 1970s energy crisis. In the 1980s, the fund helped the Latin American countries in overcoming a debt crisis (Camdessus, 1998). In 1989, IMF helped in designing and financing substantial global efforts required to help the 26 transition countries of Eastern Europe and the former USSR to abandon the legacy of centralized planning. Between 1994 and 1995, IMF helped Mexico out of a looming financial collapse. Meanwhile, the fund has continued nurturing economic reforms in Russia, thereby sustaining its delicate democracy. Moreover, the fund has helped sub-Saharan African countries and turned situations of poverty, hopelessness and despair into thriving GDP growths, improvement in per capita incomes and rising opportunities. The IMF achieved all these in cooperation with World Bank, a cooperation that will be even more vital to face future challenges (Camdessus, 1998). Despite the numerous changes in the global economy and at the fund, certain policies have remained the same, such as effective monetary cooperation on a global scale and stress on sound policies at the state level. The fund is not only a crisis management mechanism but also an economic consultant for all the member countries (Camdessus, 1998). What do the critics say about IMF's legitimacy The IMF has failed many countries, especially the developing ones due to a shift in its earlier intended policies. Moreover, the fund has forced many countries, especially developing ones into liberalization without first ensuring that they can compete globally. IMF has also been accused of unfairness in the way it deals with the developed and developing countries, usually favoring the former. Economist Joseph Stiglitz (2002) is of the view that the IMF has not achieved its goal of securing economic stability due to its change in economic policies and mission. Stignitz further faults IMF for the current economic globalization problems. The fund's initial mission assumed that markets work imperfectly sometimes, at which time intervention is needed in securing a stable economic order. That philosophy has since changed and the fund operates mainly on the idea that markets should operate by themselves with little or no intervention (Stiglitz, 2002). This is a both a betrayal of the key ideas leading to its inception and bad economics. IMF was formed to promote expansionary economic policies during crises to encourage or enable lower interest rates, lower taxes, and increase expenditure. Instead the fund adopted the direct opposite approach that involves giving finances to countries only if they raise interest rates, raise taxes and cut deficits. Although IMF was initially charged with the responsibility of helping countries in crises employ as much of their workforce as possible, it vividly changed route. This change is what has made the fund fail in its mission (Stiglitz, 2002). IMF policies often do not work, and in some cases worsen the already bad situations in crises-hit countries. Some of the fund's misdirected policies include liberalization of capital markets, insensitivity to the strength of local markets and using Latin America as the template. The IMF puts pressure on countries petitioning for loans to make their domestic markets accessible to foreign investment. Instead of solving the situation, this approach worsens the situation since it destabilizes both the country's economy and the global economy. People may invest heavily in a country, only to suddenly withdraw the investment, leading to a sharp economic crisis (Stiglitz, 2002). Many of the IMF ideas are founded on its experience with Latin America, disregarding the fact not all policies work in all countries. The Latin American countries were experiencing unsustainable economic growth; governments had failed to control their budgets and had loose monetary policies, leading to great inflation. IMF strongly believed that this was as a result of too much government intervention in the economy, and therefore advocated for limited or no such intervention. This gave rise to the liberalization of capital markets in the Latin American countries. Even though this approach worked for some Latin American countries, IMF should not have blindly applied the same policies in other countries in different situations because it ended up not solving the problem and instead worsened the situation (Weaver, 2000: pp 176) IMF and globalization The IMF policy of rapid liberalization and globalization has failed and has not followed lessons learned from history (El-Erian, 2008). The liberalization may have helped Japan and the US since both countries had developed their industries to compete on a global level. IMF should not have forced these policies on developing countries whose industries are struggling and cannot compete on a global market. This has caused harm in developing countries since the local industries could not compete, causing job loses, misery, poverty and economic stagnation (Tabb, 2004). The specific example of Russia Many questions have arisen as to whether IMF really helped Russia or harmed it, or indeed if the fund has been relevant to the country. The answer has been quite controversial and mixed. With regard to the fund's narrow mandate of influencing macroeconomic stability, there has been some success in Russia. However, IMF miserably failed to help in Russia's transition from communism to capitalism (Stiglitz, 2002 pp 15). Furthermore, during the initial stages of reform, the fund was not fast enough in giving assistance to help in leveraging and consolidating the position of pro-macroeconomic stability reformers. This has been attributed to the hesitation of IMF's principal shareholder. Moreover the fund has not had a flawless record of its technical expertise as well as its employees, even within their constricted mandate. Earlier, IMF failed to forecast the danger of advocating for a common ruble zone, and also failed to consider in its programs, the immense disintegration in the Russian output. The IMF must now go beyond its traditional expertise and mandate that mainly focus on stabilization. Russia requires deeper institutional reforms that include strengthening of its property rights, rule of law, a stronger judicial system, and banking regulation and supervision (Woods and Gound-Davies, 2001). Although the fund's shareholder pressure, intellectual capital and mandate have greatly influenced its programs, their implementation has mainly depended on the institutional and political environment in Russia (Reddaway et al, 2001 pp 294). Ironically, the fund's activity in the country has caused the evolution of some severe domestic mishaps. For instance, the success of the 1995 to 1997 stabilization achieved courtesy of the IMF led to the growth and establishment of the position of oligarchs. The very reforms seen by the fund as essential are being hindered by the financial-industrial groups that were beneficiaries of the 1995 to 1997 successes (Truman, 2006: pp 259). Russia's experience with IMF has been a mixed one mainly due to the fund's policies and the country's political and institutional infrastructure. Both the country and the fund need to revise their principles and policies in order to benefit from each other. Conclusion There have been several changes since the establishment of IMF, some of which are positive and others negative. Some countries, especially the Latin American ones, have greatly benefited from the fund's policies. Others such as the sub-Saharan African ones are yet to benefit from it, with some experiencing worse situations due to liberalization. The critiques of the IMF have clearly brought out the fund's change of mission since its establishment. This change has ended up hurting some countries especially developing ones. Russia has had little benefit from IMF, mainly due to the fund's narrow mission and the country's own political and institutional infrastructure. From the analysis, it is evident that IMF lost its legitimacy and has not fulfilled its promises to most countries. References Camdessus, M (1998) The Role of IMF: Past, Present, and Future, retrieved from www.imf.org, on January 6, 2009 El-Erian, M (2008) When Markets Collide: Investment Strategies for the Age of Global Economic Change, McGraw-Hill Professional, pp 193-234 Reddaway, P et al (2001) The Tragedy of Russia's Reforms-Market Bolshevism Against Democracy, US Institute of Peace Press, Pp 294 Soros, G (2002) George Soros on Globalization, Public Affairs, pp 116 Stiglitz, J (2002) Globalization and Its Discontents, Norton New York, pp15, 195-213 Tabb, W (2004) Economic Governance in the Age of Globalization, Columbia University Press, pp 212 Truman, E (2006) Reforming the IMF for the 21st Century, Peterson Institute, pp 259 Woods, N and Gound-Davies (2001) Russia and IMF, retrieved from www.globaleconomicgovernance.org, January 6, 2009 Weaver, F (2000) Latin America in the World Economy-Mercantile Colonialism to Global Capitalism, Westview Press, Pp176 Read More