The Role of IMF and World Bank - Essay Example

From the initiation of an International Monetary System (IMS), the IMS and its agents are to severe criticisms in terms of lack of uniformityin action and partiality. The IMF and World Bank should clearly distinguish between pro poor and pro growth strategies. Pro growth can be considered, as a promotional policy while pro poor is a preventive measure. If these two concepts are to be mingled, then it may end up as the wrong medicine for a disease and lead to misjudgment and misallocation of resources. IMS does not promise any corrective measure addressed towards the increasing global imbalance. For the past few years the strength of the dollar is declining against the floating currencies of Europe (more specifically against euro and pound) and that of the Anglo Saxon world. However this will lead to the leveling of the current account deficit of USA. It also ensures that US fiscal deficit has to be adjusted immediately resulting in a wide leap in tax rate and finally a 25 percent revaluation of US $. The Europeans are in need for structural reform to liberalize the sclerotic European labor markets. However, neither US nor the European nations are adopting any corrective measures, making the current order as unsustainable. If this continues, the central bank of the Asian countries refuses to accumulate more dollars then in no time it will lead to a global recession. A viable IMS has to mend this type of disaster. In order to efficiently manage such disastrous condition, the IMS should adopt a set of rules and protective measures that will compel the nations to undergo necessary macroeconomic and exchange rate policy reforms. (Sodersten and Reed, 2003, 662) However, IMF cannot be expected policing upon the countries. Therefore, if it develops a system of reference rates for exchange rates then the system will be viable under a floating exchange rate combined with inflation targeting. The system is sustainable too as it will abolish conservative national policies, focused to maintain a disequilibria exchange rate and on the other hand it will lead to an international consensus regarding the level of current account imbalance. Moreover the IMF monitoring will now be more effective than before as countries can no longer sustain with their improper demand management policies. This kind of a set up registers another benefit to its account in the present era of ‘right to information’ it is obvious that this kind of reference rates will be of public interest and this eventually will lead to a more accurate speculation. The compliance to IMF’s advice will be justified as well. This will follow from two reasons. Firstly, the IMF is drawing on a body of analysis that will ensure a mutually desirable global outcome and the IMF has more knowledge in understanding the global scenario than any individual country. Secondly. While setting the reference rates, the outline of the expected and desirable outcomes has been agreed already. Now refusing to comply with the monitoring of the IMF will dismantle the process of reaching that outcome at a very base level. The countries will not be willing to pursue with this. The process of determining the reference rate should also follow a new regime. During the process of determining the reference exchange rates, the IMF staff for all the member nations suggests the rates to the board. The rates may or may not be accepted by the board. The staff would make changes to the accordingly. The best option here is to obtain a majority vote and decide on the reference rate on the due date of agreement. The present international monetary system lacks in clarity in operation. Often, the policies formed and implemented by IMF and World Bank lacks theoretical justification. One such policy might be their strong position as the proponents of laissez faire. Free economy without any sort of government intervention does not always lead to economic welfare. Consequences of such free economy are well illustrated down the history. A few years before the economy of Argentina suffered a crash and before that the so-called’ roaring tigers of the south’ reduced to paper tigers following the free market regime. South Korea followed full capital account convertibility much sooner than it deserved and after initial flourish they were almost bankrupt. Even in India their current economic success reflected through abnormal rise in SENSEX came in exchange of a pretty high inflation rate that burdens the common people. A mutually beneficial relation can be framed with the collaboration between the national government and the agents of the IMS. The national governments are well aware of their situation, knowing much better what are their actual needs. IMF and World Bank are equipped with the necessary finance to extend help to the poorer countries. Therefore a golden handshake between the national government and the IMS agents will lead to a beneficial collaboration. USA took a major role in shaping the international monetary system. It is the largest contributor in IMF and thereby often tries to dictate the terms for the other nations. The IMS in order to achieve a universal acceptance must get rid of this kind of impediments. The IMS has a much bigger responsibility than to look after the responsibility of any individual country. A more detailed explanation of each of its policies especially to the recipient countries would be more beneficial to attain that. Often some of the academicians suggest an introduction of common currency among all nations would facilitate the operation of the IMS to a great extent. They cite example of dollar that is accepted by all the American states and euro, which is followed by 27 European countries. However, on one hand adopting a common currency would result in monetary efficiency gain and on the other it will lead to economic stability loss. Therefore the common currency cannot qualify as a viable option. However, to incorporate more integrity into the system, a universal central bank may be created. The universal central bank in cooperation with the central banks of each country of the world will form an integrated international monetary system that will be devoted to the interest of all the nations of the world. With little modifications, clarity and neutrality on its behalf World Bank in near future can easily carry on this responsibility. (Tobin, 2000, 1101-4) Starting from Bimetallism, IMS has passed through several stages such as the Classical Gold Standard, Interwar flexible rates and Post war control and Bretton Wood system to reach the present flexible exchange rate system in 1973. (Krugman, and Obstfeld, 2004, 547) Much before that IMF and World Bank was found as two supranational organizations. (Ray, 2002, 701) The academicians have criticized these two organizations. Krueger, one of the foremost critics of IMF and World Bank, said that both these supranational organizations chose their policies irrespective of the characteristics of any nation and therefore, the policies failed to generate any substantial outcome. Krueger called their policies as anti growth that ignores the conditions of environmental sustainability. Krueger also believed that in order to pay back the loan of IMF and World Bank the national government is left with less finance for government expenditure. That is reducing the level of output of the poor countries. Krueger also believed that while IMF and World Bank funding the essential requirements of government would lead to a certain kind of loosening with development within the government that will result in the continuity of irrelevant policies on behalf of the government. Krueger believed that in order to make IMF and World Bank viable international organizations they must be drawn from middle income countries and concentrate more on poorer nations. (Krueger, 1998, 1983-2020) This, on one hand will protect the middle income nations from falling into further debt trap and on the other the Bank and IMF will be more focused regarding their operations in poor nations. (Eun and Resnick, 2006, chapter1 and 2) Despite all, if the supranational organizations want to continue in middle-income nations they should be concentrating on social and environmental issues. In recent times, the supranational organizations seem to pay attention to all these critics. Both IMF and World Bank now consider the environmental issues. They are extending their helping hands to protect the rain forests of Amazon and that of other regions. While extending help they are emphasizing on macroeconomic stability rather than anything else. Some years earlier, to reduce the influence of dollar, a more justified currency SDR was created. SDR is a weighted average of sixteen currencies having at least 1 percent share in global trade volume. Due to the culmination of 16 currencies the chance of any sudden fluctuation has been mostly reduced. However, SDR has failed to bring popularity and dollar for most of the poorer countries to remain a lucrative type of currency to hold. The role of IMF and World Bank is changing under the increasing collective bargaining power of the developing nations and hopefully in near future the supranational organizations will be able to unshackle the political economic impediments they always face while pursuing their functions and carrying their responsibilities towards the poorer nations. References 1. Cohen B.J, 1977, Organizing the Worlds Money: the Political Economy of International Monetary Relations, Basic Books 2. Cooper R.N N, 1987, The International Monetary System: Essays in World Economics, MIT Press 3. Dornbusch, R, 1976, "Expectations and Exchange Rate Dynamics," Journal of Political Economy, Vol. 84, pp. 1161-76. 4. Eun, C and Resnick, B. 2006 International Financial Management, 4th edition, McGraw-Hill (E&R), Chapters 1 & 2 5. Friedman, M, 1953, "The Case for Flexible Exchange Rates," In Essays in Positive Economics, pp. 157-203. (Chicago: University of Chicago Press). 6. Eichengreen, B ed ed, 1985, The Gold Standard in Theory and History, Methuen Press 7. Funabashi, Y Y, 1989, Managing the Dollar from the Plaza to the Louvre, Institute for International Economics, Washington D.C. 8. Giovanini, A A, 1992, Bretton Woods and Its Precursors: Rules Versus Discretion in the History of International Monetary Regimes, NBER Working Paper, n° 4001, February 9. Hamouda, O, Rowley, R. and Wolf, B. eds, 1989, The Future of the International Monetary System, Edward Elgar 10. Kenen, P. P, 1989, Exchange Rates and Policy Coordination, Ann Arbor, University of Michigan Press 11. Kenen, P. P, 1994, Understanding Interdependence; the Macroeconomics of the Open Economy, Princeton University Press 12. Keohane, R R, 1984, After Hegemony, Princeton University Press 13. Krugman, P P, 1991, Currencies and Crises, MIT Press 14. Krugman, P.R., M. Obstfeld, 2004, International Economics: Theory and Politics, Singapore: Pearson Education. 15. Krueger A.1998, Whither the World Bank and the IMF?, Journal of Economic Literature, XXXV1, 1983-2020 16. Levin, J.H. 2000. A Guide The Euro. Boston: Houghton Miffin 17. Luca, C 2007, Trading in the Global Currency Markets, 3rd Edition, Prentice Hall Press 18. Mac Kinnon R. R, 1993, The Rules of the Game: International Money in Historical Perspective, Journal of Economic Literature, Vol XXXI, p. 1-44 19. Mundell, R ed ed, 1968, International Economics, Mac Millan 20. Murray, R.D. Keeping up with world currencies: revisiting foreign exchange risk management--how it can work for you.(business strategies), Thomson Gale, October, 2005. 21. Models of Exchange Rate Determination: Lecture 1”, 2006. retrieved on November 15, 2007 from: http://my.liuc.it/MatSup/2006/F83523/liuc%20lezione%201%202006.pdf 22. MCSCTERundell, Robert, 1963, "Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates," Canadian Journal of Economics, 29, pp. 475-485. 23. Obstfeld, Maurice, and Alan Stockman, 1985, "Exchange-Rate Dynamics," R. Jones and P. Kenen (eds.), Handbook of International Economics, Vol. 2. (Amsterdam: North-Holland) 24. Padoa Schioppa T and Saccomanni F, 1994, Managing a Market-Led Global Financial System, IIE Conference, Washington D.C., May 25. Philip L., 1995. "The Link Between the Cash Rate and Market Interest Rates," Reserve Bank of Australia. 26. Ray D. 2002, Development Economics, Noida: Oxford India Paperbacks. 27. Sodersten and Reed G. 2003 3rd ed. International Economics, Macmillan Press limited: London. 28. Temin, P 2004, Financial Intermediation in the Early Roman Empire, Journal of Economic History, 64, 705-33 (working paper available) 29. Tobin J. 2000, Financial Globalization, World Development, 1101-4 30. Tower, E. and Thomas D. Willet. 1976. The Theory Of Optimal Currency Areas And Exchange Rate Flexibility. Princeton University. 31. Tore E. & Ulf S., "undated". "Why are Long Rates Sensitive to Monetary Policy," IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. 32. Steinherr, A and Weiserbs, D eds, 1991, Evolution of the International and Regional Monetary Systems, Mac Millan 33. Williamson, J, 1977, The Failure of World Monetary Reform 1971-74, New York University Press Read More