International Business Opportunities of IMF Lending Policies to Developing Nations - Coursework Example

IMF LENDING POLICIES IMF Lending Policies to Developing Nations The Great depression in 1930s impacted heavily to economic status of many countries prompting the need to come up with appropriate measures to prevent future economic crisis. As such, the Breton Woods institutions, International Monetary Policy (IMF) and the World Bank, were created. Although both the IMF and World Bank have several similarities, their fundamental purposes are quite different. The World Bank is regarded more of a development institution due to some of its functions such as funding projects in member countries. Conversely, the IMF is seemingly a cooperative whose main purpose is to maintain an orderly system for payments and receipts between nations. In maintaining cooperation between nations, IMF plays a huge role in facilitating international trade. This is done through formulation of favorable trade policies and supporting member countries such as through finances. Additionally, IMF ensures a balance between developing and developed countries in relation to trade. However, the IMF has faced unending criticism over the years mostly with regard to its governance and functionality. For example, there have been complains directed towards IMF’s loan conditions with critics arguing that they are unfavorable to borrowing countries. Nonetheless, amid these challenges IMF has created several opportunities to improve international business through its policies especially those targeting developing nations. International business has been boosted to great heights by IMF policies such as trade liberalization. Trade liberalization seeks to lift restrictions on imports and exports thereby encouraging international trade. For example, taxes targeting either exports or imports may be reduced in order to make trade between countries favorable. This is because regulations surrounding entry of and exit of goods are flexible hence encouraging more participation. Additionally, reducing trade restrictions may result in reduced prices consequently causing increased consumption. Moreover, increasing competition levels implies that producers will increase quality of products to the advantage of the consumer. Nevertheless, there is also focus on increasing international business activities since they consequently lead to economic growth. As such, in addition to increasing economic activities, international trade also creates an infrastructure that allows modern economies to function (Stern and Sauve, 2000, p.6). However, trade liberalization is seemingly imbalanced due to favorable trade policies in countries implementing it at the expense of countries without trade liberalization. However, the long run effect of trade liberalization implemented by IMF is increased international business. Additionally, IMF policies seek to increase economic output for member countries by increasing productivity growth and increased involvement on international trade. IMF policies require structural changes before lending to a given country. These policies seeks to improve the overall economic status of countries by giving advice and implementing new structural policies for economic growth. This acts as IMF’s security for repayment of funds lent out since economic growth and development will ensure that countries will have funds for repayment. As such IMF policies encourage exports mainly targeting production increment. IMF promotes such activities mainly through funding and giving advice to member states. For example IMF may come up with strategies that “decompose the annual percentage change in real GDP into a weighted average” paying considerations to the human capital and labor input (De Masi, 1997, p.8). As a result of increased productivity, countries are able to sustain domestic markets and also take part in international trade. Implementation of such policies assists countries to increase and maintain productivity levels with lower rates of resource utilization. Such an interaction where input is relatively lower than output is effective especially in conserving natural resource. As such countries are able to depend on their resources for longer periods which implies increased sustainability in relation to trade involvement. Therefore, IMF policies have major contributions to the advancement of international business. Moreover, IMF policies have great focus on currency devaluation thereby creating international trade stability. Currency devaluation mainly seeks to create a fixed exchange rate in order to control competitive devaluations. Additionally, fixed exchange rates are essential in increasing countries’ foreign currency reservoirs hence increasing international trade. This is an effort by the IMF to create monetary discipline in member countries thereby curtailing price inflation on goods and services and the general economy. Avoiding economic inflation is essential in attracting investors and foreign traders. The direct effect of devaluation are increased exports and decreased imports. Moreover, currency devaluation increases the competitive position of exports in international markets (Owen, 2004). Through this effects on imports and exports, countries are able to reduce trade deficit. This is because the amount of imports will be less than exports hence preventing trade deficits. In the long run currency gains more value and this is useful in reducing national debt. For example, IMF intervened during Japan’s devaluation process that had had sparked fears in different countries including the US, arguing that devaluation would not affect Japan’s ability to pay debts (Obe, 2013). This implies that with currency devaluation countries are able to pay back the IMF while maintaining development hence increased involvement in international trade without necessarily relying on aid. While lending to countries the IMF takes part in changing structural policies to ensure budget balancing. Balancing the budget entails ensuring that revenues are equal to expenditures hence eliminating both budget deficits and or surplus (Taylor, 2012). However, there is seemingly more focus on eliminating budget deficit than budget surplus. Nonetheless, a balanced budget throughout the year is not economically desirable but should rather fluctuate with economic status. For example, budget deficits are desirable during lean times while budget surplus is favorable for booming times. According to the Keynesian economics, budget deficits offer fiscal stimulus during lean times while budget surplus offers restraint in boom times (Coddington, 2013). However, balanced budgets throughout the year result in reduced interest rates hence increased savings and investments. The long term implications of balanced budgets are reduced trade deficits and economic growth increments simultaneously. Improved international business is heavily dependent on favorable economic status hence IMF policies are essential for promoting international trade. Furthermore, IMF promotes international business by providing restrictions and policies within which trading activities should be carried out. IMF is involved in reconciling conflicting claims between member countries. This is an important role in foreign trade since it improves relations between countries. IMF’s role in resolving conflicting issues is facilitated by its position as a neutral agency serving all member countries equally. International trade is heavily dependent on favorable relations between countries hence improving relations is boosts international business. Conflicting claims related to trade are mainly addressed through a set of policies providing directions and expectations of participating members. For example, international trade policies provide for equality among participating members and also restricts price manipulation (Jain, 2012, p.142). This is important mainly for developing countries since it prevents exploitation by other countries. Additionally, international trade policies as provided by IMF are essential for ensuring and enforcing ethics within trading activities. For instance, there has been increased focus from member states to conserve the environment in the course of trading activities such as through avoiding damping. Through trade regulation policies, IMF has been able to create a favorable environment for international trade. Conclusively, the IMF policies have played a huge role in enhancing international business. Although not all IMF policies target international trade increment, they have positive implications that facilitate its growth. For example, through trade liberalization international trade has been boosted with more countries joining the trade. Additionally, IMF is focused on increasing production of member states such as through funding and giving advice thereby promoting participation in international trade. IMF also plays an important role in the currency devaluation process by setting a fixed exchange rate. Additionally, IMF gives advice on implications of currency devaluation to prevent inflation. Member states of IMF are advice on effectiveness and applications of budget balancing. This is done through the IMF conditions for lending hence thereby increasing economic stability that is essential in promoting international trade. Moreover, IMF through international trade policies that seek equality and ethics creates a favorable environment for trade. As such, developing nations are protected from exploitation hence increased participation in international trade. Through these policies IMF plays an important role of promoting international business. References Coddington, A. (2013). Keynesian Economics. Hoboken: Taylor and Francis. De Masi, P. (1997). IMF estimates of potential output: theory and practice. Washington, D.C.: International Monetary Fund, Research Dept. Jain, N. (2012). Economics of global trade and finance. New Delhi: Alfa Publications. Obe, M. (2013 April 16). IMF Says Currency Devaluation Fears Overblown. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB10001424127887324030704578426472822487926 Owen, J. R. (2004). Currency devaluation and emerging economy export demand. Aldershot: Ashgate. Sauve, P., & Stern, M. (2000). GATS 2000: New directions in services trade liberalization. Boston, Mass: Center for Business and Government, Harvard University. Taylor, D. (2012). Balancing the budget in a progressive priority. New York, NY: Springer. Read More