Global Political Economy - Key Achievements of International Monetary Fund, Global Finance Crisis - Case Study Example

Global Political Economy Institution Name Date The International Monetary Fund The International Monetary Fund (IMF) is an organization made up of 187 countries whose role is to foster monetary cooperation globally, secure financial stability of its member countries, promote high rates of employments and ensure sustainable economic growth, facilitate international trade and reduce poverty in the world. The main mission of IMF is to ensure economic stability in the global system. This is achieved through keeping track of the changes in the global economy and the economy of its member countries. This involves overseeing the international monetary system and also the financial policies of its member countries as well as offering financial policy advice. IMF also lends to countries that are experiencing payment difficulties. This assistance is given to ensure that those countries rebuild their international reserves as well as stabilizing their currencies so that they can restore their macroeconomic stability. IMF also offers concessional credit facilities to countries with low income to assist them in developing their economies and also reduce their poverty levels. Another responsibility of IMF is to give technical help to its member countries. This involves assisting the low and middle income member countries to manage their economies effectively. It also offers practical guidance to those countries on how to advance their institutions, how to come up with effective financial, macroeconomic and structural policies. This paper looks at various aspects of the International Monetary Fund and how its services are becoming irrelevance with the recent financially critical matters that are being experienced globally. Rationale behind the creation of IMF The main functions of IMF are to promote economic growth and ensure economic stability. This is achieved by offering policy advice to members when they experience economic difficulties and helping them reduce poverty as well as achieving macroeconomic policy. The rationale behind the creation of IMF was that the international capital markets work imperfectly and most countries in the world have limited access to financial markets. Such imperfections in the market together with a balance of payments financing justify for official financing. Lack of an official financing would lead to these countries correcting the huge external payment imbalances through means which would lead to adverse results that would affect both national and international economic well being. IMF can therefore offer alternative sources of funds to needy countries which would not be available if there is no economic stabilization institution such as the one offered by IMF (Carin, 2005). The origin of IMF During the great depression of 1930s, most countries in the world attempted to save their ailing economies by highly raising their foreign trade barriers, devaluing their currencies so that they can compete against each other in the export markets and also cutting on the freedom of their citizens to poses foreign exchange. However, all these efforts proved to be fruitless and were detrimental to the economies. There was a sharp decline in the world trade, unemployment increased and the living standards of most countries went down. This breakdown in international monetary cooperation created a need for a solution. Representatives from 45 countries met in Bretton Woods, New Hampshire in the United States where they came up with a framework for establishing international monetary cooperation which would start functioning after the World War II. The main reason for this framework was to ensure economic cooperation that would avoid a repeat of the nasty activities that involved competitive devaluations which resulted to the great depression. IMF was therefore to stabilize the international monetary system and enable the countries to continue with their own economic developments. IMF was therefore established but its work started as the Second World War ended in 1945 (Carin, 2005). The IMF Charter The IMF is governed by the governments of its 187 member countries and is also accountable to those governments. The IMF charter is the Articles of Agreement which states that its main interlocutors are the financial authorities. These are the ministry of finance or the central bank of the member country. The IMF articles of Agreement recognizes that the main responsibility for communication to the legislators lies with the national authorities of the member countries and that its interaction with the legislators is customized to the circumstances in that specific country and coordinated with respective financial authorities in the country together with IMF executive board representatives. The IMF Articles of Agreement has a total of 31 articles which give guidelines on various IMF issues including membership, operations and transactions of the fund, capital transfers, replenishments and scarce currencies, organization and management, special drawing rights, termination of participation, withdrawal from membership and emergency provisions among others (IMF, 2008). Key achievements of IMF IMF has many achievements which would take an entire book to cover. However, some of its achievements that are worth noting include: 1. IMF triggered economic transition in Poland. This included building of institutions, liberalization and management of macroeconomic. In 1989, Poland was in a serious political and economic crisis which was heading to hyperinflation. They suffered shortages of all types of resources, high external debt and they were not certain about the future. Their economic turning point was reached in December 1994 after taking string economic policy decisions. Intervention of IMF played a very great role in transformation of Poland’s macro economy by assisting on all the economic needs of the transformation process. 2. Another notable achievement of IMF can be seen in countries such as Czech Republic, the Slovak Republic the Baltic and Hungary. Initiatives by IMF in these countries set off economic growth, liberalization of prices and the spread of democratic institution. 3. Another achievement can be seen in the progress of the Asia Pacific region in 2008 where a considerable progress was made in addressing downside risk to economic growth through the intervention of IMF (Layton, 2010). IMF actions dealing with recent critical matters Global Finance Crisis One of the roles of the IMF is surveillance of the global economy. This involves overseeing the international monetary system and to monitor the financial policies of its member countries. IMF is charged with analyzing the financial and economic policies of its member countries and their appropriateness in ensuring an orderly economic growth. The fund also assesses the consequences of these policies to other countries and also to the global economy. However, it is evident that IMF did not play this role properly and its failure resulted in the global economic crisis of 2008. IMF and other financial institutions shifted their purpose in 1970s towards a neoliberal economic agenda which was backed by the Washington Consensus. A neoliberal agenda is for ensuring that global trade and investment is means to prosper all the nations equally and fairly. During this time, policies such as structural adjustment that required equal adjustment of all economies started being pushed to the developing world. This resulted in devastating consequences to most of the world’s population. Some of the problems that resulted include: Developing countries were forced to open markets at a time when they were not prepared to. The developed nations were the first beneficiaries of the markets opened by the developing nations. The poverty level in the developing nations worsened as the structural adjustment policies reduced the ability of the poor nations to make decisions concerning the running of their own economies. The global financial crisis is highly blamed on the greed of the Wall Street because it is in the United States that most of the institutions and the highly influential banks are found. The policies that resulted to all these problems can be blamed on IMF and the World Bank. Most of the developing countries were then left in deep poverty due to the negative role played by IMF and World Bank in allowing the adjustment policies (Truman, 2009). Eurozone Crisis IMF played a role in the Eurozone crisis by the manner in which it lent to Greece when Greece experienced a payment balance. IMF decided to give 30 billion Euros to Greece where half of the amount was to be drawn from IMF quota resources and the other half from bilateral lines of credit that is usually pledged by its member countries. However, some things were unusual with the package that IMF lent to Greece. One unusual thing is that since the late 1970s, IMF had not been lending to the developed nations and has never lent to a member of the Eurozone since the creation of the euro. IMF had programs on its involvement with Europe before but its involvement was not recent. There was therefore no recent history of its lending to Eurozone members. Another unusual thing about the deal between IMF and Greece was the relative magnitude of the lending program. Initially, IMF maintained a limit on the amount that it can lend to a country either through a Stand-By Arrangement (SBA) or through Extended Fund Facility (EFF) which is usually not different to SBA when lending is to a country which has experienced a long term balance of payment problem. The lending guidelines by IMF indicated 200% of the member’s quota annually and 600% of the cumulative quota. The quotas are commitments made by a country upon joining the IMF. However, there are exceptional situations that the se lending limits can be exceeded. The loan of IMF to Greece was far much exceptional since it was lend 3200% of its IMF quota which was the largest access that IMF had ever granted to a member state. It was not very justified for IMF to lend to Greece since Greece had other options of addressing its crisis which eventually affected all the Eurozone members (Nanto, Sanford & Weiss, 2010). Other failed role of IMF in rescue packages Another failed state financial rescue packages offered by IMF is in Mexico where in 1995, $50 billion was offered by IMF. The crisis that had befallen Mexico started when Mexico exchanged peso-dominated bonds for a deal known as Tesobono, which was a short term note, an indication of a dollar that was meant to protect investors against devaluation. The value of the Tesobonos increased up to $29 billion in 1994 placing further pressure on the country’s economy. Mexican crisis was followed by Asian crisis caused by implosion of Thai currency in 1998. This triggered an economic collapse that spread from one Asian nation to another. IMF and the United States stepped in and gave rescue packages for all the affected countries. The role of IMF in this recue can be seen as imprudent and is an example of a risky short sightedness. The role played by IMF and Clinton’s administration was to promote a policy of global financial bailouts which are offered through IMF charity and conditions. If IMF bailouts continue to prevail, eventually the efficiency of the global capital markets will be at stake and incidences of crisis will increase as well as severity of financial crisis. Shortcoming of IMF The role that IMF is currently playing has been criticized by Vaknin (2010) who identifies various shortcomings in the three main roles of IMF which are surveillance, financial assistance and technical assistance. In surveillance, Vaknin argues that IMF regularly monitors the general economic policies of some through dangerous mechanisms with the countries’ monetary and fiscal authorities. In the last decade, IMF has been noted to transform from into a non official states’ credit rating agency. Bad review by IMF results to penalties imposed by IMF to the country in crime inform of higher interest rates and other charges payable on the country’s international borrowings. Another mechanism used is the Monitoring Agreement which sets economic benchmarks to a country under a shadow economic program that is designed by IMF. On its financial assistance role, Vaknin (2010) says that financial assistance is extended to member countries which are experiencing difficulties in balance of payment to support them reform and adjust their economic policies. However, in 1997, IMF extended a total of $23 billion to more than 5o countries. However, its surprising that 90% of this amount was extended to the rich western nations. This is contrary to the mandate of IMF which is to lend as a last resort to countries that are financial despair. On technical assistance, Vaknin argues that this role has been turned to crisis management. The member countries have been buying currencies of other member countries and converting them to hard currencies. They pay for this purchase with their local currencies. In turn, they buy their own currencies from IMF after an agreed period of time. This cycle continues until a country finds itself in a crisis which rapidly spreads to other countries. IMF then comes in to help manage that crisis. Basically, the country enters into risky deals and does so in the light of IMF but when things go wrong, IMF is in the front line solving the crisis. Alternative organizations to IMF With all the activities and the crisis that IMF has been involved in, its services are no longer relevant and there is need for an alternative organization to carry out the mandate properly. One such organization is the United Nations (UN). Initially, it was the role of the UN to regulate the world economy and IMF, World Bank and GATT were to function as part of the UN. However, this was overturned due to the restricted funding for the UN agencies. But with the recent crisis involving the IMF, its mandate needs to be transferred back to the UN agencies. UN has the ability to carry out the functions of IMF under its agencies such as Economic and Social Council (ECOSOC), The UN Conference and Trade and Development (UNCTAD) and the United Nations Development Program (UNDP). These agencies have the necessary knowledge, information and the experience to get back their regulatory role on the global economy and make it to be more equitable. Unlike the International Financial Institutions, the UN agencies are also naturally democratic and representative of all UN member countries (Makwana, 2005). However, for UN to be able to take up the role of IMF, it should adopt the concept of sharing essential resources such as water, food, land and medicine. Sharing of these resources will affect the global economy in that the situation will be that these resources are no longer involved in financial markets directly as commercial products. Se excess production of them will not be exchanged. The excess will instead be held by the UN system and distributed when needed. Conclusion Having failed to play an active role in the financial crisis that have affected most countries in the world, IMF’s services have become irrelevant and it needs mark end of era and the need for an alternative system which is in order with the new global economy. An alternative body that can unite the global economy is the United Nations which should take back its place in the control of the global economy. However, the UN must be strengthened in a process that would involve abolishment of the Security Council and any other right to overturn decisions. It must also be given more financial power which can be achieved through mechanisms such as taxes on arms, pollution among others. References Makwana , R. (2005). Decommissioning the IMF, World Bank and WTO. Retrieved on 13th April 2012 from http://www.stwr.org/imf-world-bank-trade/decommissioning-the-imf-world- bank-and-wto.html Vaknin, S. (2010). International Monetary Fund (IMF) – Kill or Cure. Retrieved on 13th April 2012 from http://samvak.tripod.com/nm044.html Nanto, D., Sanford, J. & Weiss, M. (2010). Frequently Asked Questions about IMF Involvement in the Eurozone Debt Crisis. New York: Congress Research Service. Truman, E. (2009). The IMF and the Global Crisis: Role and Reform. Washington DC: Peterson Institute for International Economics. Carin, B. (2005). Accountability of the International Monetary Fund. London: Ashgate Publishing, Ltd. Layton, R. (2010). The International Monetary Fund (IMF): Financial Crisis and Select Issues. New York: Nova Science Publishers. IMF. (2008). Articles of Agreement of the International Monetary Fund. Retrieved on 13th April 2012 from http://www.imf.org/external/pubs/ft/aa/index.htm Read More