The Effect of the International Monetary Fund - Essay Example

"The Effect of the International Monetary Fund and World Bank on Global Economies" The economic depression faced during 1930s played a great partin the occurrence of Second World War, hence in 1944; Western powers were quiet anxious and motivated to stop such situations in future. In the last year of the destruction of that war, preference had to be given to the stabilization of the states' economics. Robert Olivier declared: "their major objective was to provide a world within which competitive market forces would operate freely, unhampered by government interference, for they supposed that market forces would produce optimum results for the entire world...As Jacob Viner put it 'trying to reverse the whole trend of policy and practice of the world at large in the field of international economic relations since 1914 and especially in the ill-fated years since 1929" (www.globalexchange.org). From the establishment the Bank was planned to challenge protectionism and economic depression. The Government of United States was chiefly involved in designing The World Bank and it is situated in Washington. It was based on a synthesis of the economic theories put forward by Harry Dexter White (U.S.) and Maynard Keynes (U.K.). America had 36% of the voting power in 1946 and offered the biggest part of the official finances and hence was considered as a dominating power. Moreover, the president of The World Bank has always been an American. In 1944, at Bretton woods conference, two different but complementary institutions were established. IMF was designed to help government maintain their balance-of-payments, whereas, the World Bank was founded with the basic intention of post-war re-stabilization of countries by giving loans to the affected countries. The proper name given to The World bank is 'International Bank for Reconstruction and Development'. The World Bank and International Monetary Fund were set up in the finishing stages of World War II, at a convention in Bretton Woods, New Hampshire; USA. The participants signified the governments quickly to win the battle in opposition to fascism. The participants wanted to rebuild Europe and the global economic system which was harshly affected by that destructive war (Peet, 2003). The main objective of the conference held at Bretton Woods was among the British and US delegations addressing the moderate and conservative ideas of worldwide economic institutions. Maynard Keynes represented the views of British Delegation and proposed that the new IMF should be a helpful fund for the countries facing economic crises, to aid them in maintaining economic and employment activities during periodic crisis. This vision recommended an IMF serving governments to operate as the US government had during the New Deal in reply to the great downturn of the 1930s. On the other hand, the US delegation put forward a view that IMF should be more similar to a bank and the needy countries are liable to return the debts on time. This view was more conservative and was less concerned to solve the problems of recession and unemployment. However, the US vision succeeded and this is the way how economic crises have been controlled since WW-II (Harris, 1988). The International Monetary Fund has been helping the governments facing economic crises since the Second World War by offering them, loans for a certain period of time. These loans are widely known as 'Structural Adjustment' loans as their main objective is to aid borrowing governments to adjust the structure of economic activity. The International Monetary Fund (IMF) was established on December 27, 1945. Twenty nine states accepted its Articles of Agreement in the expectations of avoiding a reappearance of the economic procedures that donated to the United States Great Depression in the 1930's. Other objectives of the IMF comprise the endorsement of international monetary cooperation, the development of worldwide trade, and the feature that has become its major identity is the loan of funds it provides to member countries. However, this fund is just made accessible after the country requiring the loan has applied certain structural adjustment program (www.imf.org). Structural Adjustment Programs (also known as SAPs) are economic policies created by each country but having shared common principles. These common principles include the devaluation of currency against the dollar, export-led development, privatization, and improved free market practices. States following SAPs are usually obliged to balance their budgets, release import and export limitations, and lessen or stop state subsidies as well as price controls. While the IMF obliges states to make an effort to balance their budgets, they object to the plan of raising taxes. As an alternative, states practicing SAPs are generally required to cut expenses for education, healthcare and social services. These SAPs are the chief cause of such a quarrel over the International Monetary Fund. However, using a liberal view it can be seen that in 'most' of the cases SAPs hurt the states more than they aid. The execution of SAPs has become the source of riots and disputes. Algeria can be taken as an example of it. In October 1988, riots were caused due to the high prices and increased unemployment caused by the implementation of SAPs. During the riots more than 200 people were killed. In order to support this point some more examples would be helpful. Like during the riots in Jordan, due to the increase in prices brought about by SAPs, five citizens were killed in April 1989. In Venezuela, from February 28th to March 2nd, 1989, approximately 600 inhabitants were killed and more than 1000 injured as riots broke out because of the increase in fuel and public transportation prices, caused by SAPs (www.Whirledbank.org). The major issue against the International Monetary Fund is not just the point that SAPs hurt the poor but it also increases profits for the rich people, multinational companies and the IMF itself. As a result of reduced social expenditure, states can pay back their debts. The IMF directly makes profit from this, as a greater amount of the money generally goes to repaying the state's liability to the IMF. Due to increase in the prices of education and health facilities, a large number of children, particularly girls, are dragged out of schools and death rates increase. One more obligation of the International Monetary Fund is the shrinkage of the government. In numerous poor states the government is a chief employer, so the shrinkage brings about mass layoffs. It can also be said that the government does not have the authority anymore to supervise corporations' obedience to ecological, employment and financial rules. Multinational corporations mostly prefer moving to these states as they have a very few rules. When governments try to implement rules on the companies, companies can report to WTO for free trade protection. Another outcome of implementing SAPs is to send the small business owners out of business. Due to the cheaper rate of imported goods and services it becomes indispensable for the small business owners to participate. They get de-motivated and often become a part of unemployed population (www.globalexchange.org). IMF worked in Thailand during 1980s when the state was facing a depression resulted due to a rise in the price of oil, decrease in the costs of agricultural exports, heavy burden of foreign debts and deficit in the external financial accounts. A stabilization program was designed for Thailand which was supported with a strategic structural adjustment program and was implemented with a joint effort of The World Bank and IMF. The aim of the IMF's and the World Bank's hard work was not merely to alleviate the country's external accounts but to radically readjust the state away from inward, import-substituting industrialization on the road to better integration into the global market by means of trade and financial liberalization, deregulation, as well as privatization. During the same period, an identical system was being implemented by the World Bank on Indonesia, which was experiencing a comparable balance of payments crisis cum depression. Malaysia, also implemented its own structural adjustment program during its economic depression period rather than using the fund or the bank. There are many institutions which are established with the main objective to aid countries which are facing financial deficit. The World Bank and International Monetary Fund (IMF) are two of the strongest international financial institutions around the globe. They provide loans to the countries, in need of funds and describe some major changes in policies and economies of those states. The World Bank is the biggest public development institution around the world, granting loans over US$23 billion in 2006 and around US$4 billion are sent to Africa. The USA is among world's wealthiest countries and is a major shareholder in two major institutions namely, The World Bank and IMF. The World Bank, headquartered is based on a "one dollar, one vote" policy according to which members with the biggest financial contributions has the biggest power in decision making. The U.S. carries around 13% of the vote in the World Bank and the 48 sub-Saharan African states in total have fewer than 9% of the votes. Over the previous two decades, the states with higher deficiency of finance have no other option then to move for IMF and World Bank's financial aid because the extreme deficit of capital has kept them from borrowing elsewhere. These two institutions make several changes in the policies of the borrowing countries and hence somehow get a major control over the governments of those countries. An estimate of 67 conditions is applied per World Bank loan and the poor states have to sign and agree on these policies in order to get new loans. African states were in need of loans and hence adopted all the policies as required by these institutions (Battikha, 2002). The World Bank and IMF have the same rules of reducing the money expenditure on basic services and the implementation of Structural Adjustment Programs (SAPs). According to their requirement Africans were obliged to open their markets for multinational companies providing them with cheap work force and raw material with no or less trade barriers. The result of these policies was severe and caused an increase in the poverty of countries and reduced average incomes of Africans. The failure of IMF and World Bank in African countries worsened the situation of their financial and economic conditions and it made them more dependent on loans and aids. Their policies have not only injured their financial situations but the policy to cutback in spending on healthcare and privatization of basic services has exposed the Africans to HIV/AIDS and other disease (Konadu-Agyemang & Ankomah, 2004). The level of international Financial Institution (IFI) participation in the Middle East and North Africa (MENA) section has varied considerably over time. After a decade of comparatively self-effacing movement, the quantity of new lending is once more approaching the elevated levels observed in the early 1990s. While typical multilateral lenders for example the World Bank and International Monetary Fund have traditionally prevailed, the previous few years have perceived the emergence of new associations, for instance the European Investment Bank (EIB), whose financial support in the area reports for a great deal of the latest growth. The World Bank, IMF and EIB are playing chief roles in helping economic integration in the area as element of a push to support "free trade" and private sector investment. Thus far, this approach has formed diverse outcomes. In spite of comparatively elevated national incomes in MENA, achievements in decreasing poverty levels have been inadequate, and a lot of countries in the section face an expanding space among the rich and poor. The World Bank itself admits that regardless of affirmative trends in economic development, the amount of poor has increased and 80 million public in the region remain jobless. The study notes that in 2001, the World Bank contributed 507 million dollars to Middle East and North Africa -- just 2.9%of the entire Bank lending that year. however in 2006, it handed over 1.7 billion dollars, more than half which set out for finance and energy schemes after a number of years of moderately negligible allotments to these sections. Lending projects in the water and hygiene, health and agricultural segments drifted off almost totally. Of the 83 schemes accepted in final year, forty-four were project loans and thirty nine were for technical support. During the previous five years, Egypt has taken more loans from the World Bank as compared to some other country, getting over 1.2 billion dollars, followed intimately by Iran, which has borrowed 1.1 billion dollars from the Bank over the equivalent time (Weiss, 2004). At of the closing stages of 2006, Morocco, Egypt, Algeria and Tunisia, the states in North Africa, were the major cumulative borrowers in the section. CONCLUSION: IMF and the World Bank both institutions face extraordinary criticism. The Fund is blamed of imposing one-size-fits-all proposals that are extremely inconsiderate in certain regions including budget cuts and price rises. The Bank faces criticism for its supposed incompetence to obtain proper report of human and environmental requirements in its schemes, and for being bloated and unproductive. Both refuse the blames and both are carrying out a variety of changes to convince the criticizers. On of the most significant reforms, they declare, is a new stress on discussing with national governments, domestic specialists and help associations before explaining policies, the imaginary Poverty Reduction and development plan. Bibliography: Weiss, M. A. (2004). World Bank activities in the Middle East anad North Africa (MENA). [Washington, D.C.]: Congressional Research Service, Library of Congress. Konadu-Agyemang, K., & Ankomah, K. (2004). Reviews - IMF and World Bank Sponsored Structural Adjustment Programs in Africa: Ghana's Experience. Economic Development and Cultural Change. 52 (2), 499. Peet, R. (2003). Unholy trinity: the IMF, World Bank and WTO. Malaysia: Zed Books. The Origins of the IMF, IMF Homepage, http://www.imf.org/external/pubs/ft/exrp/what.htm The Whirled Bank Group, http://www.whirledbank.org/development/sap.html World Bank/IMF Fact Sheet, Global Exchange, http://www.globalexchange.org/wbimf/facts.html Battikha, A.-M. (2002). Structural adjustment and the environment impacts of the world bank and IMF conditional loans on developing countries. Blacksburg, Va: University Libraries, Virginia Polytechnic Institute and State University. http://scholar.lib.vt.edu/theses/available/etd-04272002-135235. Read More