What has been happening at the I M F?

Posted by Allison on 4 April 2009, 10:05

The IMF, which is the International Monetary Fund, was founded in 1944 by 45 countries, which met in America and decided that they would work together in order to ensure that there could be economic stability and co-operation between countries. In the 1920s and 1930s there had been sustained periods of economic recession and what is more governments had systematically failed to address the issue of economic policy and this had resulted in some economies becoming ever more weak.

Thus the IMF was born in order to bring stability to the world's economy and ensure that governments instigated economic policies that were sound and appropriate to the needs of the country.

Crucial to the development of the IMF was a belief that it needed to monitor and regulate exchange rates, to ensure that trade could carry on between countries and that inflation could be controlled quite easily and without draconian economic policies.

Currently the IMF has a total of 185 countries that are signed up members to the IMF. Consequently, it is a very influential body and it influences monetary policy throughout the world and as such is very powerful.

However, the IMF has recently been facing a number of problems and for the first time in its history it is starting to look a little bit shaky and people are even starting to question its relevance and whether or not this great institution can actually accommodate 21st century financial requirements.

Could the end be nigh for the great IMF or is this merely a blip and the IMF will be around for some time to come? Currently this is unclear, but if you scratch beneath the surface of some of the things that have been happening at the IMF, it certainly doesn't seem a completely safe bet that it will survive another 50 years.

How does the IMF work?

The IMF has as its main goals the stability of economies throughout the world and the prevention of economic crises. It also seeks to encourage economic growth and to eradicate poverty.

It does so is in three main ways, it keeps an eye on a global markets to ensure that they are stable, it provides technical assistance to various governments throughout the world by advising them of how they should run their economies or stabilise them and finally it will also lend aid money to countries that need it.

The IMF keeps an eye on global markets by ensuring that it is aware of current trends within the market, but it also enters into dialogue with each member on an annual basis. This dialogue involves an in depth assessment of the economic position of each country. In this way the IMF can be alerted to any potential difficulties that a country may be facing and it can also advise the country on how best it can alleviate the situation.

In addition the IMF publishes a report this every year one of which is the Global Financial Stability report and the other is the World Economic Outlook. The Global Financial Stability is a report, as its name would suggest, that gives some indication of how things are looking in terms of global finance.

The World Economic Outlook document gives information about future prospects for the world outlook as a whole.

Development of the IMF

Since the IMF was set up in1944, it has obviously had to change significantly since its inception, mainly because the world has changed so much since that time. When the IMF was set-up any financial crisis that happened tended to be isolated within the one country, or at least it would take some time for a financial crisis to spread to other countries. However, because of the global nature of the world today a financial crisis that happens in the US is felt throughout the world and the rest of the world feels this quite quickly. This means that economies are much more subject to being adversely affected by events that are happening in other parts of the world.

As a result, the IMF has had to make sure that it became stronger through acquiring more members and thus it could advise on the economic stability of the world as a whole.

One major way in which the IMF has changed is that it has welcomed countries that were formerly part of the Soviet Union. The IMF is also pleased to be able to welcome members who are from oil producing countries, which means that it is well-placed to be able to try and resolve any crisis surrounding oil exports or oil production.

So, the IMF has grown dramatically from its inception and is now more than four times bigger than when it was first established. Global technology and its use throughout the world, means that the IMF now has to face the future and to radically adapt to an ever-changing world.

The IMF is also responsible for the World Bank and basically the IMF offers the financial policies that are implemented by the World Bank. Since many Third World countries owe money to the World Bank, the fiscal policies of the IMF have at times been subject to quite a lot of criticism because people feel that the World Bank may be too quick to try and recoup the money it has loaned to Third World countries.

The IMF always states that it thinks that if it merely wiped out Third World debts that this would simply lead to a culture of dependency whereby Third World countries would borrow from the World Bank, but they would have no intention of repaying the debt. Obviously this is not a situation that the World Bank could tolerate. This issue is one that causes a significant amount of tension between people who feel that the World Bank is out of order and other people who feel that the World Bank should not be seen as some kind of cash cow.

Changes to the IMF

In 2005, the IMF along with the World Bank came up with a framework for debt sustainability. This new framework acts as their policy as to how they will finance low-income countries.

This policy looked at what countries would be likely to earn in terms of their exports and how their economy was going to grow and then provided a means of assessing how much money the country could pay back in terms of its debt to the World Bank.

At the time this policy was severely criticised by many non-government organisations, which felt that because the IMF was looking at projected earnings instead of actual earnings, many countries would be unable to repay the amounts of money that the IMF was looking for. Critics asserted that looking at projected earnings failed to take account of the central government spending in poor countries, thereby diverting money away from essential services in these countries, such as education, health care and even water supplies.

The IMF argued that it needed to look at debt sustainability because even if it were to cancel all the Third World debts that were in existence, these countries would still require substantial levels of funding. In other words, the cycle of debt would still continue, but the IMF was facing a severe shortfall in terms of its budget and this meant that unless it could develop a new framework, it would simply be unable to survive. Thus the new framework was introduced despite the criticism that it faced from many charities and non- government organisations.

Whilst this new framework helped to protect the IMF, it was still desperately short of money. It could see that unless it changed, it would simply become unfeasible as time progressed. As a result, in 2007 the IMF decided that it needed to dramatically overhaul not only the framework under which it operated, but it needed to change some of the ways in which it operated because it was actually facing a 400 million budget deficit and even for the IMF this was a significant budget deficit.

So it decided that it would have to do what it used to tell its members to do and that is to cut back spending and sell off some of its assets. Eventually in 2008 the new framework was agreed upon so that the IMF will be more prepared to face the future and hopefully survive the rigors that it may face over the next few years.

The IMF will thus cut its spending until 2011, saving it a projected $100 million. It is also dismissing between 350 and 380 of its staff and it is offloading 400 tons of its gold reserves. This will make the IMF a much more streamlined organisation and it also means that it is financially in a better position to adapt to the changes of the modern world.

The IMF gains its money through charging member nations a quota. How much money the charge is set at is dependent on the wealth of any particular country. The wealthier countries pay more in terms of quotas, but they also get more voting rights than poorer countries. Some of the smaller countries and poorer countries feel that this effectively gives all power to the more developed and richer countries, with the poorer countries having fewer voting rights. The IMF countered this argument by pointing out that many smaller countries combined, will have a substantial amount of the votes and so it was an essentially fair system.

However, in March 2008, the IMF changed how it allocated its voting shares and gave 135 of its members an increased share of voting rights. This was seen as a significant breakthrough in terms of reforming the IMF and making sure that it actually met the needs of its members.

The IMF actually played down this significance of this change and simply said that it was keen to be a much more efficient and focused organisation so that it will be able to advise its members for the foreseeable future and this is why it has introduced these changes.

Has the IMF changed enough?

Some critics feel that the changes introduced do not go far enough. Despite the fact that the IMF projects herself as being the watchdog and policeman of the world's economy, it has done little to assist the prevention of the credit crunch in the United States which has been felt so keenly throughout the world and has dented many of the economies in the world. If the IMF was doing its job properly, then, many critics state, that it would have been able to prevent the credit crunch and thus keep economies stable and much more resilient.

The IMF has also failed to keep the dollar strong and this is of significance due to the fact that oil prices are measured in dollars and the dollar being weak has actually resulted in the price of oil rising. Again, why didn't the IMF stop this, since the rising price of oil is also adversely affecting economies throughout the world?

Many critics are actually saying that the IMF is becoming an increasing irrelevance in the world's economy. After all it really should have been able to prevent these problems and the fact that it has members from OPEC, means that it should be able to negotiate over the price of oil and try to stop the price from rising, however this is simply not happening and the price of oil is just increasing.

As people begin to talk about the IMF in these terms, confidence is lost in the IMF and some governments or representatives from national economies are questioning whether or not the IMF will survive in the 21st century. After all the world has changed significantly since the IMF was created and perhaps it really has had its day and since it seems to be losing its effectiveness then is there any reason to keep it alive?

Certainly the IMF seems to feel that it has important work to do and that it will continue with its work for the foreseeable future and that it will not be made redundant for some time to come.

Certainly, the new managing director Strauss-Kahn seems keen to review the IMF and its role to ensure that it does survive and move forward.

The IMF's wake up call

Some economists believe that the real reason for all the changes at the IMF stem back to not just the budget deficit, but also the fact that in 2005, Brazil suddenly announced that it was going to pay off all the loans that had from the IMF. It was also paying back the loans early, in other words ahead of schedule.

Argentina also announced in 2005, only two days later than Brazil, that it too was going to pay off all its loans. When the Brazilians had made their announcement, they had been relatively diplomatic. However, when the Argentineans made their declaration they said that they were paying off all their loans because they felt that the IMF imposed suffocating conditions, which they could no longer tolerate.

The Philippines, Indonesia, Serbia and Uruguay took the lead from South America and made similar declarations that they too were ridding themselves of the conditions imposed by the IMF.

This was serious news for the IMF, because Argentina and Brazil alone were two of its biggest borrowers and so to lose them and their repayments of interest, would create financial headaches for the IMF. But losing the other countries meant that for the first time in its history the IMF was in serious trouble and potentially could have gone bust.

So in effect it had to change and that period of change will continue for some time the IMF will simply lose their borrowers and as a result it will find itself in it serious financial difficulties.

The IMF has indeed had a wake up call and it needs to be sure that it listens to what its members are telling it. The events of 2005 should actually demonstrate to the IMF that it cannot be complacent and that it needs to take continuous action to ensure that its members have confidence in it and that they will continue to support it.

Economists would also like the IMF to take a stronger role in sorting out the price of oil and making sure that the price of oil is stabilised. If it could do this, then it would undoubtedly be hailed as the hero of the hour, if not this century- and its members would regain a great deal of confidence in this institution. However, given the complexity of the situation, it is unlikely that the IMF will actually manage to bring this about and as such its members probably will go on having some kind of crisis of confidence. But hopefully the IMF will continue in at least some form, so that it can act as a watchdog on the world's economy.