IMF †International Monetary Fund

IMF – International Monetary Fund Free Online Research Papers IMF International Monetary Fund On, 1st July 1944, World War II, perhaps the darkest age of the human race, was about to end. The allies have landed in Normandy, and the fall of the Axis powers was inevitably near. Already, the economic visionaries and idealists have gathered at Bretton Woods to discuss the future economy of the upcoming peaceful times. After twenty-two days of meeting, twenty-nine participating nations signed the articles of agreement and the International Monetary Fund was established, with its noble goals to provide a world of economic cooperation, to maintain a fixed exchange rate, to safeguard against any nations misfortunes and disequilibrium, and to achieve a world economy that would reduce the possibilities of isolationism and therefore, war. Yet, after fifty years of commitment to that noble goal, after providing more than $100 billion dollars to developing nations, the program is facing grave opposition and a possible end to its organization. Anti-IMF organizations have begun to wage a vicious campaign named 50 years is enough against the IMF and the World Bank. Did the IMFs service to the world economy have a negative effect? Or is it because the environmental, political, financial and humanitarian concerns outweigh the positive economic gains of the organization? Or has the rapid advancement of the world economy made the once useful organizations services obsolete? A closer examination of the organization and its workings, its problems, and its opponent’s positions reveals the answers to these questions. The International Monetary Fund officially started operating on March 1, 1947. The philosophy behind the organization was mainly influenced by two men: Harry Dexter White and John Maynard Keynes. They were both heavily influenced by main economic and political events of the 1920s and 1930s: the economic depression connected with isolationist policies of the thirties and the rise of extremist political forces in Germany and the Soviet Union. Most of the experts thought that these events were more or less a consequence of the collapse of the international trade system in the interwar years. We share this view to this day: an isolated country is much more prone to be subject to destructive political forces of the left or of the right, as examples abound, than a country fully integrated in world economic cooperation . But the two disagreed on the method of bringing about that world economy that will prevent such depressions and related political dangers. John Maynard Keynes, a brilliant British economist proposed a world reserve currency system, which would be governed by a central bank. However, the view which prevailed was that of U.S. delegates led by Harry Dexter White, who opted for a system based on the relatively free movement of goods with the dollar as the international currency . In the end, the IMF was established to promote international monetary cooperation by maintaining fixed exchange rates among the currencies of different nations . To accomplish this, the Fund was to make short-term loans to nations which had temporary balance of payments deficits (i.e., when the net imports of a nation exceeded its exports). The three to five years loans would then allow a nation to recover from its imbalance without having to resort to devaluing its currency . These loans are given out according to a quota that is set for each country. The quotas consist of the capital each country has paid in, usually twenty-five percent in gold and the rest in the member nation s currency. A member nation can exchange a portion of its quota to buy another nations currency, usually in dollars, German marks, or Japanese yen. These funds in turn can be used to support the borrowing countrys currency on exchange markets or to pay off creditors while it gets its economy back in shape. However, the IMF was unable to foster the fixed exchange system. The inflation of many countries made devaluation of their currencies inevitable . Finally, on August 15, 1971, the fixed rate system complete collapsed when the United States abandoned the gold-exchange standard. Many critics speculated that the IMF would fade into oblivion since its primary role maintenance of fixed rates was eliminated . The agency, however, survived. The IMF actually substantially expanded its roles in the World economy. When it no longer had fixed exchange rates to justify its existence, IMF turned to lending for balance of payments deficits as its primary function. Between 1970 and 1975 the volume of the Funds lending more than doubled in real terms, and from 1975 to 1982 it increased by a further 58 percent . With its generous loan commitments to more than 30 nations totaling more than $30 billion per year, it is no doubt that its contribution to economic stability has been significant. When Turkey experienced a severe balance-of-payments crisis in the late 1970s, the IMF arranged a two-year, $450 million credit in 1978, and a three-year $1.6 billion credit in 1980. Turkey, for its part, agreed to successive currency devaluations, higher domestic interest rates and cuts in government spending and subsidies. The results were successful: inflation fell from 94% in a year to 30%, while economic growth rate rose from 1% to 4%. Even politically, Turkey was saved by IMF, and returned to civilian rule . In Jamaica, heavy taxes, curtailed investment, crop failures, poor sugar prices and falling tourism revenues combined to create an economic disaster. Jamaica soon became the largest borrower from the IMF. After the Harvard educated Seaga became elected, he secured a $650 million three-year line of credit from the IMF. Combined with a resurgence in investor confidence (partially due to excellent leadership, and perhaps also as a result of the IMF loans), IMF aid stabilized and improved the Jamaican economy modestly. Inflation fell from 30% to less than 7% in less than two years. Perhaps the best example illustrating the importance of IMF is its admission of an aid to Mexico: The Fund, created near the end of World War II to encourage trade and help a few industrial nations stabilize their currencies, had been forced by Mexicos near-bankruptcy and subsequent severe strains in Argentina and Brazil into a new, activist role, designed to hold together a world financial system under enormous stress. Some are already describing the fund as the worlds bank of last resort, the institution that will stand behind third-world countries and their bankers trying to guarantee the good faith of both borrower and lender . Yet, as IMF approaches year 1997 its fiftieth anniversary it has become the target of various attacks. Most of these attacks are concerned with the issues of politics, financial policies, humanitarianism, and the environment. It seems that in the single-minded attitude that the IMF takes to bring about recoveries of economies has its immeasurable costs. The IMF, in its attempts to stimulate the economies of third-world countries and to devaluate their currencies, often lead to environmental destruction and severe cuts in the nations social welfare programs. Critics claim that the women and the poor often become the victims of these recovery or stimulation processes. The structural and financial policies of had wide-ranging effects recently in Argentina , where the IMF structural adjustment policies have been blamed for the current economic downturn. The recessional climate has occurred due to a loss in confidence in the economy as a whole, and trade liberalization (IMF policy) keeping wages low. Although employment may be high in the short-run, it is unsustainable as the public will spend less causing muted profits and ultimately private sector cutbacks on investment and employment, giving a stagnant economy. Also, the peso became fixed to the dollar, which was designed in theory to give stability to the currency and provide the basis to build a healthy economy. However, fixed exchange rates have not worked historically and this is no exception, I feel, because Argentinas main trade is with Europe and Southern America, not the USA. My view is that the IMF tried to force policies upon a country when they need the whole world to be in similar oper ation in order to see a successful outcome as the theory suggests. Other policies seen in examples such as Honduras, Kenya, South Africa and Bolivia include the reduction of price controls, increased interest rates, export promotion, decreased government expenditure and privatization . Reducing price controls, enables more trade but causes huge price rises, often including vital basic goods and services such as food. This can be worsened by export promotion which encourages land use to alter to cash crops thereby creating expensive and high demand land, plus dependence on other international commodities which suddenly also become more expensive. When you combine these factors with lower wages as illustrated by the Argentina example, it is becoming more and more difficult for marginal families to get by and just survive day-to-day life. Increased interest rates have caused massive reductions in inflation and therefore prices, leading, as history suggests, to a stagnant economy. This is worsened by the decrease in government expenditure, freezing the public sector, and also worsening the health and education systems which produce the future workforce of the country. To secure the future of infant industries and small businesses, a dynamic economy is required, the main reason why governments seek to lend in the first place, only brought by protectionism in the early stages. Although privatization increases efficiency, it creates mass unemployment and helps to only widen the already unequal distribution of income within such countries; therefore government control is very necessary. In concluding, it is important to realize that the IMF ultimately loans single countries money on the promise of implementing policies, and this money given is used to pay back international banks. The donor countries are often forced into this as there is no other alternative open to them, but ultimately the IMF are the only organization that do what they do , so where would some countries be without them? To help the countries recover from economic crises, IMF often encourages the construction of unpopular dams, mines, and timber harvests to create a large amount of foreign exchange. In Guyana, South Africa, such an IMF insured gold mine caused the largest cyanide spill in human history. The result was the pollution of Guyanas largest river, which suffered a severe cutback in wildlife and became unusable for the inhabitants. Such environmental and social concerns have created a strong force of opposition to the IMF organization . Political scientists also question the policies of IMF and its effects on the countries that rely upon it. Because of IMFs neutral stand on politics, the fund will serve as a safety net for any nations economy regardless of whether it is democratic or despotic. As a result, many politicians believe that IMF helps maintain despotic rule in third world countries, and that mismanaged economies are kept going under the loans of IMF. Where as without it, there might have been change for the better. So, after fifty years, IMF and the World Bank have come to be viewed as mixed blessings. But nevertheless, it was successfully committed to its original goals to bring about cooperation in world economy, and to bring about stability and prosperity. Economics was the sole concern of the Bretton Woods convention, and economics had been the sole aspect that IMF is concerned with. And it has been more than successful in that field. Little did the founders of IMF know that maintaining the world economy would come at a price of lost social programs, lost personal liberties, and destruction to the environment? But the final question of whether it is more important to promote the economy or to protect those who would be victimized by an IMF plan is simply too subjective. Research Papers on IMF - International Monetary FundAppeasement Policy Towards the Outbreak of World War 2Assess the importance of Nationalism 1815-1850 EuropePETSTEL analysis of IndiaThe Effects of Illegal ImmigrationTwilight of the UAWDefinition of Export QuotasLifes What IfsHarry Potter and the Deathly Hallows EssayRelationship between Media Coverage and Social andThe Project Managment Office System