sem 2 eco project

8/12/2019 Sem 2 Eco Project

1/26

International Monetary Fund

The International Monetary Fund(IMF) is aninternational organizationthat was initiated in 1944 at

theBretton Woods Conferenceand formally created in 1945 by 29 member countries. The IMF's

stated goal was to assist in the reconstruction of the world'sinternational payment systempostWorldWar II.Countries contribute money to a pool through a quota system from which countries with

payment imbalances can borrowfundstemporarily. Through this activity and others such as

surveillance of its members' economies and the demand for self-correcting policies, the IMF works to

improve the economies of its member countries.[1]

The IMF describes itself as an organization of 188 countries, working to foster global monetary

cooperation, secure financial stability, facilitate international trade, promote high employment and

sustainable economic growth, and reduce poverty around the world.[2]

The organization's stated

objectives are to promote international economic co-operation,international trade,employment, and

exchange rate stability, including by making financial resources available to member countries to

meetbalance of paymentsneeds.[3]

Its headquarters are inWashington, D.C.,United States.
http://en.wikipedia.org/wiki/International_organizationhttp://en.wikipedia.org/wiki/International_organizationhttp://en.wikipedia.org/wiki/International_organizationhttp://en.wikipedia.org/wiki/Bretton_Woods_Conferencehttp://en.wikipedia.org/wiki/Bretton_Woods_Conferencehttp://en.wikipedia.org/wiki/Bretton_Woods_Conferencehttp://en.wikipedia.org/wiki/International_payment_systemhttp://en.wikipedia.org/wiki/International_payment_systemhttp://en.wikipedia.org/wiki/International_payment_systemhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-1http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-1http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-1http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-2http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-2http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-2http://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-3http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-3http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-3http://en.wikipedia.org/wiki/Washington,_D.C.http://en.wikipedia.org/wiki/Washington,_D.C.http://en.wikipedia.org/wiki/Washington,_D.C.http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Washington,_D.C.http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-3http://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-2http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-1http://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/International_payment_systemhttp://en.wikipedia.org/wiki/Bretton_Woods_Conferencehttp://en.wikipedia.org/wiki/International_organization


2/26

Abbreviation IMF

FMI

Formation Formally formed 27 December 1945 (68 years ago)

Began financial operations (de factoformation) 1 March 1947 (66 years ago)

Type International Financial Organization

Headquarters Washington, D.C.,United States

Membership 29 countries (founding); 188 countries (to date)

Official languages English, French, and Spanish

Managing Director Christine Lagarde

Main organ Board of Governors

Website www.imf.org

From the early 19th century till the past First World War period most of the

industrialized countries of the world followed gold standard. Under gold standard each

country following gold standard expressed its currency in terms of gold. In 1900 for

example the dollar was equal to 1/20lh ounce of gold and the Pound sterling was equal

to 5/20th ounce of gold. Hence 1=S5. Secondly the countries also agreed to convert its

paper currency in the gold on demand. Thirdly there was no restriction on the shipment

of gold from one country to another. The gold standard provided for an automatic

corrector of balance of payments disequilibrium. If the country imported goods more
http://en.wikipedia.org/wiki/Washington,_D.C.http://en.wikipedia.org/wiki/Washington,_D.C.http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Christine_Lagardehttp://en.wikipedia.org/wiki/Christine_Lagardehttp://www.imf.org/http://www.imf.org/http://www.imf.org/http://en.wikipedia.org/wiki/Christine_Lagardehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Washington,_D.C.


3/26

than its exports then gold flowed out.

Conversely when a country exported goods more than its imports gold flowed in.

Many supply in the country also depended on the receipt and payment of gold. In case

receipt of gold money supply expanded in the country conversely in case of payment of

gold money supply contracted in the country. The increase in money supply led to

increase in prices. While the contraction in money supply led to fall in the price level.

Until the outbreak of First World War (1914) the gold standard worked remarkably well

and the stability in the exchange rate was maintained. Gold standard countries were

very eager to abide by the golden rule of gold standard to expand money and credit.

When it coming in and to contract the volume of money and credit when gold is going

out. The gold standard was, shattered in the first week of first world war (1914-1918).

The conversion of paper currency notes in the gold was prohibited and the import and

export of gold was stopped. After the First World War the international gold standard

was restored line due to the following reasons:-

i) There was a natural wish to return to normalcy

ii) People wished to go back to pre-war conditions

iii) Post war inflation

However, after a decade the international gold standard once again was abandoned by

majority of the world countries due to 1930's great depression. Great Britain suspended

international gold standard in 1931 followed by majority of the countries of the world

including U.S.A.

The breakdown of the international gold standard created a vacuum in the field of

international trade. All the countries of the world realised the need for international

economic co-operation. The breakdown of international gold standard created a chaos in the field of

foreign exchange rates. In order to take the advantage of increase in


4/26

exports each country deliberately switched over to competitive devaluation. Each

country tried to prosper at the cost of the other. They followed, "beggar thy neighbour

policy." Competitive devaluation, exchange controls, import quota, tariffs 73, export

regulations and bilateral pacts were the order of the day. Thus the volume of

international trade declined to a considerable extent. Due to uncertainly, international

investment suffered a lot.

It was realised that mutual agreements between world countries having international

economic relation would solve the problem of international monetary disorder.

International monetary Co-operation became the need of the hour. It was impossible to

revive the international gold standard, a new system had to we devised which would

provide sufficient flexibility through international assistance without disturbing the

internal economies. Different nations put forwarded different plans to solve the problem

of international trade and monetary disorder, in 1943 the United States Treasury

published a proposal for the establishment of an International stabilization Fund of the

United and Associated Nations. Great Britain also proposed the establishment of an

International clearing union. The American proposal was known as "white plan" while

the British proposal was known as, "Keynes plan". The author of "white plan" was Mr.

White while the author of "Keynes plan" was Lord J.M. Keynes. In 1944 a joint plan in

the shape of" Joint statement by Experts on the Establishment of International Monetary

Fund of the United and Associated Nation" emerged which become the basis for the

United Nations monetary and Financial conference. Which was held at Bretton woods,

New Hampshire from July 1 to July 22, 1944. The purpose of the Bretton woods

conference was to devise means for assuring a system of international trade and

payments consistent with the dual objections of high world productivity and trade and

domestic income and employment with economic stability. At the meeting it was


5/26

decided that an 'International Monetary Fund (IMF)' be organised for the smooth

settlement of international payments.

The IMF was organised in 1946 and it commenced its operation in March 1947. The

International monetary system introduced at Bretton woods rested on two pillars viz. the

maintenance of stable exchange rates and a multilateral credit mechanism

institutionalized in he IMF and supervised by it. The International Monetary System that

existed from 1947 to 1971 in generally known as the par value system or pegged

exchange rate system. Under this system each member country of IMF is required to

define the value of its currency in terms of gold or U.S. dollar and to maintain (to peg)

the market value of its currency within of the defined par value. The value of US dollar

was set at 1/ 35 of an ounce of gold and the limited states promised that all US dollars

in the hands of central banks would be redeemed in gold, up on demand at the fixed

price of $ 35 per ounce of gold. Every country defined its currency in items of gold or dollar. The dollar

was not merely as good as gold, but it was better than gold because

dollar reserves earned interest while gold did not. The exchange rate between two

currencies would not remain constant for-ever. It would change under following

conditions :-

i) A member shall not propose to change except to correct the fundamental

disequilibrium in the balance of payments and it shall act only after consultation with

IMF.

ii) The fund will not object to change not exceeding 10% of the initial par value.

iii) It a change in proposed exceeding 10% but not exceeding 20% of the initial par

value. The IMF may agree or object but must declare its attitude within 72 hours.

iv) If the proposed change is longer than 20% the Fund may concur or object without

limit of time.


6/26

v) The Fund must agree "if it is satisfied that the change is necessary to correct

fundamental disequilibrium in the balance of payments.

Concept

The international monetary fund is a landmark in the history of international monetary

Co-operation. It is an international Financial Institution. The abbreviation IMF stands for

International Monetary Fund. The International Monetary Fund (IMF) is an organization

of countries that seeks to promote international monetary co-operation. It facilitates the

expansion of international trade. Thus, it contributes towards increased employment

and improved economic conditions in all member countries. Membership of IMF is open

to-every country of the world that controls its foreign relations and is able and prepared

to fulfill the obligations of membership. Membership of IMF is a pre - requisite for

membership in the IBRD i.e. the World Bank. There is a close relationship between the

IMF and the IBRD. The Fund is a specialized agency within the United Nation system, it

cooperates with the UN on matters of mutual interest.

The IMF can be designated as a central bank of central Banks of the world countries

because it collects the resources and maintains the reservoir of nations currencies just

like that of the central bank of a country which collects cash reserves of the commercial

banks of the country. However, there is a difference in the functioning of the central

bank of the respective countries and IMF. The central banks of the world countries can

control the volume of money and credit through the monetary policy while IMF can't

control the volume of money and credit of any member country.

Functions and Objectives

The fundamental objective of the IMF was the avoidance of competitive devaluation and


7/26

exchange control. Basically there are three general objectives of IMF viz.

i) The elimination or reduction of existing exchange controls.

ii) The establishment of maintenance of currency convertibility with stable exchange

rates.

iii) The establishment of multilateral trade and payments.

Objectives As per the Article 1 of the IMF Agreement are as follows:

ary co-operation through a permanent institution

which provides machinery for consultation and collaboration on international monetary

problems.

contribute thereby to the promotion and maintenance of high level of employment and

real income and to the development of the productive resources of all member countries

as the primary objective of economic policy.

ngements

among members and to avoid competitive exchange depreciation.

current transactions between member countries and in the elimination foreign exchange

restrictions which hamper the growth of world trade.

under adequate safeguards, thus providing them with opportunity to correct mal

adjustments in the balance of payments without resorting to measures destructive to

national and international prosperity.

disequilibrium in the balance of payments of the member countries.


8/26

To fulfill the above objectives, the IMF performs the following functions:

1. The IMF operates in such a way as to fulfil its objectives as laid down in the Bretton

Woods Articles of Agreements. It is the IMFs duty to to see that these provisions are observed

by member countries. Some of the provisions of the original Articles such

as relating to exchange rates have become obsolete due to international monetary

events. Accordingly IMF has amended its Articles of Agreement to make appropriate

adjustment.

2. The fund gives short-term loans to its members, so that they may correct their

temporary balance of payments disequilibrium.

3. The fund is regarded as the guardian of good conduct in the sphere of balance of

payments. It aims at reducing tariff and other trade restrictions by the member

countries. Article VII of the Charter provides that no member shall ,without the

approval of the fund, imposes restrictions on the making of payments or engage in

discriminatory currency arrangement or multiple currency practices. It is the

functions of the IMF to have surveillance of the policies being adopted by the

member countries.

4. The fund also renders technical advice to its members on monetary and fiscal

policies.

5. It conducts research studies and publishes them in IMF staff papers, Finance and

Development, etc.

6. It provides technical experts to member countries having balance of payment

difficulties and other problems.

7. It also conducts short training courses on fiscal, monetary and balance of payments

for personnel from member nations through its Central Banking Services

Development, the Fiscal Affairs Department, the Bureau of Statistics and the IMF


9/26

institute.

Thus the Fund performs Financial, Supervisory and Controlling functions.

Surveillance of the global economy

The IMF is mandated to oversee the international monetary and financial system and monitor

the economic and financial policies of its 188 member countries. This activity is known as

surveillance and facilitates international co-operation. Since the demise of theBretton Woods

system of fixed exchange rates in the early 1970s, surveillance has evolved largely by way of

changes in procedures rather than through the adoption of new obligations. The

responsibilities of the Fund changed from those of guardian to those of overseer of members

policies.

The Fund typically analyses the appropriateness of each member countrys economic and

financial policies for achieving orderly economic growth, and assesses the consequences of

these policies for other countries and for theglobal economy.

2]

In 1995 the International Monetary Fund began work on data dissemination standards with

the view of guiding IMF member countries to disseminate their economic and financial data

to the public. The International Monetary and Financial Committee (IMFC) endorsed the

guidelines for the dissemination standards and they were split into two tiers: The General

Data Dissemination System (GDDS) and theSpecial Data Dissemination Standard (SDDS).

The International Monetary Fund executive board approved the SDDS and GDDS in 1996

and 1997 respectively, and subsequent amendments were published in a revised Guide to the

General Data Dissemination System. The system is aimed primarily at statisticians and aims

to improve many aspects of statistical systems in a country. It is also part of the World Bank

Millennium Development Goals and Poverty Reduction Strategic Papers.
http://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Global_economyhttp://en.wikipedia.org/wiki/Global_economyhttp://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-IMF_Surveillance:_A_Case_Study_on_IMF_Governance-12http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-IMF_Surveillance:_A_Case_Study_on_IMF_Governance-12http://en.wikipedia.org/wiki/Special_Data_Dissemination_Standardhttp://en.wikipedia.org/wiki/Special_Data_Dissemination_Standardhttp://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-IMF_Surveillance:_A_Case_Study_on_IMF_Governance-12http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-IMF_Surveillance:_A_Case_Study_on_IMF_Governance-12http://en.wikipedia.org/wiki/Global_economyhttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Bretton_Woods_system


10/26

The primary objective of the GDDS is to encourage IMF member countries to build a framework to

improve data quality and increase statistical capacity building. Upon building a framework, a country

can evaluate statistical needs, set priorities in improving the timeliness,transparency,reliability and

accessibility of financial and economic data. Some countries initially used the GDDS, but later

upgraded to SDDS.

Benefits

These loan conditions ensure that the borrowing country will be able to repay the Fund and

that the country won't attempt to solve their balance of payment problems in a way that

would negatively impact the international economy. The incentive problem of moral hazard,

which is the actions of economic agents maximising their own utility to the detriment of

others when they do not bear the full consequences of their actions, is mitigated through

conditions rather than providing collateral; countries in need of IMF loans do not generally

possess internationally valuable collateral anyway.

Conditionality also reassures the IMF that the funds lent to them will be used for the purposes

defined by the Articles of Agreement and provides safeguards that country will be able to

rectify its macroeconomic and structural imbalances. In the judgment of the Fund, the

adoption by the member of certain corrective measures or policies will allow it to repay the

Fund, thereby ensuring that the same resources will be available to support other members.

As of 2004, borrowing countries have had a very good track record for repaying credit

extended under the Fund's regular lending facilities with full interest over the duration of the

loan. This indicates that Fund lending does not impose a burden on creditor countries, as

lending countries receive market-rate interest on most of their quota subscription, plus any of

their own-currency subscriptions that are loaned out by the Fund, plus all of the reserve assetsthat they provide the Fund.

Criticisms

In some quarters, the IMF has been criticised for being 'out of touch' with local economic

conditions, cultures, and environments in the countries they are requiring policy reform. The

Fund knows very little about what public spending on programs like public health and

education actually means, especially in African countries; they have no feel for the impact

that their proposed national budget will have on people. The economic advice the IMF gives

might not always take into consideration the difference between what spending means on

paper and how it is felt by citizens.

For example, some people believe that Jeffrey Sach's work shows that the Fund's usual

prescription is 'budgetary belt tightening to countries who are much too poor to own belts'. It

has been said that the IMF's role as a generalist institution specialising in macroeconomic

issues needs reform. Conditionality has also been criticised because a country can pledge

collateral of "acceptable assets" to obtain waivers on certain conditions. However, that

assumes that all countries have the capability and choice to provide acceptable collateral.

One view is that conditionality undermines domestic political institutions. The recipient

governments are sacrificing policy autonomy in exchange for funds, which can lead to public

resentment of the local leadership for accepting and enforcing the IMF conditions. Political

instability can result from more leadership turnover as political leaders are replaced in
http://en.wikipedia.org/wiki/Transparency_(behavior)http://en.wikipedia.org/wiki/Transparency_(behavior)http://en.wikipedia.org/wiki/Transparency_(behavior)http://en.wikipedia.org/wiki/Transparency_(behavior)


11/26

electoral backlashes. IMF conditions are often criticised for their bias against economic

growth and reduce government services, thus increasing unemployment.

Another criticism is that IMF programs are only designed to address poor governance,

excessive government spending, excessive government intervention in markets, and too much

state ownership. This assumes that this narrow range of issues represents the only possibleproblems; everything is standardised and differing contexts are ignored. A country may also

be compelled to accept conditions it would not normally accept had they not been in a

financial crisis in need of assistance.

It is claimed that conditionalities retard social stability and hence inhibit the stated goals of

the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient

countries. The IMF sometimes advocates austerity programmes, cutting public spending

and increasing taxes even when the economy is weak, to bring budgets closer to a balance,

thus reducing budget deficits. Countries are often advised to lower their corporate tax rate.

In Globalization and Its Discontents Joseph E. Stiglitz, former chief economist and senior

vice-president at the World Bank criticises these policies. He argues that by converting to amore monetarist approach, the purpose of the fund is no longer valid, as it was designed to

provide funds for countries to carry outKeynesian reflations, and that the IMF "was not

participating in a conspiracy, but it was reflecting the interests and ideology of the Western

financial community.

Reform

The IMF is only one of many international organisations and it is a generalist institution for

macroeconomic issues only; its core areas of concern in developing countries are very

narrow. One proposed reform is a movement towards close partnership with other specialist

agencies to better productivity. The IMF has little to no communication with other

international organisations such as UN specialist agencies like UNICEF the Food andAgriculture Organization (FAO), and the United Nations Development Program (UNDP).

Jeffrey Sachs argues in The End of Poverty: "International institutions like the International

Monetary Fund (IMF) and the World Bank have the brightest economists and the lead in

advising poor countries on how to break out of poverty, but the problem is development

economics". Development economics needs the reform, not the IMF. He also notes that IMF

loan conditions need to be partnered with other reforms such as trade reform in developed

nations, debt cancellation, and increased financial assistance for investments in basic

infrastructure to be effective. IMF loan conditions cannot stand alone and produce change;

they need to be partnered with other reforms or other conditions as applicable.

History

The International Monetary Fund was originally laid out as a part of the Bretton Woods

system exchange agreement in 1944.During the earlier Great Depression, countries sharply

raised barriers to foreign trade in an attempt to improve their failing economies. This led to

the devaluation of national currencies and a decline in world trade.

This breakdown in international monetary co-operation created a need for oversight. The

representatives of 45 governments met at the Bretton Woods Conference in the Mount

Washington Hotel in the area of Bretton Woods, New Hampshire in the United States, todiscuss framework for post-World War II international economic co-operation. The


12/26

participating countries were concerned with the rebuilding of Europe and the global

economic system after the war.

There were two views on the role the IMF should assume as a global economic institution.

British economist John Maynard Keynes imagined that the IMF would be a cooperative fund

upon which member states could draw to maintain economic activity and employmentthrough periodic crises. This view suggested an IMF that helped governments and to act as

the US government had during the New Deal in response to World War II. American delegate

Harry Dexter White foresaw an IMF that functioned more like a bank, making sure that

borrowing states could repay their debts on time. Most of White's plan was incorporated into

the final acts adopted at Bretton Woods.

The International Monetary Fund formally came into existence on 27 December 1945, when

the first 29 countries ratified its Articles of Agreement. By the end of 1946 the Fund had

grown to 39 members. On 1 March 1947, the IMF began its financial operations, and on 8

May France became the first country to borrow from it.

The IMF was one of the key organisations of the international economic system; its designallowed the system to balance the rebuilding of international capitalism with the

maximisation of national economic sovereignty and human welfare, also known as embedded

liberalism. The IMF's influence in the global economy steadily increased as it accumulated

more members. The increase reflected in particular the attainment of political independence

by many African countries and more recently the 1991 dissolution of the Soviet

Union because most countries in the Soviet sphere of influence did not join the IMF.

The Bretton Woods system prevailed until 1971, when the US government suspended the

convertibility of the US$ (and dollar reserves held by other governments) into gold. This is

known as theNixon Shock. As of January 2012, the largest borrowers from the fund in order

are Greece, Portugal, Ireland, Romania and Ukraine.

In the October 2013 Financial Monitorpublication, the IMF suggested that a capital

levy capable of reducing Euro-area government debt ratios to "end-2007 levels" would

require a very high tax rate; about 10 percent.

The 188 members of the IMF include 187 members of the UN and the Republic of

Kosovo All members of the IMF are alsoInternational Bank for Reconstruction and

Development (IBRD) members and vice versa.

Former members are Cuba (which left in 1964) and the Republic of China, which was ejectedfrom the UN in 1980 after losing the support of then US President Jimmy Carter and was

replaced by the People's Republic of China. However, "Taiwan Province of China" is still

listed in the official IMF indices.

Apart from Cuba, the other UN states that do not belong to the IMF

are Andorra, Liechtenstein, Monaco, Nauru and North Korea.

The former Czechoslovakia was expelled in 1954 for "failing to provide required data" and

was readmitted in 1990, after the Velvet Revolution. Poland withdrew in 1950allegedly

pressured by the Soviet Unionbut returned in 1986.


13/26

Qualifications

Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar

period, rules for IMF membership were left relatively loose. Members needed to make

periodic membership payments towards their quota, to refrain from currency restrictions

unless granted IMF permission, to abide by the Code of Conduct in the IMF Articles of

Agreement, and to provide national economic information. However, stricter rules were

imposed on governments that applied to the IMF for funding.

The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates

secured at rates that could be adjusted only to correct a "fundamental disequilibrium" in the

balance of payments, and only with the IMF's agreement.

Some members have a very difficult relationship with the IMF and even when they are still

members they do not allow themselves to be monitored. Argentina for example refuses to

participate in an Article IV Consultation with the IMF.

Benefits

Member countries of the IMF have access to information on the economic policies of all

member countries, the opportunity to influence other members economic policies, technical

assistance in banking, fiscal affairs, and exchange matters, financial support in times of

payment difficulties, and increased opportunities for trade and investment.

Board of Governors

The Board of Governors consists of one governor and one alternate governor for each

member country. Each member country appoints its two governors. The Board normallymeets once a year and is responsible for electing or appointing executive directors to the

Executive Board. While the Board of Governors is officially responsible for approving quota

increases, special drawing right allocations, the admittance of new members, compulsory

withdrawal of members, and amendments to the Articles of Agreement and By-Laws, in

practice it has delegated most of its powers to the IMF's Executive Board.

The Board of Governors is advised by the International Monetary and Financial

Committee and the Development Committee. The International Monetary and Financial

Committee has 24 members and monitors developments in global liquidity and the transfer of

resources to developing countries. The Development Committee has 25 members and advises

on critical development issues and on financial resources required to promote economicdevelopment in developing countries. They also advise on trade and global environmental

issues.

Executive Board

24 Executive Directors make up Executive Board. The Executive Directors represent all 188

member-countries. Countries with large economies have their own Executive Director, but

most countries are grouped in constituencies representing four or more countries.

Following the 2008 Amendment on Voice and Participation, eight countries each appoint an

Executive Director: the United States, Japan, Germany, France, the United Kingdom, China,

the Russian Federation, and Saudi Arabia.[45]

The remaining 16 Directors represent
http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-45http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-45http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-45http://en.wikipedia.org/wiki/International_Monetary_Fund#cite_note-45


14/26

constituencies consisting of 4 to 22 countries. The Executive Director representing the largest

constituency of 22 countries accounts for 1.55% of the vote.

Managing Director

The IMF is led by a managing director, who is head of the staff and serves as Chairman of the

Executive Board. The managing director is assisted by a First Deputy managing director andthree other Deputy Managing Directors. Historically the IMF's managing director has been

European and the president of the World Bank has been from the United States. However,

this standard is increasingly being questioned and competition for these two posts may soon

open up to include other qualified candidates from any part of the world.

In 2011 the world's largest developing countries, the BRIC nations, issued a statement

declaring that the tradition of appointing a European as managing director undermined the

legitimacy of the IMF and called for the appointment to be merit-based. The head of the

IMF's European department is Antnio Borges of Portugal, former deputy governor of

the Bank of Portugal. He was elected in October 2010.

Effects of the quota system

The IMF's quota system was created to raise funds for loans. Each IMF member country is

assigned a quota, or contribution, that reflects the country's relative size in the global

economy. Each member's quota also determines its relative voting power. Thus, financial

contributions from member governments are linked to voting power in the organisation.

This system follows the logic of a shareholder-controlled organisation: wealthy countries

have more say in the making and revision of rules. Since decision making at the IMF reflects

each member's relative economic position in the world, wealthier countries that provide more

money to the fund have more influence in the IMF than poorer members that contribute less;

nonetheless, the IMF focuses on redistribution.

Developing countr ies

Quotas are normally reviewed every five years and can be increased when deemed necessary

by the Board of Governors. Currently, reforming the representation of developing

countries within the IMF has been suggested. These countries' economies represent a large

portion of the global economic system but this is not reflected in the IMF's decision making

process through the nature of the quota system. Joseph Stiglitz argues "There is a need to

provide more effective voice and representation for developing countries, which now

represent a much larger portion of world economic activity since 1944, when the IMF wascreated." In 2008, a number of quota reforms were passed including shifting 6% of quota

shares to dynamic emerging markets and developing countries.

Uni ted States inf luence

A second criticism is that the United States' transition to neoliberalism and global capitalism

also led to a change in the identity and functions of international institutions like the IMF.

Because of the high involvement and voting power of the United States, the global economic

ideology could effectively be transformed to match the US's. This is consistent with the IMF's

function change during the 1970s after the Nixon Shock ended the Bretton Woods system.

Another criticism is that allies of the United States are able to receive bigger loans with fewer

conditions.


15/26

Overcoming borr ower/creditor divide

The IMF's membership is divided along income lines: certain countries provide the financial

resources while others use these resources. Both developed country "creditors"

and developing country" borrowers" are members of the IMF. The developed countries

provide the financial resources but rarely enter into IMF loan agreements; they are the

creditors. Conversely, the developing countries use the lending services but contribute little to

the pool of money available to lend because their quotas are smaller; they are the borrowers.

Thus, tension is created around governance issues because these two groups, creditors and

borrowers, have fundamentally different interests in terms of the conditions of these loans.

The criticism is that the system of voting power distribution through a quota system

institutionalises borrower subordination and creditor dominance. The resulting division of the

Fund's membership into borrowers and non-borrowers has increased the controversy around

conditionality because the borrowing members are interested in making loan access easier

while the creditor members want to maintain reassurance that the loans will be repaid.

Use

A recent study reveals that the average overall use of IMF credit per decade increased, in real

terms, by 21% between the 1970s and 1980s, and increased again by just over 22% percent

from the 1980s to the 19912005 period. Another study has suggested that since 1950 the

continent of Africa alone has received $300 billion from the IMF, the World Bank and

affiliate institutions.

A study done by Bumba Mukherjee found that developing democratic countries benefit more

from IMF programs than developing autocratic countries because policy-making, and the

process of deciding where loaned money is used, is more transparent within a democracy.

One study done by Randall Stone found that although earlier studies found little impact ofIMF programs on balance of payments, more recent studies using more sophisticated

methods and larger samples "usually found IMF programs improved the balance of

payments.

IMF and globalization

Globalization encompasses three institutions: global financial markets and transnational

companies, national governments linked to each other in economic and military alliances led

by the US, and rising "global governments" such as World Trade Organization (WTO), IMF,

and World Bank. Charles Derber argues in his bookPeople Before Profit,"These interacting

institutions create a new global power system where sovereignty is globalized, taking powerand constitutional authority away from nations and giving it to global markets and

international bodies.Titus Alexander argues that this system institutionalises global

inequality between western countries and the Majority World in a form of global apartheid, in

which the IMF is a key pillar.

The establishment of globalised economic institutions has been both a symptom of and a

stimulus for globalisation. The development of the World Bank, the IMF regional

development banks such as the European Bank for Reconstruction and

Development (EBRD), and, more recently, multilateral trade institutions such as the WTO

indicates the trend away from the dominance of the state as the exclusive unit of analysis in

international affairs. Globalization has thus been transformative in terms of areconceptualising of state sovereignty.


16/26

Following US President Bill Clinton's administration's aggressive

financial deregulation campaign in the 1990s, globalisation leaders overturned long-standing

restrictions by governments that limited foreign ownership of their banks, deregulated

currency exchange, and eliminated restrictions on how quickly money could be withdrawn by

foreign investors.

Criticisms

Overseas Development Institute (ODI) research undertaken in 1980 pointed to five main

criticisms of the IMF which support the analysis that it is a pillar of what activist Titus

Alexander calls global apartheid. Firstly, developed countries were seen to have a more

dominant role and control over less developed countries (LDCs) primarily due to the Western

bias towards a capitalist form of the world economy with professional staff being Western

trained and believing in the efficacy of market-oriented policies.

Secondly, the Fund worked on the incorrect assumption that all payments disequilibria were

caused domestically. The Group of 24 (G-24), on behalf of LDC members, and the UnitedNations Conference on Trade and Development (UNCTAD) complained that the Fund did

not distinguish sufficiently between disequilibria with predominantly external as opposed to

internal causes. This criticism was voiced in the aftermath of the 1973 oil crisis. Then LDCs

found themselves with payments deficits due to adverse changes in their terms of trade, with

the Fund prescribing stabilisation programmes similar to those suggested for deficits caused

by government over-spending. Faced with long-term, externally generated disequilibria, the

Group of 24 argued that LDCs should be allowed more time to adjust their economies and

that the policies needed to achieve such adjustment are different from demand-management

programmes devised primarily with internally generated disequilibria in mind.

The third criticism was that the effects of Fund policies were anti-developmental. Thedeflationary effects of IMF programmes quickly led to losses of output and employment in

economies where incomes were low and unemployment was high. Moreover, it was

sometimes claimed that the burden of the deflationary effects was borne disproportionately

by the poor.

Fourthly is the accusation that harsh policy conditions were self-defeating where a vicious

circle developed when members refused loans due to harsh conditionality, making their

economy worse and eventually taking loans as a drastic medicine.

Lastly is the point that the Fund's policies lack a clear economic rationale. Its policy

foundations were theoretical and unclear due to differing opinions and departmental rivalries

whilst dealing with countries with widely varying economic circumstances.

ODI conclusions were that the Fund's very nature of promoting market-oriented economic

approach attracted unavoidable criticism, as LDC governments were likely to object when in

a tight corner. Yet, on the other hand, the Fund could provide a 'scapegoat service' where

governments could take loans as a last resort, whilst blaming international bankers for any

economic downfall. The ODI conceded that the fund was to some extent insensitive to

political aspirations of LDCs, while its policy conditions were inflexible.

Argentina, which had been considered by the IMF to be a model country in its compliance to

policy proposals by the Bretton Woods institutions, experienced a catastrophic economic

crisis in 2001, which some believe to have been caused by IMF-induced budget restrictionswhich undercut the government's ability to sustain national infrastructure even in crucial


17/26

areas such as health, education, and securityand privatisation of strategically vital national

resources. Others attribute the crisis to Argentina's misdesigned fiscal federalism, which

caused subnational spending to increase rapidly. The crisis added to widespread hatred of this

institution in Argentina and other South American countries, with many blaming the IMF for

the region's economic problems. The currentas of early 2006trend toward moderate left-

wing governments in the region and a growing concern with the development of a regionaleconomic policy largely independent of big business pressures has been ascribed to this

crisis.

In an interview, the former Romanian Prime Minister claimed that "Since 2005, IMF is

constantly making mistakes when it appreciates the country's economic performances.

Support of military dictatorships

The role of the Bretton Woods institutions has been controversial since the late Cold

War period, due to claims that the IMF policy makers supported military

dictatorships friendly to American and European corporations and other anti-

communist regimes. Critics also claim that the IMF is generally apathetic or hostile to their

views of human rights, and labour rights. The controversy has helped spark the Anti-

globalization movement.

Arguments in favour of the IMF say that economic stability is a precursor to democracy;

however, critics highlight various examples in which democratised countries fell after

receiving IMF loans.

Impact on access to food

A number of civil society organisations have criticised the IMF's policies for their impact on

people's access to food, particularly in developing countries. In October 2008, former USpresident Bill Clinton presented a speech to the United Nations World Food Day, which

criticised the World Bank and IMF for their policies on food and agriculture:

We need the World Bank, the IMF, all the big foundations, and all the governments to admit

that, for 30 years, we all blew it, including me when I was president. We were wrong to

believe that food was like some other product in international trade, and we all have to go

back to a more responsible and sustainable form of agriculture.

Impact on public health

In 2009 a study by analysts from Cambridge and Yale universities published on the open-

access Public Library of Science concluded that strict conditions on the international loans by

the IMF resulted in thousands of deaths in Eastern Europe by tuberculosis as public health

care had to be weakened. In the 21 countries to which the IMF had given loans, tuberculosis

deaths rose by 16.6%.

In 2009, a book by Rick Rowden titled The Deadly Ideas of Neoliberalism: How the IMF has

Undermined Public Health and the Fight Against AIDS, claimed that the IMFs monetarist

approach towards prioritising price stability (low inflation) and fiscal restraint (low budget

deficits) was unnecessarily restrictive and has prevented developing countries from beingable to scale up long-term public investment as a percent of GDP in the underlying public


18/26

health infrastructure. The book claimed the consequences have been chronically underfunded

public health systems, leading to dilapidated health infrastructure, inadequate numbers of

health personnel, and demoralising working conditions that have fuelled the push factors

driving the brain drain of nurses migrating from poor countries to rich ones, all of which has

undermined public health systems and the fight against HIV/AIDS in developing countries.

Impact on environment

IMF policies have been repeatedly criticised for making it difficult for indebted countries to

avoid ecosystem-damaging projects that generate cash flow, in particular oil, coal, and forest-

destroying lumber and agriculture projects. Ecuador for example had to defy IMF advice

repeatedly to pursue the protection of its rain forests, though paradoxically this need was

cited in IMF argument to support that country. The IMF acknowledged this paradox in a

March 2010 staff position report which proposed the IMF Green Fund, a mechanism to

issue special drawing rights directly to pay for climate harm prevention and potentially other

ecological protection as pursued generally by other environmental finance.

While the response to these moves was generally positive possibly because ecological

protection and energy and infrastructure transformation are more politically neutral than

pressures to change social policy. Some experts voiced concern that the IMF was not

representative, and that the IMF proposals to generate only US$200 billion a year by 2020

with the SDRs as seed funds, did not go far enough to undo the general incentive to pursue

destructive projects inherent in the world commodity trading and banking systems

criticisms often levelled at the World Trade Organization and large global banking

institutions.

In the context of the May 2010 European banking crisis, some observers also noted that Spainand California, two troubled economies within Europe and the United States respectively, and

also Germany, the primary and politically most fragile supporter of a euro currency bailout

would benefit from IMF recognition of their leadership in green technology, and directly

from Green Fundgenerated demand for their exports, which might also improve their credit

standing with international bankers.

Credit facilities of IMF

In order to help the member countries to correct disequilibrium in their balance of payments,

the IMF operates various borrowing facilities.

1. Basic Credit Facility:

The loan is repaid when the member repurchases its own currency with other

currencies or SDRs. A member can unconditionally borrow from the Fund in a year

equal to 25% of its quota. This unconditional borrowing right is called the reserve

tranche. It addition, four tranches (each equal to 25% of the quota) are available to a

country.


19/26

Thus, a member country has the basic credit facility of 5 tranches (i.e., 125% of its quota)

from the Fund. In other words, the borrowings from the IMF should not increase the currency

of a member country with the Fund more than 200% of its quota.

2. Buffer Stock Facility:

The buffer stock financing facility was started in 1969. The purpose of this scheme was to

help the primary producing countries to finance contributions to buffer stock arrangements

for the stabilisation of primary product prices.

3. Extended Fund Facility:

In September 1974, the IMF started extended fund facility to assist the member countries

with sever balance of payments problem for long periods. Under this arrangement, the

IMF provides additional borrowing facility up to 140% of the member's quota, over and

above the basic credit facility. The extended facility is limited for a period up to 3 years

and the rate of interest is low, i.e., from 4% to 6.5%.

4. Special Oil Facility:

In 1974, the IMF established a temporary credit facility called Special Facility to extend

credit to countries with payments difficulties caused by oil price hikes. The facility was

terminated in 1976.

5. Structural Adjustment Facility:

The IMF established in March 1986 Structural Adjustment Facility (SAF) to provide

additional balance of payments assistance on concessional terms to the poorer member

countries. In December 1987, the Enhanced Structural Adjustment Facility (ESAF) was set

up to augment the availability of concessional resources to low income countries.The purpose

of SAF and ESAF is to help the poor countries to undertake strong macroeconomic and

structural programmes to improve their balance of payments positions and promote economic

growth.

6. Trust Fund:

The IMF has sold gold in public auctions at prices much above the price prevailing in the

market. Part of the profits so earned has been used to establish a Trust Fund in 1976 for

making conditional loans to the less-developed countries with payments problems.

7. Compensatory Financing Facility:

In 1963, IMF established compensatory financing facility to provide additional financial

assistance to the member countries, particularly primary producing countries facing shortfall


20/26

in export earnings. In 1981, the coverage of the compensatory financing facility was extended

to payment problem caused by the fluctuations in the cost of cereal inputs.

IMF AND INTERNATIONAL LIQUIDITY

Major function of IMF is to provide International liquidity in accordance with the purpose of

the Fund specified in Articles of Agreement. The IMF provides two types of International

Liquidity viz.

i) Conditional Liquidity and

ii) Unconditional Liquidity

The conditional liquidity is provided by IMF under its various lending facilities. Most of the

funds credit extended under these arrangements require an adjustment programme for themembers which is intended to promote a sustainable external position. When the member

countries obtain Fund's finance under agreed condition, its access to International capital

market is enhanced. This gets referred to as a catalytic role of the fund which has become

more important in recent times when private lending institutions have been less willing to

engage in international lending.

The unconditional liquidity is supplied by the Fund through the allocation or SDRs and also

in the form of reserve positions in the Funds which are the claims corresponding to the

resources that countries have made available to the Fund. The member countries holding

SDRs and reserve positions in the Fund can use them finance balance of payments deficitswithout having to enter into policy commitments with the Fund The fund makes its resources

available to members under agreed conditions in support of efforts on their parts to overcome

balance of payments problems in an orderly manner without undue disruption of the flows to

International trade. Several facilities are available for extending credit to members for

varying periods up to ten years subjected to different degrees of conditionality the credit

arrangements that envisage policy actions to be taken by the member, the use of the Funds

resources is normally made conditional upon the policy action in accordance with the

programme agreed between the member country and the Fund.

The limits placed under present policies on members use of Fund's credit facilities are

defined in terms of members quota with the fund, for e.g. to meet a short fall in export

earning a member may draw from the Fund up to 100% of its quota on the other hand in

order to meet the structural balance of payments problem a member may borrow under

certain conditions Funds reserves up to 150% of the quota in any year, up to 450% over three

years.


21/26

ACHIEVEMENTS OF IMF

Undoubtedly the IMF has made a remarkable success in achieving most of its principal

objectives:

1. The primary goal of the IMF was to promote stability in exchange rates. The measure ofexchange stability that the world has witnessed in the IMF era is remarkably superior to what

was seen during the inter-war period or gold standard regime. Under IMF arrangements,

stable exchange rates do not imply rigid exchange rates. IMF's object is to combine the merits

of stability with flexibility in exchange management.

2. The IMF also served as an expert institution for consultation and guidance in international

monetary matters. It serves as an excellent forum for discussions, practically on a day-to-day

basis, of the economic, fiscal and financial policies of member nations, with particular

reference to their balance of payments impact.

3. The Fund has contributed in certain ways to the expansion of world trade by providing

credit facilities to member countries. It assists the deficit countries in meeting their temporary

disequilibrium in the balance of payments. It also "works for facilitating multi-lateral

payments and trade, promoting thereby, international trade as a whole.

4. In recent years the Fund has achieved some success in bringing about a simplification of

the multiple exchange system at least in countries that have sought financial assistance from

the Fund.

5. The Fund has been instrumental in ensuring steady progress in the establishment of a

multilateral system of payments in respect of current transactions.

6. IMF has changed its attitude by accepting a more liberal credit policy. Today, the Fund

grants development loans, too. Hence, the quantum of borrowings from the Fund has shown a

marked increase in recent years.

7. In a nutshell, the Fund has thus, been able to secure all the advantages of managed paper

standard by maximizing employment and accelerating the pace of economic development and

of the gold standard by maintaining comparative economic stability, while carefully avoiding

the disadvantages of either.

8. Moreover, the Fund has been particularly interested-in the newly developing countries of

the world and has been liberally assisting them to maintain a healthy balance of payments and

monetary stability at home.

9. The Fund has been already providing technical assistance to its members in this respect.

10. To solve the current international liquidity problem, the IMF has succeeded in

establishing the SDR scheme. In recent years, however, underdeveloped countries have

started looking to the Fund to assist them in their economic development programme also.

Furthermore, most of the new member countries who have acquired independence recentlyare facing difficult problems in organizing their monetary, fiscal and exchange systems.


22/26

These countries, thus, require Fund's growing assistance in constructing a solid monetary and

exchange base for their economic growth.

ROLE OF IMF

Since the onset of the global economic crisis in 2007, The IMF introduced several changes inits lending reforms, policy of lending aid to poor countries, governance reforms,

conditionalitys of getting funds etc. which are as follows:

GOVERNANCE REFORM

On December 15, 2010, the Board of Governors approved far-reaching governance reforms

under the 14th General Review of Quotas. The package includes a doubling of quotas, which

will result in more than a 6 percentage point shift in quota share to dynamic emerging market

and developing countries while protecting the voting shares of the poorest member countries.

The reform will also lead to a more representative, fully-elected Executive Board. Changes inConditionality of Fund: The conditionality of IMF are no longer set in quantitative targets

such as reducing fiscal expenditure, or contracting the supply of credit to bring aggregate

demand in balance with the aggregate supply. The conditionalitys are now set in qualitative

targets such as structural reforms, passing of new legislations such as bankruptcy codes,

reform of tax administration and removing rigidities that hold back growth.

CREDIT LINE FOR STRONG PERFORMERS

The Flexible Credit Line (FCL), introduced in April 2009 and further enhanced in August

2010, is a lending tool for countries with very strong fundamentals that provides large and

upfront access to IMF resources, as a form of insurance for crisis prevention. There are no

policy conditions to be met once a country has been approved for the credit line. Colombia,

Mexico, and Poland have been provided combined access of over $100 billion under the

FCL (no drawings have been made under these arrangements). FCL use has lead to lower

borrowing costs and increased room for policy scheme.

SOCIAL SAFETY NET PROGRAMS

The IMF is promoting measures to increase spending on, and improve the targeting of, social

safety net programs that can mitigate the impact of the crisis on the most vulnerable in

society.

REFORMS IN THE LENDING FRAMEWORK OF THE IMF

To provide better support to countries during the global economic crisis, the IMF beefed up

its lending capacity and approved a major overhaul of how it lends money by offering higher

amounts and tailoring loan terms to countries varying strengths and circumstances.

POLICIES FOR LOW INCOME COUNTRIES


23/26

In response to the global financial crisis, the IMF undertook policy reforms towards low-

income countries. As a result, the IMF programs are now more flexible and modified to the

individual needs of low-income countries, with streamlined conditionality, higher

concessions and more emphasis on more safeguarding social spending.

AVAILABILITY OF RESOURCES

Resources available to low-income countries through the Poverty Reduction and Growth

Trust over the period 20092014 were boosted to $17 billion, consistent with the call by G-20

leaders in April 2009 of doubling the IMFs concessional lending capacity and providing $6

billion additional concessional financing over the next two to three years. The IMFs

concessional lending to low-income countries amounted to $3.8 billion in 2009, an increase

of about four times the historical levels. In 2010 and 2011, concessional lending reached $1.8

billion and $1.9 billion respectively.

Establishment of a Post-Catastrophe Debt Relief (PCDR) Trust:

This allows the IMF to join international debt relief efforts for very poor countries that are

hit by the most catastrophic of natural disasters. PCDR-financed debt relief amounted to $268

million in 2010.

Efforts against Global Crisis:

As a key part of efforts to overcome the global financial crisis, the Group of Twenty

industrialized and emerging market economies (G-20) agreed in April 2009 to increase

borrowed resources available to the IMF (complementing its quota resources) by up to $500

billion (which tripled the total pre-crisis lending resources of about $250 billion) to support

growth in emerging market and developing countries. In April 2010, the Executive Board

adopted a proposal on an expanded and more flexible New Arrangements to Borrow (NAB),

by which the NAB was expanded to about SDR 367.5 billion (about $560 billion), with the

addition of 13 new participating countries and institutions, including a number of emerging

market countries that made significant contributions to this large expansion. On November

15, 2011, the National Bank of Poland joined the NAB as a new participant, bringing the total

to about SDR 370 billion (about $570 billion) and the number of new participants to 14 (once

all new participants have joined). In addition to increasing the Funds own lending capacity,

in 2009, the membership agreed to make a general allocation of SDRs equivalent to $250billion, resulting in a near ten-fold increase in SDRs. This represents a significant increase in

own reserves for many countries, including low-income countries.

SUGGESTED REFORMS IN THE IMF

The IMF is the pillar of the edifice of the international monetary system. The world is

changing very fast with dynamism to embrace the 21st century. Over 50 years old institution

like the IMF need reformation to meet the emerging challenges and tackle the new problems

in the modern global finance system. Time has ripped to undertake certain reformatory

measures immediately in the interest of the new economic order of the world economy and itsprogress, besides wiping out the tarnished image of the IMF in its working as a financial


24/26

institution. Power relationship within the IMF structure of the monetary system need a

change. The SDRs scheme is a substitution for gold. SDRs should be made more significant

in the international monetary system. SDRs should play the role of the main denominator in

determining parties of different currencies and the exchange rate instead of the US dollar.

Nowadays, there is de facto dollar standard in the global monetary system.

Instead of dollar, the SDRs should become the principal reserve asset, then only one can hope

for the minimization of the American dominance into the global monetary system. The IMF

should become more strong, fair and neutral. This requires restructuring of its power

relationships. With adoption of the SDR standard and its equitable distribution with due

consideration for the liquidity need of developing countries, the power relationships can

hopefully be rationalized. The problem of currency speculation also deserves an immediate

attention of the IMF. Ways should be formed to alleviate currency trading under speculation

motive; When speculation leads to currency crises, it endangers the world trade, growth and

welfare of the global economy. The IMF should intervene and cooperate with the Central

Bank of a country whose currency tends to be a target of speculative attack. Even if acountry's currency appears to be weak, speculation is not to be justified as a method for de

facto devaluation or to teach a lesson and forcing it to correct its BOP situation. Heavy

speculation, on the contrary, will ruin the country's economy and worsen its BOP further.

Further, if currency speculation is checked immediately with IMF intervention when it is

targeted on a country, it would be less costlier (in terms of assistance) then to assist the

country to recover after the damage as often currency crisis forced by heavy speculation

attack generates economic crisis as is evidenced by the recent Malaysian experience. The

IMF should also realize that in reality today liberalized market-oriented global economy is

based on floating rate system and not on the fixed exchange rate ideology.

As such, its policies and strategy of assistance to stabilize the exchange rate and economies of

the countries should be revised appropriately as per the emerging need. The bureaucratic

approach of the IMF must change with positive thinking and pragmatic consideration.

Further, IMF should be decentralized its working. There should be a few more regional

centers in major parts of the world such as South Asia, East Asia, Africa, Europe, Middle

East, etc., and deal with the problems locally. These regional centers may be established with

the assistance and local personnel - experts from the countries in each region.

CRITICISMS OF IFM

The IMF has been severely criticized in recent years for mishandling global financial crises in

East Asia and Latin America, aggravating poverty in developing countries, encouraging bad

policies by governments and financial investors and favouring the developed countries. We

discuss below some points of criticism.

The IMF is not familiar with local economic conditions, cultures, and environments in the

countries they are requiring policy reform. The Fund has very little knowledge about the

impact of public spending on programs like public health and education, especially in Africancountries.


25/26

The IMF proposed to give short term loans to correct the fundamental disequilibrium in the

balance payments. But the post second world war and the 1930s great depression scenario

required long Term loans and aid for reconstruction of the economies.

In order to reduce the budget deficits the IMF sometimes advocates austerity measures,

cutting public spending and increasing taxes even when the economy is weak, in order tobring budgets closer to a balance.

The IMF has failed to prevent dollar crisis. No timely action and the measures were taken by

the fund.

As per the agreement the member countries were required to fix the par value of their

currencies in terms of gold or US dollar but the members had to fix the par values when there

was already over valuation.

A research undertaken by overseas development Institution (ODI) in 1980 pointed to findmain criticisms of the IMF which support the analysis that it is a pillar of global apartheid.

Firstly, developed countries were seen to have a more dominant role and control over less

developed countries (LDCs) primarily due to the Western bias towards a capitalist form of

the world economy with professional staff being Western trained and believing in the

efficacy of market-oriented policies.

The third criticism was that the effects of Fund policies were anti-developmental. The

deflationary effects of IMF programmes quickly led to losses of output and employment in

economies where incomes were low and unemployment was high. Moreover, it was

sometimes claimed that the burden of the deflationary effects was borne disproportionately

by the poor.

Fourthly is the accusation that harsh policy conditions were self-defeating where a vicious

circle developed when members refused loans due to harsh conditionality, making their

economy worse and eventually taking loans as a drastic medicine.

Lastly is the point that the Fund's policies lack a clear economic rationale. Its policy

foundations were theoretical and unclear due to differing opinions and departmental rivalries

whilst dealing with countries with widely varying economic circumstances. Despite the

various shortcomings, the fund has achieved a tremendous success in the field of international

monetary cooperation.

CONCLUSION

The future of both Bretton Woods institutions remains uncertain. Both the IMF and World

Bank escaped the efforts of the Republican U.S. Congress in the mid-1990s to sharply curtail


26/26

and even eliminate both organizations. These agencies have been less successful in answering

the charges from the left, as the IMF retains its demand for "structural adjustments" and the

World Bank still favors funding for large, project-driven funding. While both the IMF and the

World Bank have instituted some reforms, they have been unable to appease the concerns ofoutraged environmentalists, labor unionists, and nationalists and advocates of indigenous

peoples in the developing world.

Still, as this essay has suggested, these two organizations are really the misguided target for

the legitimate concerns people of all ideological stripes have had about the rapid pace of

globalization in the past half century. It is likely this globalization would have occurred

whether or not there had been a Bretton Woods conference, and it is all but certain it will

continue in the future regardless of the policies pursued by the IMF and World Bank. While it

is true that they have often been too driven by U.S. foreign policy concerns, in the end the

influence of both institutions has been widely overstated. And despite their mistakes during

the past half century, they have rarely been given credit for many of the little things they do

well. For example, both institutions perform economic surveillance over most of the world's

economy, a valuable task that no other international or private organization could perform

with such skill. Both agencies also serve as a store of expert knowledge and wisdom for

countries throughout the world that lack trained specialists. While neither the IMF nor the

World Bank has met the lofty goals of their founders or wielded the nefarious influence

charged by their critics, they have and should continue to play a small but important role in

promoting prosperity and economic stability worldwide.

sem 2 eco project

Documents