IMF

Question 1

what is the International Monetary Fund?

Answer 1

The IMF began in 1945

Based in Washington DC

A legacy of America’s leading role in the Brettonwood system

A specialised agency within the UN overseen by the economic and social Council although it is independent from it but still has a close working relationship with the UN

Currently has 189 members

Question 2

structure of the IMF

Answer 2

Managed by an executive board of 24 directors run by 2700 staff drawn from 148 countries

Led by a managing director who was appointed for a five year renewable term the IMF’s current managing director is Christine Lagarde for the French Finance Minister all managing directors have been European mainly French

Question 3

what is the aim of the IMF?

Answer 3

Works to foster global monetary corporation secure financial stability facilitate international trade promote high employment and sustainable economic growth and reduce poverty around the world

In 2012 the mandate of the IMF was updated to include all macro economic and financial issues that affect global economic stability

Question 4

three main tasks of the IMF

Answer 4

Surveillance (Its primary purpose)

capacity development

lending

Question 5

main tasks of the IMF: surveillance

Answer 5

It’s maintains the stability of the international financial system by monitoring the system exchange rates and international payments that allows countries and their citizens to do business with each other

Produces regular reports about the financial health of member states

The IMF act to prevent financial crises however it did not for see the global financial crash of 2007 to 9 and could not prevent it since the crisis the IMF has been working with member states and the EU to encourage financial institutions to increase the capital reserves so that they can withstand a mass withdrawal of funds by depositors

Monitors the economic health and stability of its 188 member states and warns against policies which she considers could be damaging to the economy this is known as surveillance e.g. the IMF has advised to Mexico that it is too dependent on all revenue and that it should therefore diversify in 2015 it warned African countries that they would need to reduce public spending to compensate for reduced Chinese growth rates

Question 6

main tasks of the IMF: capacity development

Answer 6

Promotes capacity development by giving policy advice to member states on financial matters

Offers technical advice to countries on how best to maximise their economic potential

E.g. the IMF is providing the bank of Ghana with advice on how to improve financial stability and in Peru it is advising on methods of tax Collection and public spending

Question 7

main tasks of the IMF: lending

Answer 7

While the Brettonwood system remained in operation the IMF acted as a currency buffer lending to countries experiencing temporary balance of payments deficit to reduce volatility in exchange rates

Balance of payments deficit undermine confidence in the value of currency which can lead to the selling of the currency by speculators had a fall in its value against other currencies

Since the development of the system in the early 1970s the IMF has increasingly focused on lending to the developing world for example it has helped to post Communist states to liberalise the markets and develop economically

After the 2008 global financial crisis African countries with hard the demand for imported goods from Africa declined an international growth rate slowed in response the IMF proactively made billions of dollars available to places like Ghana at extremely low interest rates with this support Ghana’s growth rate increased to over 9% in 2011 and remain one of Africa’s frontier emerging markets

Acts as a lender of last resort if a member country is facing a balance of payments crisis allows them to access emergency loans this should then stabilise its currency ensuring that the contagion does not spread elsewhere potentially causing a global economic crisis

Question 8

what is meant by the IMF being a contributory system?

Answer 8

The IMF is a contributory system meaning that member states pay subscriptions in relation to the size of their economies and the size of loans available to states varies accordingly

The largest borrowers in 2016 where Portugal Greece Ukraine and Pakistan were the most expensive precautionary loans were given to Mexico Poland Columbia and Morocco

Question 9

how are policy decisions made in the IMF?

Answer 9

Policy decisions are made by the member states however unlike the UN general assembly Westates are treated equally and have one vote each the allocation of votes reflects the relative positions of the member states economies in the world so richer countries have more votes than poorer countries and the USA the richest country in the world has the most votes of any single member

Question 10

voting shares in the IMF

Answer 10

USA 16.53%

China 6%

Japan 6%

Germany 5%

UK 4%

Brazil 2%

Turkey 0.96%

Question 11

strengths of the IMF: EFFECTIVE

Answer 11

Seems to be effective it was created to promote global economic stability and was arguably successful in doing so especially over the immediate postwar period

In the 1950s and 1960s the world experienced its longest period of sustained economic growth

OECD countries Members of the organisation for economic co-operation and development and international organisation founded in 1960 to stimulate economic progress on well trade were enjoying growth rates of 4-5% a year

However this growth may have been the product of other causes such as the application of Keynesian demand management policies by domestic governments or the stimulus affect of the United States economy which led to the globalisation of production boosting Economic growth beyond America’s borders

Question 12

strengths of the IMF: LENDER OF LAST RESORT

Answer 12

The IMF will lend to countries that can find no other source of finance

As such it acts as a bulwark Against economic disaster as that may spill over and affect other economies in the world

It has taken the lead in bailing out a number of countries suffering Debt crises as a result of the 2007 tonight global financial crisis including Cyprus Greece Ireland Portugal and Spain which prevented the further spread of the crisis

It has also acted as a source of expertise and information for member states to draw on to stabilise their economies

The IMF is the lender of last resort providing competitive loans to countries in trouble and preventing the spread of economic crises e.g. the Asian financial crisis of 1997

E.g. the IMF provided €32 billion in emergency loans to keep the Greek economy from collapsing

Question 13

strengths of the IMF: ADAPTED TO THE CHANGING INTERNATIONAL CONTEXT

Answer 13

The IMF has adapted to the changing international context for example when the US spend the dollars convertibility to gold bringing an end to the regime of fixed exchange rate the IMF we focused its activities onto debt reduction and development

For example helping Eastern European states transition from Communist to capitalist economies

More recently the IMF has responded to criticisms about the underrepresentation of developing countries in decision-making by increasing the quotas for Brazil India China and Russia which are now among the 10 largest members of the IMF alongside France Germany Italy Japan the UK and the USA

following the widely unforeseen global financial crisis, the IMF refocused on surveillance, warning members when their debt burdens or economic policies are jeopardising economic growth

Since the 2007 to 9 global crash the IMF has taken on the role of global surveillance identifying risks to stability and proposing solutions while the capital of the world bank has been significantly expanded

Question 14

weaknesses of the IMF: DOMINATED BY THE USA

Answer 14

The IMF is dominated by the USA the USA was the country that was the IMF’s leading architects and heavily influence decisions about its role and functions

The capital of the US is home to the IMF’s headquarters which facilitates US government influence

Because the US is the worlds largest economy it contributes the largest quota and enjoys the largest proportion of votes 16.53%

As decisions require majorities of 85% of votes and the US has nearly 17% it effectively exercises veto power meaning it can heavily influence and dominate the IMF easily

Question 15

weaknesses of the IMF: TOOL OF WESTERN NEO-LIBERALISM

Answer 15

the IMF has been criticised for being a tool of Western neo liberalism

It’s president is always European currently Christine Lagarde and the US has 16.74% of the votes

And 85% majority is required to change its constitution so the US therefore has not affected veto over this India has just 2.34% of the votes and the UK 4.2% of the votes

The IMF therefore serve the interests of the west and have no adapted to the new realities of the distribution of global power

The IMF allows disparate levels of influence Because member nations that invest more money in the IMF get more voting rights the US has nearly 1/5 of all available votes because they are the largest contributor

Question 16

pressure for reform of the IMF and World Bank

Answer 16

Two main issues have emerged concerning the global economic system whether it is fit for purpose and whether it perpetuates global structural inequality

Question 17

general criticisms of economic global governance organisations

Answer 17

Dominated by the US although US dominance was justified because it was the architect of these institutions and remains the most powerful state in the world

Promote the interests of the developed countries at the expense of the developing world although they are trying to address the problems of the developing world such as cancelling poor countries debts

Have not done enough to promote sustainable development although the environment is becoming a more important concern for these institutions

Question 19

strengths of IMF and World Bank: SUCCESSFUL

Answer 19

The IMF and World Bank were successful in maintaining the stability of the monetary system from 1945 to the 1970s with economic growth rates and world trade both increasing and postwar Europe reconstructed

This is largely due to the powerful and influential nature of both of these organisations they have 189 member states and have become the principal source of funds for developing countries

Without IMF loans Greece would’ve had to default on its creditors which would’ve likely lead to Greece exiting the euro and resulting contagion could have been undermined vulnerable economies such as Portugal Italy and Spain this may have caused the collapse of the euro and another economic crisis

Intervention in Greece has been effective previously the Greek system of pensions was costing 17.5% of greases GDP but since the iOS intervention pensions have been cut and I’m now estimated to be worth 25 to 55% less than that at the beginning of the debt crisis

Question 20

strengths of IMF and World Bank: SAPs

Answer 20

From the 1980s the IMF and World Bank supplied Loans with conditionality in order to deliver long-term economic success and tackle poverty

Examples of successes include Jordan South Korea and Chile

Question 21

weaknesses of IMF and World Bank: DOMINATED BY THE US

Answer 21

Both the IMF and World Bank are dominated by the USA and Europe as a vote share is calculated based on the size of estates economy the USA has a 16.8% Vote share in the IMF which is affectively a veto because decisions require at least 85% support

The headquarters are also in Washington DC and the IMF managing director is always European and its deputy is always American and the World Bank president is traditionally a US citizen

Question 22

weaknesses of IMF and World Bank: SAPs

Answer 22

The conditionality of saps did more harm than good in most countries as in Tanzania

Loans did not improve financial crises but worse on them as in Indonesia and Thailand in 1997 and did not provide contagion as the Asian financial crisis spread to Russia in 1998

Conditionality was motivated by the powerful elites in northern countries to further their own objectives of opening up markets for them to exploit

The implementation of saps in economy is so painfully high and persistent unemployment growing levels of inequality and increased poverty

Saps have a very weak record for tackling poverty and inequality countries that have prospered have refused loans (Malaysia) or have used state intervention rather than neo liberalism (China)

The IMF is too obsessed with just one model of development and needs to appreciate that their are routes other than the Washington consensus to prosperity

Too often the IMF focuses on a one size fits all mentality and does not appreciate that a more nuanced approach is needed that will take into account the specific circumstances

Since the IMF is somewhat of a last resort countries in trouble have no choice but to agree to significant austerity measures that may not necessarily be in their best interest or agree with their ideologies e.g. Ukraine had to pass and austerity bill required by the IMF

With so much influence in the political policies of struggling countries it is dangerous to try and treat domestic problems with simple cash infusions and austerity measures

By opening up the markets of developing countries infant industries will be exposed to the full force of global capitalism and small farmers and local businesses are likely to be overwhelmed by cheap foreign imports

Question 23

weaknesses of IMF and World Bank: INEFFECTIVE

Answer 23

Global stability in the last 25 years has decreased with an increasing number of crises

Saps damage state sovereignty of states have little choice but to accept these loans with the conditions limiting the States ability to make its own economic policy

Question 24

successes of the IMF: growth rates

Answer 24

IMF loans based on the encouragement of free market reforms have enabled many countries to take advantage of the opportunities offered by globalisation

IMF loans to Africa have enabled the continent to diversify from subsistence agriculture into world markets thus significantly boosting growth rates

For example by 2015 the growth rate in the Ivory Coast was 8.5% in Ethiop year it was 8.3% and in Tanzania it was 6.6%

Question 25

successes of the IMF: restoring global confidence

Answer 25

The IMF provides greater global confidence in potentially vulnerable states so encouraging greater economic growth

During financial crises it has also played a crucial role in restoring global confidence in vulnerable economies so avoiding a more global crash

For example in 1997 South Korea was successfully bailed out with a $55 billion aid package in 1998 the Russian rouble Was on the verge of collapse and so the IMF loan stabilised confidence in the Russian economy

Question 26

IMF reforms

Answer 26

Increasingly focusing on country ownership so that its most recent loans have involved less strict conditionality enabling countries to tailor their loans — Counters the argument that the IMF uses a one size fits all approach

Has moved away from saps and moved towards PRSPs (Poverty reduction strategy papers) that are more focused on country ownership and long-term poverty reduction

E.g. in 2015 Ghana was loaned $918 million to support the reform program aimed at foster growth and job creation while protecting social spending

Demonstrates that the IMF is making efforts to improve

The IMF and World Bank have replaced saps with poverty reduction strategy papers which are more flexible seek to promote local ownership and control are better adapted to particular needs and circumstances and focus more on poverty reduction

They have also made loans that are conditional on sustainable development and taking into account environmental concerns as well as good governance and anticorruption measures they have adapted their governance so that the voice of the developing world is better represented

Question 27

quote about the IMF failure to predict financial crises

Answer 27

The IMF failed miserably to remotely anticipate the two largest and systematically most important economic and financial crises of the post war period — Desmond Lachman