It is painfully obvious, that the critically acclaimed International Monetary Fund (IMF) was quite instrumental, and still is, in the rejuvenation of myriad countries, both developed and developing, that were steadily taking precarious economic directions. This was partly occasioned by poor economic management, because of perennial budget deficits that were witnessed every fiscal year, corruption and failure to incorporate austerity measures in the fiscal budgets, when government revenues fell short of expectation; after the two world wars in Europe, and the end of colonization in the third world.
Additionally, poor monetary policies that encouraged excess liquidity, which is a primary cause of inflation, only shifted the situation from the frying pan to the fire ( Mullineux & Mulinde, 2003). The institutionalization of the IMF provided an alternative, for countries that we’re cash strapped, with an opportunity of accessing short term and long term loans, for the achievement of macroeconomic goals (Carbaugh, 2011). Most countries did this, to avoid defaults on their provision of welfare services to their citizens. On the flip side, there are those factions that are still of the borderline opinion that, the IMF should be done away with because it is exploitative, and has outlived its usefulness. This piece of literature, therefore, seeks to shed light on the relevance of the IMF in the world economy.
Incidentally, the IMF was the brainchild of John Meynard Keynes and Harry Dexter White and was formed with the core purpose of governing international trade and flows (Rajan, 2006). The need for the IMF emerged, when economic turmoil was witnessed in the aftermath of world war two (Rajan, 2006). This was sadly followed by the affected countries, constantly ailing from cases of idle labor, adopting trade policies that devalued their currencies and imposing tariffs to curb importation, to counter the problems that they were facing (Rajan, 2006). The net effect of this move is that it weakened international trade and exchange rates. Therefore, in 1944 at the Bretton Woods Conference, the IMF was instituted to harmonize international trade and promote desirable levels of employment and real income (Rajan, 2006).
At its inception, the IMF was mandated with the task of ensuring that exchange rates were kept steady and that its member countries did not engage in loathsome trade policies, like currency devaluation for competitive advantage. The IMF, in turn, flexed its muscles, in a move to mitigate such malpractices, by supervising exchange policies of countries that subscribed to it (Rajan, 2006).
The logic behind such measures was to ensure that, whenever a country engaged in such economic malpractices, there would be no ripple effects that extended to the larger global economy. Furthermore, the IMF was to act as a financial intermediary, which was to lend money to countries that had a wanting balance of payments positions (Rajan, 2006). The IMF assisted countries that were faced with such problems, by providing them with temporary financial assistance, to get them out of the rough patches they were in (Rajan, 2006).
When countries finally came around and got their economic rhythms’ back after world war two depression, capitalism was fully adopted by most industrialized countries which wholesomely incorporated floating exchange rate policies, that encouraged borrowing from capital markets (Rajan, 2006). It is only the United States that did not borrow from the IMF during the aforementioned period. Moreover, the major industrialized countries, that were major stakeholders of the IMF stopped borrowing, from it by 1980 and instead decided to form another policy-making body, of wealthy nations that came to be known as the G-7 (Rajan, 2006).
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Much as the IMF is touted as a sought after solution, to the global trade imbalance, it also has a downside in as far as lending is concerned. The IMF has stringent lending conditions, which require a country to sacrifice a lot, to meet its lending eligibility threshold. At its inception, the lending conditions just pivoted around the exchange rate and macroeconomic policies, but as more and more countries joined the bandwagon of states, that needed one form of financial assistance or the other, the conditions spilled over to structural reforms; that included privatization, fiscal reforms, financial sector reforms, trade reforms and central bank independence (Rajan, 2006).
A perfect example would be in Indonesia, where the lending conditions by the IMF in 1998 were excessive and intrusive (Rajan, 2006). The IMF set requisite lending conditions that were rather frivolous and superfluous, and included but were not limited to dealing with re-afforestation programs, introducing microcredit schemes and disbandment of the clove monopoly (Rajan, 2006). In a nutshell, countries that are key stakeholders of the IMF and who do not even borrow from the same agency, set very high standards for emerging economies, which intend to borrow from the Fund. Arguably, emerging economies have in the recent past, shied away from borrowing from the IMF for short term projects, finding it more prudent to use they’re saved up foreign reserves for development and trade matters, for fear of intimidation by the IMF (Rajan,2006).
The IMF has to play a supervisory role in policy formulation, because of the repercussions that certain policies that are instituted, tend to have on the policy-making economy, the hosting continent, or the entire world (Goldsbrough, 2005). The IMF acts as an oversight body, in economic policy formulation, because it boasts of highly qualified and impartial staff who produce undoctored reports, on economic research undertaken globally (Rajan, 2006). This is particularly beneficial to develop countries especially in Africa, that cannot produce reliable data on economic progression, because of vested interests by politicians, with short term goals that are usually flanked by corruption sideshows.
The IMF is indeed an important institution in the global economy, because of its role in ensuring that there is consistent stability in the world economic arena and that there is the admirable and sustainable growth of its member states (Mohammed, 2001). However, due to the need for every country to become policy independent, necessitated by economic patriotism, there has been diminishing multilateral dialogue, which is necessary to reform the IMF (Rajan, 2006). It would be harsh and undeserving to countries that are still emerging economies, to do away with the IMF because, much as they might be having foreign reserves for economic development, they might need some aid for their long term objectives, because of the volatility of world markets (Rajan, 2006).
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Therefore, all the member countries need to be engaged in renewed discussions, to rejuvenate the faith of industrialized countries, on the need of having an institution that sets the precedence, as far as macroeconomic policies are concerned. The IMF should, therefore, review its mission statement, and also the various policies that tend to make more and more countries, give it a wide berth. Additionally, conditions that seem to be unnecessary, when it comes to lending, should be scrapped. If such reform initiatives are taken, it would ensure that the IMF is still held in high esteem, as it was back in the day, unlike today where the World Bank has stolen the spotlight from it.
References
Carbaugh, R.J. (2011). Global Economics. New York: Southwestern.
Goldsbrough, D. (2005). Independent Evaluation Office: International Monetary Fund. Washington, D.C: IMF Publications.
Mohammed, A., A. (2001). The Future Role of International Monetary Fund. New York: UNCTAD and CID.
Mullineux, W., A, & Murinde, V. (2003). Handbook of International Banking. Northampton: Edward Elgar Publishing.
Rajan, G., R. (2006). The Role of the International Monetary Fund in a Changing World. International Monetary Fund. Web.