International Monetary Fund

Abstract

After the world war had come to an end, the business world experienced a crisis in trade transactions due to lack of the systematic framework to govern trade. As a result in the year 1944, 45 countries within Europe sat in the New Hampshire to structure the An economic framework that will monitor and control the the international monetary and financial systems in the globe, today has significantly increased to 185 membership: IMF institution. however with the current situation of the economy faced with many wriggles ranging from the inflation to economic recession trends it leaves the world with the big question as to whether the the IMF is competent enough to cub the challenges that are arising. that is not only the question that need to be given attention to but also if the IMF is still on course with the objects of design. because recently its unveiling the democracy objectivity aspect which not included in the objective in the article of agreement. therefore this term paper is going to look the functionalities of the IMF in matter relating to the global monetary systems with insight from formation and as to whether its performing its mandates well or not leading to the inefficiencies detected and criticism fro the world economists.

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Introduction

International economics is the study of the cross boarders economic of countries or the globe that includes the economy of trade, finance and monetary theory (Stephen Stuart 42). Whereby trade focuses on the international trade both within and across the countries boundaries, finance aspect looks at the international financial markets and the monetary category deals with the flow of money within the globe (Ngaire 200). Monetary theory deals with the analysis of worlds systems and how the various systems affects the equilibrium in production, trade, socio-economic activities within a macro economy environment (John 335). The monetary theory too in cooperates both non-circulating money such as deposit certificates and treasury bills, then circulating money within the population. the two categories of money system are compared to determine socio-economic consequences when either dominates the market by using spending and good against good approaches (Horst 56). But however, the economy should be supportive in macro and micro-economics and when one component of an economic system doesn’t perform it will cause a crisis in the economic arena. Currently the world economy is facing a challenge in terms of up hinging of money supply growth from inflation in many countries today and lack of proper monetary policy to activate the economic growth and progress (Stephen Stuart 43).

In the monetary theory in the world today there’s an organization that handles the money flow around the continents in the world. Which should be responsible for the emerging situation and see its contribution. But however, because we cannot embark on looking what it should have done to the current economic situation that pertains the monetary policies, its a point of worthy looking at the history and functionalities of the international monetary fund(IMF) in order to connect the current events. These should happen with insight of other influence of key economic players as trade, financing, agriculture and others have to be factored in, in an attempt to try and unveil this challenge in the global monetary sector of economy. Therefore this section will lead to the looking at the history of the formation of IMF, functions and objectives during formation, the key policies it intends to address and the current agendas it has (Horst 57).

Formation

During the 1930s there was great depressions in the worlds economy attributed to the devastated economic policies of the time which came as a result of protectionism policies, that aimed to favor trade that countries adapted which worsened the situation. Therefore as a result the economic representatives of 45 governments held a meeting in the United States of America at Brenton woods town in New Hampshire to agree upon on a structured plan framework for the international economic cooperation in the year 1944 (John 27). This the conference where the IMF was founded and formulation of articles of agreement was done as a guiding document. The following year December 27, 1945 the articles of agreement are enforced after being signed by the 29 members governments equivalent to 80% of the founding quotas (Ngaire 39). Then from there the IMF moved forward drastically by adopting the by-laws, inaugurating board of governors in Savannah at Georgia town in the United States where the agreement was reached to settle at the IMF headquarter at Washington DC in the United States and the executive Directors were elected. This saw Camille Gutt who was a Belgian to serve as the first IMF managing director starting May 6th, 1946 up to May 5th 1951.

Before the formation the countries had experienced defeat in their monetary policy. This was evident because of many incidences of unemployment, decline in the world trade and poor living standards amongst many countries. Initially countries on their own designed on policies that could stabilize their economy through limiting imports form other countries, attempted to enhance competition in the export market by devaluing their currencies and limited their citizens from involving in trade of goods from abroad which can have them hold the foreign exchange.

Therefore countries own regulated means never provided a stable business environment because it lacked a standard measure of scale to establish the value of currencies and stability of exchange rates as far as the monetary relations was concerned. In this respect the IMF institution was to address the monetary relations and trade as part of monetary policies. Thus it was meant to restore orders in the international monetary relations, to oversee international systems of monetary so that it can ensure exchange rates are stabilized and foster trade through advising accordingly members the need to eliminate restrictions that hampered trade transactions across their boundaries (Horst 87).

The purpose of formation of the IMF institution was primary to ensure the stability of the monetary systems in the world that included the exchange rate systems and international payments. Which would facilitate international trade to both country and its citizens to have access to goods and services that would lead to sustainability of the economic growth and promotion to better living standards of people through meeting the peoples needs. IMF too was the body prevent crisis in money trading by maintaining stability in the monetary systems amongst the members and the world through risk assessment measures in collaboration with world bank and other financial institutions. Which have tools of design in assessing the risk, such include financial sector assessment program, vulnerability indicators (Ngaire 134).

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Similarly the IMF in conjunction with other institutions and the private sector to avail financing temporarily to members country so that they can address balance of payment when are short of money and are supposed to make payment to foreign countries, but their foreign earnings are less compared to what is supposed to be paid to another country, therefore in such a situation the IMF gives the amount to balance the deficit. This is done through purchasing foreign exchange form the IMF assets and not being given loan. Then the member countries receive loans of annual rate of interest about 0.5% with maturity of 10 years.

Goals and Aims

The IMF was formed to accomplish six main objectives that were agreed upon by 45 member governments that were present at the meeting as written in the article of agreement in 1944. These objectives of IMF included:

To promote cooperation in systems of international monetary through instituting a stable permanent institution hat will provide mechanism for consulting and collaborating pertaining international monetary issues and challenges in order to address them.

To increase the volume of trade and therefore, income through employment opportunities by facilitating and expand the existing balance in the international trade through developing the reproductive resources of all members as fundamental in economic policy.

To ensure that exchange rates remains table by avoiding the competitive devaluation through maintenance of well structured and orderly exchange arrangements amongst member countries and those that wishes to transact with them.

To reduce the countries own designed mechanisms that restricts the payments for trade through establishment of multilateral systems of payment in transactions amongst member countries which initially hampered the growth of world trade.

To avail the financing services that helps to refinance members to cover deficit in their balance of payments in foreign transactions without interference with internal or external interests. This gives the members confidence because are adequately safeguarded against insecurity arising from deficit when their foreign exchange purchase is less than the foreign payment to trading partner.

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To reduce the effects resulting from the BOP (Balance of Payment) crises thus members can be shorter and lessened the any consequences that are bound to result from the transactions in foreign exchange buying and selling off within member states (Stephen Stuart 432).

These objectives came about as a response to the great depression in a decade ago before the institutionalization of IMF mainly from the hostility of the business environment as a result of protectionism arising from world war and liberalization. They aimed at reducing the trade barriers that devalued international trade.

Fund Activity and Applications

IMF as an international economical undertaking body in matters relating to money, its therefore clear that it has to have pool of funds to operate within. These part will be into two distinct phases which examine the source and the uses of resulting pool of funds that is created (John 68). The IMF gets funds mainly from countries deposit of quotas when they join the IMF membership. The quotas deposit by member countries usually reflected by their economic mighty in terms of the output. Therefore, the large the country’s economic pot the likely larger quota deposit likely to be realized the IMF (Ngaire 145). In this regard the quota value is 25% of the country’s economy output, the quota is significant and determinant of the countries Voting power. United States has the biggest share of a bout 17.09%, Japan follows with 6.13%the quota because its world’s largest economy, therefore reason behind its influence in the key decision making of the IMF because of attached power of its vote in addiction to basic votes. Precisely United States has 16.79% voting power, followed by Japan 6.0% least is Sweden with 1.1%. This makes the primary source of funds for the IMF is th quotas from the members country which also dictates the amount a country can obtain from the IMF body for financing their BOP (Balance of Trade) and determining heir Special Drawing Rights (SDR) allocations too. The value attached to quota makes it the member countries to deposit as much as hey can to enjoy the attached benefits to their quota deposit in return it earns the institution earns funds (Ngaire 344). The funds are in currencies as dollar, pound, yen and Euro.

The other source of the body funds like any other financial institution is generated from the interest earned on the purchased loans. But IMF recorded a decline in this source in the year 2005, which the funds are being invested in the member countries whose currencies are included in the SDR basket as Japan, Europe, United States and United Kingdom (John 231). IMF too borrow its fund when its necessary to do so from the strongest financial members in order to supplement its funds from quotas. This done in specious occasions when the country in need of more money to finance its BOP and other activities which failure to do so will land the international monetary system in anarchy (Stephen Stuart 132).

The funding of the activities of member countries can be majority the spending or lending programs. There are varied arrangements under which the lending occurs, the dominant one is Stand-By Agreement (SBA) that takes into account he setting aside of certain amount for a period of agreement that a country procedurally can have access to by purchasing the loans to finance its needs. Then secondly, it lends using the Extended Fund Facility (EFF) that help the country address the structural problems that results to balance of payment crisis that may take longer to construct. Because failure to which may result into instability to the international monetary system (Edwin 154). IMF has docket of poverty reduction and growth facilitates that encompasses concessional loans with annual interest rate of 0.5% with maturity of 10 years (Horst 236). In 2005 the institution established the Exogenous shocks facility to give low income countries which do not benefit from the poverty reduction and growth facility funds and equally are suffering from the balance of payment in their international transactions because of the shock which is global and beyond their own control.

We have the emerging assistance to countries which needs to balance transactions as originals form he natural disaster or catastrophe’s as floods, Catrina, cyclones, Tsunami, droughts and war or military conflicts that interests are subsidized depending on the economy performance (Ngaire 99). However, the IMF integrates with other business partners and private sectors to provide loans to developing countries. This mechanisms is Trade integration mechanisms that specifically designed to meet the balance of payment within this developing nations which have resulted from multilateral liberalization of trade or on export or imports oriented due inaccessibility to markets for trade or resulting from the Agricultural failure to subsidize food imported (Stephen Stuart 292).

In all lending activities the fund uses the four main currencies that are in the SDR (Special Drawing Rights) that includes the United States dollar, yen, pound and the Euro. Despite the fact that SDR is a unit of account to the IMF funds in an economical circumstance can be issued to increase world liquidity ratio. As the case in 1981 and pending 1997 because of unapproved by the United States (John 71).

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Apart from lending the IMF is involved in the activities such as surveillance and technical advisory services to member countries. This is achieved through multilateral as world economics outlook and he Global financial stability reports or through bilateral means by IMF and the concerned country. These surveillance activity is routinely undertaken in all member countries year for both developed and developing ones (Stephen Stuart 211). These ensures economic crisis detection, prevention and resolutions be achieved in collaboration with other institution as the world bank. However, the world bank and IMF have distinct scope of their objectives during formation. World bank was formed at the same time and place but aimed at helping war-ravaged countries to rebuild such as Japan and European nations while IMF was to look after macroeconomic and financial issues. In 1960s the countries targeted had already rebuilt and no longer needed the assistance so it was directed to developing independence gained countries in Africa, Asia and Latin America to work out long term development and poverty reduction. But IMF and World bank complement each other’s work and as a matter of fact countries join first IMF to be eligible members of world bank (Ngaire 219).

The IMF advisory ranges in the sector as microeconomics policies relating to the governments budgetary issues, credit and exchange rates management the macroeconomics performance and consumer related as investments in business, exports, outputs as GDP, employment. Balance of payments in country trading off within others. Financial sector policies including both supervisory and regulatory banking and financial institutions through the countries central bank. Lastly is the structural policies in a country that has a bearing towards performance of macroeconomics in areas as labor markets, energy and trading policies. Thus IMF advice members to have effective policies in place to address unemployment, inflation and economic growth which is sustainable within member states.

IMF provides member states with technical assistance on fiscal, exchange rate and monetary policies, trainings and statistics in financial sector (Stephen Stuart 431). The outstanding significance of the IMF training and service provision is the experienced and expertized body with wide body of knowledge from the handling it has had form many countries and as a constitute body with economical expatriates the IMF also support programs that are structured for development agendas and together with the UN work together towards achieving the millennium development grabs for both poor nation and developing ones to reach universal social status.

However, to conclude the institution is good tool that have enhanced development in many sectors of economy in the world today. but the IMF faces a number of criticism such as the conditionals that are attached to the Stand-By Agreements(SBA) especially after the Asia crisis that to greater extend denies the access to fund by countries and it cuts the freedom to spend the money given. Thus it bases most on the agreement based on the conditions rather than the money. Then the second controversy pertains the scope of fund operation since the loans are long term liquidity to nations which may be salient. But the issue is who should provide loan for long term whether IMF or world bank or channeling the loan through other financial institutions. The up coming issue of funds programs connected with democracy issues, since from the very beginning the IMF did not include democracy promotion in its mandate but in todays world he democracy tune of the United States seem to be great determining factor to the effect that IMF and world bank supports military dictatorship that are friendly to United States and Europe. Lastly the president’s and top management always from Europe and United States mainly therefore the question remains is the IMF cannot be entrusted its affairs with the other member countries economic expatriates? is a question open to debate to find out main reason behind the rule.

Reference

Horst Sioebert. The Worlds Economy, New York: Routledge, 2002.

Edwin M. Truman. A Strategy for the IMF reforms, London: Peterson institute, 2006.

John Ravenhill. GLobal Political Economy, Oxford: Oxford university press, 2008.

Ngaire Woods. The Globalizers; IMF, World Bank & their Browsers, New York: Cornell university press, 2006.

Stephen Ison, Stuart Wall. economics, Ontario: Pearson education ltd, 2007.

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