Post 1930 Era was impacted by The Great Depression & World War II.• During the Great Depression the countries were trying to shore up their falling economies by – 1. sharply raising barriers to foreign trade 2. devaluing their currencies to compete against each other for export markets 3. curtailing their citizens freedom to hold foreign exchange• Countries affected by World War II desperately required • Economic Reconstruction (for well developed nations) • Economic Development (for less developed nations)• World trade declined sharply (see chart below), and employment and living standards plummeted in many countries. • This breakdown in international monetary cooperation led the IMFs founders to plan an institution charged with overseeing the international monetary system—the system of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other.
The Bretton Woods agreement• The IMF was conceived in July 1944,• Representatives of 45 countries met in the town of Bretton Woods, New Hampshire, in the Northeastern United States, agreed on a framework for international economic cooperation.• The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement• It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF.• Par value system (Bretton Woods system) • Initially, member countries agreed to peg their currencies in US Dollar terms and for US, the value of Dollar in terms of Gold-to correct Fundamental Disequilibrium.
• Keeping track of the global economy andSURVEILLANCE the economies of member countries • Lending to countries with balance of payments difficulties LENDING • Financial assistance to countries to meet International Payments TECHNICAL • To assist mainly low- and middle-income countries in effectively managing their ASSISTANCE economies
Greatest Loan is on : Mexico and GreeceHighest Loan as % of GDP: Liberia (8.5%) and Iceland (7.4%)Greatest amount to be Paid Back by: Iceland and Ireland
• Membership: 187 countries• Headquarters: Washington, D.C.• Executive Board: 24 Directors representing countries or groups of countries• Staff: Approximately 2,470 from 141 countries• Total Quotas : US$ 383 billion• Biggest Borrowers : Greece , Portugal ,Ireland (as of 18/08/2011)• The members of the IMF are 186 members of the UN (all UN member states but 7) and Republic of Kosovo.• Apart from Cuba, the other six member states of the UN not belonging to the IMF are: North Korea, Andorra, Monaco, Liechtenstein, Nauru and South Sudan.
• All member states participate directly in the IMF.• 24-member executive board- Five executive directors are appointed by the five members with the largest quotas, Nineteen executive directors are elected by the remaining members. all members appoint a Governor to the IMFs board of governors.• The powers of the other countries are represented on a proportional scale to their population and economic rank in the world.• The Executive board are the general owners of the IMF and can control major decisions.• All members of the IMF are also International Bank for Reconstruction and Development (IBRD) members and vice versa
•Where does IMF get the money from? • Most resources for IMF loans are provided by member countries, primarily through their payment of quotas. • Since early 2009, the IMF has signed a number of new bilateral, Multilateral loan and note purchase agreements to bolster its capacity to support member countries during the global economic crisis. • Concessional lending and debt relief for low-income countries are financed through separate contribution-based trust funds.
•The IMF’s gold holdings amount to about 90.5 million troy ounces(2,814.1 metric tons), making the IMF the third largest official holder of gold inthe world.•The limited sales program covering 403.3 metric tons of gold, to safeguardfrom market disruption, and Gold sales were at market prices.•Profits on the sale will fund an endowment as part of the IMF’s new incomemodel, agreed to put the institution’s finances on a sustainable footing.• The IMF can use its quota-funded holdings of currencies of financially strong economies to finance lending
•The Special Drawing Right (SDR) is an international reserve asset, created bythe IMF in 1969 to supplement the existing official reserves of membercountries.•The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potentialclaim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in twoways: 1. Through the arrangement of voluntary exchanges between members 2. By the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.• SDR also serves as the unit of account of the IMF and some other international organizations.
IMF has been bailing out several countries from crisis situations over a period oftime. However there has been some criticism too regarding its policies. In thissection we see the bailouts and the associated criticism. ASIAN CRISIS•Financial crisis broke out in Asia in 1997 -large declines in currencies, stock markets, and other asset prices•Affected emerging markets outside of Asia•IMF arranged programs of economic stabilization and reform withIndonesia, Korea, and Thailand ACTIONS TAKEN BY IMF• Temporary tightening of monetary policy• Correct the weaknesses in the financial system• Remove features of the economy that were impediments to growth• Assist in reopening lines of external financing• Maintaining a sound fiscal policy
Asian Financial Crisis IMF Sank Argentina Greek Crisis• Thailand, Indonesia, South Korea • Fixed rate of 1 peso for 1 U.S. dollar (overvalued) , Instructed • Conditions of Loans by IMF by IMF.• The IMF insisted on fiscal restraint – lower spending, higher • Austerity Package imposed by taxes and privatisation. • countrys exports too expensive, IMF and its imports artificially cheap. • Reducing government borrowing• Contractionary fiscal policy caused the economic downturn • record $400 billion trade deficit. • Higher taxes to exacerbate and the economy plunged into recession. • lower spending • Need for large reserves of dollars• Bankruptcies increased • To reduce deficit spending• confidence evaporated causing a • IMFs role arranged massive • Higher interest rates to stabilise flight of investors amounts of loans $40 billion. the currency.
“Bailout” Conditionalities on Pakistan• IMF approved US$7.6 billion loan to Pakistan in 2008• Conditionalities included- Eliminating all Government subsidies. Slashing government spending Raising Taxes• Impact • GDP Declined from 7.4 % to 4.2% in 2008-09.Economists claim that conditionalities (economic performancetargets established as a precondition for IMF loans) retard socialstability and hence inhibit the stated goals of the IMF.
Problem Of Governance IMF is driven by collective will of G-7 countries It is dominated not merely by wealthy, industrialized nations, but also by commercial and financial interest of these nations.• Capital Market Liberalization IMF pressures countries that petition for IMF loans to open their markets to outside capital investment. Investors invest huge sums in a country only to pull those investments at a moment’s notice, causing acute economic crisis. Destabilizes the economy.
• Certain policies of IMF are criticized ; however there are more examples ofcases of success than failure and clearly the existence of a global economicbody is desired.• The focus should be to make crisis resolution more country specific andkeeping in mind the various economic circumstances especially fordeveloping countries.• The surveillance of trade exchange rates and monitoring of related policiesis needed especially since Asian economies like that of China’s and India aregrowing strong and thus IMF plays an important role keeping a track.•With the kind of disasters and adversaries being faced by several countries, abody to help such economies out is required and that is where IMF comesinto spot light.