INTERNATIONAL MONETARY FUND (AIMS (Promote international monetary…
INTERNATIONAL MONETARY FUND
Promote international monetary cooperation
(Try and get states to work together on how their monetary systems work)
Facilitate the expansion and balanced growth of international trade (makes trade easier)
Promote exchange stability (don't have big variations)
Assist in the establishment of a multilateral system of payments
(assists ways that states are able to bring money to each other)
Make resources available (with adequate safeguards) to members experiencing balance-of-payments difficulties
The Board of Governors: Individuals appointed by members based off their financial experience
Any state may apply to join the IMF, the Board of Governors get the final say if they are allowed in
IMF currently has 189 member states
Upon joining, each member of the IMF is assigned a quota, based broadly on its relative size in the world economy.
When a state joins, IMF evaluates how strong their economy is then given a strength of vote and a limit of ow much money they can get from the IMF if they get in trouble
In the IMF, never equal power, bigger states/ economies get more money
A member state's quota determines its maximum financial commitment to the MF, its voting power, and has a bearing on its access to IMF financing
CURRENT IMF QUOTAS
The most important decisions made by the IMF requires a special majority of 85% of the votes.
This gives the USA - which holds almost 17% of the voting rights - an effective VETO at the IMF, the only single state with the privilege
• Promoting financial stability and growth through the surveillance activities, and policy advice to help members avoid or resolve a financial crisis, and maintain strong economic growth.
• The IMF assists the G-20 (largest 20 economies in the world) industrialized and emerging economies with recommendations to reshape their economic systems.
• The IMF as also played a very significant role in the aftermath of the Global Financial Crisis and the subsequent Sovereign Debt Crisis.
• Increasing its lending and support to many states especially in Europe.
• Have a look at Global economy and try and predict a financial crisis and help states prepare
• The technical assistance provided to its member states aims to support the development of the productive resources of the state’s economy by helping them to effectively manage their economic policy and financial affairs.
• The IMF helps states to strengthen their capacity in both human and institutional resources, and to design (what it believes to be) appropriate macroeconomic, financial, and structural policies.
• Helping states that don’t have people with a strong economic knowledge
Provide training for government to manage the economy
Trained in a way that the IMF sees as beneficial even if the state doesn't agree
Possibly trained that favours capitalism, and changes the way the state runs
• A member state may request financial assistance from the IMF if it has a significant balance of payments (trade + loan payments) need (actual or potential)
• If approved an IMF loan provides a financial cushion that should ease the adjustment policies and reforms that a state must make to correct its balance of payments problem and restore conditions for strong economic growth.
If it cannot find sufficient financing on affordable terms to meet its net international payments while maintaining adequate reserve buffers going forward
Give states money but make states change certain aspects of their economy in order to prevent it happening agains
CRITICISMS OF THE IMF
IMF voting rights are skewed heavily towards the developed world hence the IMF has been known as the 'weapon of the west'.
Has been used to change the economy of the less western states
IMF tends to implement policies that are characterized as ‘one size fits all’ approach, as it applies the same broad liberal market capitalist formula to every state it assists.
• Assumes a ‘one size fits all’ approach to economic reform and stability will be successful
• Increased poverty and lowered standards of living because of cuts to welfare, health, education
• Exposing a weak economy to international competition suddenly = high
Strong reforms must be followed. Often these reform programs involve:
o Sale of public assets (often at reduced prices)
o Sharp reduction in government spending
o Increases in taxes and charges (government gets more money)
o Abolishing of subsides and price controls
o Lowering of tariff barriers
o The combination of the above is regular referred to as "austerity measures"
ICELAND & GREECE - GLOBAL FINANCIAL CRISIS
Suffered economic meltdown due to the Global Financial Crisis, its main 3 private banks were heavily exposed to home-loan packages in the US which collapsed, causing bankruptcy
High private debt, The Central Bank of Iceland was not big enough to act as a lender of last resort to help the banks, meaning they let the banks collapse
Low public dept, put Iceland in a strong financial situation
What did the IMF do?
Two loans totalling to almost 220bn Euro from the "Troika" - The IMF, the European Central Bank and the European Commission
Raising taxes (especially sale taxes and excise (cigarettes and alcohol)
Cutting spending (especially cutting public service salaries, decrease pensions and holiday bonus payments)
Why did it fail?
The initial level of public debt was too high
Debt was not restructured until 2012 and then only partially (due to the restrictions of external creditors)
Lowering the real exchange rate involved years of austerity and high unemployment (couldn't alter their exchange rate because they were part of the EU and used euro)
High Public Debt, long history of running government deficits, high expenditure of military and highest on pensions (made in election promises
Belief that EU would never let a member state fail led to increased borrowing
What did the IMF do?
2.1bn Euro loan, combined with other sources of funding, Iceland received around 10bn Euro in loans
Banking sector restructuring and insolvency framework reform
Consolidation of public finances
Monetary and exchange rate policy, with stabilization of the exchange rate and inflation as key elements
Why did it succeed?
Most debt had been wiped through the bankruptcy of private banks.
The low exchange rate generated current account surpluses that were required to service the foreign debt that remained.
How does this fulfil the aims/role of the IMF?
How does it show IMF power?