In early May 2010 the International Monetary Fund ( IMF ) approved a three-year loan of about $ 40 billion to help Greece who is enduring from 100s of one million millions in debts and a budget shortage of 13.6 % of gross domestic merchandise ( GDP ) ( Wagner 2010 ) . As a status of the loan, Greece was required to increase revenue enhancements and drastically cut authorities disbursement. In visible radiation of the IMF going a chief participant to help Greece in its current debt crisis, I became interested in the function of the IMF in the planetary economic system and its effectivity in relieving economic crises. However, the inside informations of the debt crisis in Greece are beyond the range of this paper and hence will non be exhaustively examined. In this paper I will discourse the history and function of the IMF, explore some of the successes and failures of the IMF ‘s engagement in certain states, and present the unfavorable judgment faced by the IMF.
Overview of the IMF
The International Monetary Fund ( IMF ) is an international fiscal establishment that was established to guarantee the stableness of the international pecuniary system by forestalling crises, supplying advice, and moving as a loaner of last resort for member states in fiscal hurt. The IMF was created in July 1944 at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire ( led by John Maynard Keynes and Harry Dexter White ) to organize a system for international economic cooperation through fixed exchange rates and short-run funding for shortage states ( Sau, 2004 ) . On December 27, 1945, the first 29 states signed the IMF ‘s Articles of Agreement which officially established the IMF ( International Monetary Fund [ IMF ] , 2007 ) . Article I of the Articles of Agreement sets out the IMF ‘s chief ends: “ advancing international pecuniary cooperation ; easing the enlargement and balanced growing of international trade ; advancing exchange stableness ; helping in the constitution of a many-sided system of payments ; and doing resources available ( with equal precautions ) to members sing balance of payments troubles ” ( IMF, 2010b ) . The IMF, headquartered in Washington, D.C. , still maintains these original ends and its current rank has grown to 186 states ( IMF, 2010c ) .
Membership and Quota
Membership in the IMF requires a state to “ carry on its exchange rate policy and related economic and fiscal policies in conformity with the Articles, and provide requested economic and fiscal information to the Fund ” ( Pujol, 1991 ) . Upon fall ining the IMF, members must pay a country-specific capital subscription ( known as a quota ) , which is a amount of money that must be contributed to the IMF. The quotas fund a pool of money that is used to impart to member states in fiscal hurt. The IMF sets the quota for each member based on each state ‘s wealth and economic public presentation. In 2008 the Board of Governors adopted a new quota expression:
CQS = ( 0.5*Y + 0.3*O + 0.15*V + 0.05*R ) K
Where CQS = calculated quota portion ;
Y = a blend of GDP converted at market rates and PPP exchange rates averaged over a three twelvemonth period. The weights of market-based and PPP GDP are 0.60 and 0.40, severally ;
O = the one-year norm of the amount of current payments and current grosss ( goods, services, income, and transportations ) for a five twelvemonth period ;
V = variableness of current grosss and net capital flows ( measured as a standard divergence from the centered three-year tendency over a 13 twelvemonth period ) ;
R = twelve month norm over a twelvemonth of official militias ( foreign exchange, SDR retentions, reserve place in the Fund, and pecuniary gold ) ; and
K = a compaction factor of 0.95. The compaction factor is applied to the uncompressed calculated quota portions which are so rescaled to sum to 100. ( IMF, 2008 )
Harmonizing to the IMF, “ Countries deposit 25 % of their quota subscriptions in Special Drawing Rights or major currencies, such as U.S. dollars or Nipponese hankerings. The IMF can name on the balance, collectible in the member ‘s ain currency, to be made available for loaning as needed ” ( IMF, 2006 ) . The size of the quota determines voting powers, subscriptions in gold and currencies, borrowing powers and SDR ( particular pulling rights ) allotments. The IMF ‘s Board of Governors reviews quotas every five old ages to find if an addition is necessary. The United States contributes the largest quota of $ 37.1 billion which is 17 % of the IMF ‘s entire capital from quotas ( IMF, 2010c ) . Based on informations obtained from the IMF ( 2010c ) , the undermentioned figure depicts the largest IMF members by quota portion:
The IMF was designed to guarantee the stableness of the international pecuniary system and prevents crises. In order to carry through its ends, the IMF performs three chief activities:
1 ) monitoring national, planetary, and regional economic and fiscal developments and reding member states on their economic policies ( “ surveillance ” ) ;
2 ) loaning members difficult currencies to back up policy plans designed to rectify balance of payments jobs ; and
3 ) offering proficient aid in its countries of expertness, every bit good as preparation for authorities and cardinal bank functionaries. ( IMF, 2006 )
The first activity of state surveillance is conducted through the usage of one-year audiences with single member states. The IMF sends a squad of economic experts to each state to analyse the state ‘s current economic conditions by roll uping economic and fiscal informations, and discoursing the state ‘s economic policies with authorities and cardinal bank functionaries. “ The squad examines financial and pecuniary policy, exchange rate, general macroeconomic stableness, and any related policies, such as labour policy, trade policy, and societal policy ( such as the pension system ) ” ( Levin Institute, 2009 ) . A study of the official sentiment of the IMF is so compiled and given to the leaders of the state. The intent of the audiences is to analyze national policy determinations that may potentially hold an consequence on the international economic system.
Fiscal aid is the chief activity performed by the IMF. The IMF offers fiscal aid to member states that have balance of payments jobs so that the states can “ pay off their duties and readapt their economic policies so that they will non confront another crisis or near-crisis ” ( Levin Institute, 2009 ) . A state experiences jobs of balance of payments “ if it can non happen sufficient funding on low-cost footings in the capital markets to do its international payments and maintain an appropriate degree of militias ” ( IMF, 2006 ) . A state must hold to implement the alterations in its financial and pecuniary policies that IMF experts deem necessary in order to have fiscal aid. The IMF offers loans that range from a twosome months up to ten old ages ; nevertheless, the loans are disbursed in stages so that the IMF can supervise the advancement of the reforms required of the having state. The loans and involvement accrued must be paid back on a rigorous agenda set by the IMF. Harmonizing to the Levin Institute ( 2009 ) , the IMF provides the aid through several lending plans:
Stand-by agreements are loans granted for specific sums over 12 to 18 months to cover with short-run jobs.
The Drawn-out Funds Facility is used to assist a member-country trade with what are called “ structural ” economic jobs ensuing from a history of hapless economic planning. The IMF attaches strong conditions to loans through this installation, which are granted for three to four twelvemonth footings.
The Poverty Reduction and Growth Facility is granted at low involvement rates to hapless states.
The Supplemental Reserve Facility grants short-run loans during crises, but adds a surcharge to deter excessively much adoption.
Contingent Credit Lines are granted during moving ridges of crises that can distribute from one state to another, called ‘contagions. ‘
Emergency Assistance is granted to states confronting military struggles or other sudden catastrophes. ( Levin Institute, 2009 )
Loans from the IMF merely provide a fraction of what a state needs to finance its balance of payments. However, since borrowing states must reform their economic policies in conformity with IMF guidelines, IMF funding basically reassures investors and attracts extra funding from other beginnings for the financially hard-pressed state.
Last, the IMF besides provides proficient aid and preparation in countries such as cardinal banking, pecuniary and exchange rate policy, revenue enhancement policy and disposal, and official statistics. Harmonizing to the IMF ( 2006 ) , “ Specifically, [ the IMF ] has been assisting states bolster their fiscal systems, better the aggregation and airing of economic and fiscal informations, beef up their revenue enhancement and legal systems, and better banking ordinance and supervising. ” Low-income states are the chief donees as about 85 % of the IMF ‘s proficient aid goes to low and in-between income member states ( IMF, 2010a ) . The IMF helps these states identify failings and exposures in their economic policies and advises authorities and cardinal bank functionaries of these states.
IMF Success and Failure
Over the class of its being, IMF intercession has successfully led to fiscal crisis declaration in legion states ; nevertheless, the IMF is non an infallible establishment and has experienced several failed intercessions as good. In the undermentioned two subdivisions I will analyze an illustration of a successful IMF intercession and an illustration that is considered to be a failure of IMF policies.
In the late eightiess, Jordan had fallen into a major economic recession and was being negatively impacted by its wars with Israel. Jordan was enduring from a 35 % unemployment rate and an inability to pay its loans ( Siddiqi, 2000 ) . The IMF intervened and Jordan agreed to a series of five-year reforms. However, during the Gulf War, Jordan ‘s unemployment rate continued to increase because of Iraq ‘s invasion of Kuwait which caused 230,000 Jordanians to return back to the state which put a strain on its authorities ( Siddiqi, 2000 ) . From 1993 to 1999, the IMF granted Jordan three extended fund installation loans which consequences in the authorities set abouting “ monolithic reforms of denationalization, revenue enhancements, foreign investing and easier trade policies ” ( Siddiqi, 2000 ) . Jordan joined the World Trade Organization ( WTO ) in 2000 and later signed a free trade understanding with the United States ( Siddiqi, 2000 ) . As a consequence of Jordan ‘s engagement with the IMF and WTO, the state was able to cut down its debt to a manageable degree. Jordan is an illustration of how the IMF can further strong, stable economic systems that are productive members of the planetary economic system.
Prior to 1985, Tanzania was a badly indebted socialist province that the IMF hoped to turn into a strong subscriber to the universe economic system. The IMF granted Tanzania a loan of $ 69 million with conditions that the state was required to take down trade barriers, cut authorities plans and sell the state-owned industries ( Pooley, 2000 ) . By 2000 these policy alterations resulted in many effects for the state in respects to the health care industry, instruction system, and its gross domestic merchandise ( GDP ) . The health care industry which was antecedently free started bear downing patients and the AIDs rate in Tanzania shot up to 8 % ( Pooley, 2000 ) . The instruction system besides began to bear down kids to go to school and as a consequence, school registration dropped from 93 % in 1993 to 66 % in 2000 ( Pooley, 2000 ) . Due to the reduced registration, the illiteracy rate of the state drastically increased by 50 % ( Pooley 2000 ) . During 1985 to 2000, Tanzania ‘s GDP per capita was strongly affected and dropped from $ 309 to $ 210 ( Mbogora, 2003 ) . By 2000, Tanzania ‘s debt from the IMF, World Bank and other loans reached a balance of $ 6.4 billion and “ the authorities was passing 40 % of its one-year gross on involvement payments — more than it spends on wellness and instruction combined ” ( Pooley, 2000 ) . However, in 2000 the IMF and World Bank announced a $ 2 billion debt-forgiveness bundle for Tanzania ( Pooley, 2000 ) . The IMF ‘s engagement in Tanzania is an illustration of how the IMF ‘s liberalized scheme is non appropriate for all member states.
The IMF has been the mark of unfavorable judgment for its apparently neoliberal policies to accomplish economic globalisation and for the range of influence within the IMF. Based on the finding of voting rights antecedently discussed, the degrees of influence in the IMF are cited as one of the grounds for its liberalisation policies. The United States ( U.S. ) and Europe are the major influences within the IMF with the U.S. stand foring 17 % of entire vote power ( the largest portion of any single state ) and Europe as a whole maintains 23 % of entire vote power ( IMF, 2010c ) . There are ailments that the U.S. , who represents about 30 % of the universe economic system, uses the IMF as a manner to back up states that are strategically of import to them, instead than based on economic demand. Asymmetrical vote influence is a major point of contention among IMF members and critics. For illustration, African states account for 25 % of IMF rank, yet merely yields a 4 % vote portion based on quota ( IMF, 2010c ) . Basically the states that have a greater interest in the universe economic system hold the greatest influence over the IMF and its policies.
The IMF is besides criticized for its conditionality on loans and its execution of certain economic policies. By and large, the IMF ‘s policies include cut downing authorities borrowing through higher revenue enhancements and lower disbursement, higher involvement rates to stabilise the state ‘s currency, leting failing houses to travel belly-up, and originating structural accommodation that includes denationalization, deregulating, and cut downing corruptness and bureaucratism. These policies can really hold an inauspicious consequence and do fiscal crises worse in certain states. For illustration, during the Asiatic fiscal crisis of 1997, many states such as Indonesia, Malaysia and Thailand were required by the IMF to raise involvement rates, cut down their budget shortages, and beef up their exchange rates ( Joyce, 2004 ) . However, these policies exacerbated the job in Asia and resulted in a serious recession with high degrees of unemployment. Coercing states to adhere to free market policies of denationalization has besides negatively wedged certain states where these policies are non best suited for the state ‘s state of affairs and can take to the creative activity of exploitative private monopolies ( Kahn & A ; Sharma 2003 ) . Critics argue that these cover reforms reflect the IMF ‘s failure to acknowledge the different kineticss of single states ‘ state of affairss and its mission to advance neoliberal policies. Joseph Stiglitz, economic expert and Nobel laureate, has criticized the IMF ‘s failure to supply the best policy to better the public assistance of developing states by stating, “ the IMF was non take parting in a confederacy, but it was reflecting the involvements and political orientation of the Western fiscal community ” ( Stiglitz, 2002 ) . Basically the critics argue that the IMF uses financially hard-pressed states as tools to accomplish their mission of planetary trade and economic liberalisation.
In add-on to unfavorable judgments of the IMF ‘s policy reforms, the IMF is besides criticized for its deficiency of transparence and answerability, and it ‘s willingness to impart to states with human rights misdemeanors and states ruled under a military absolutism. Critics claim the IMF lacks transparence because the IMF does non offer public certification of its determinations, except for brief imperativeness releases which lack inside informations needed for professional rating of its plans ( Khor, 1998 ) . Jeffrey Sachs, economic expert and former caput of the Harvard Institute for International Development, criticized the IMF in an article in the Financial Times published in 1997 stating, “ The people most affected by these policies have small cognition or input. In Korea the IMF insisted that all presidential campaigners instantly ‘endorse ‘ an understanding which they had no portion in outlining or negotiating, and no clip to understand ” ( Khor, 1998 ) . If the IMF fails to to the full educate the leaders of a state on the policies it is implementing, so it should non be surprising that many of the IMF policies end up neglecting and doing worse conditions for a state. The IMF has besides been criticized for denying loans to democratic states while allowing loans to military absolutisms in Brazil and Argentina. In July 2009 the IMF approved a $ 2.6 billion loan for Sri Lanka despite being cognizant of the state ‘s human rights misdemeanors. Harmonizing to Reuters ( 2009 ) , “ The loan was approved by the IMF board but with resistance from five states including the United States, Britain, Germany, France and Argentina, which expressed concern at human rights maltreatments in Sri Lanka despite the terminal of the state ‘s 25-year civil war. ” The IMF defended its place to help Sri Lanka despite its recognition of the state ‘s human rights misdemeanors.
The IMF responds to unfavorable judgment by emphasizing the fact that states are non obligated to accept a loan ( Wendt, 1999 ) . By accepting a loan, a state is holding to the policies and reforms mandated by the IMF. However, states that are highly financially distressed with no other options are basically at the clemency of the IMF and have small bargaining power to negociate the footings and conditions of the loan. As a loaner of last resort, the IMF acts as a accelerator to bring forth extra financess for a state by reassuring investors that the state is on the right path towards economic stableness. Since the IMF intervenes in economic crises, the IMF acknowledges that troubles and complications will probably originate and readjustments will be economically painful at times ( Wendt, 1999 ) . Most critics tend to concentrate on the IMF ‘s failures and short-run jobs which provide a skewed analysis of the IMF by disregarding its successful steps and a long-run position of its aid.
How effectual the International Monetary Fund is in the planetary economic system is a widely debated issue. Since the IMF is still comparatively immature at 66 old ages old, it has to work through a procedure of test and mistake when it comes to helping states and analysing the best policies to implement given a state ‘s specific state of affairs. However, the IMF must travel off from its cover reforms and implement discretional policymaking if it wishes to increase its effectivity and minimise its failed attempts. One of the biggest jobs with the IMF is its exposure to political influence of a neoliberal docket. The IMF deficiencies objectiveness when covering with states in crises and has a history of helping states that are strategically of import to it and the planetary economic system. Many critics recommend reform of the IMF ‘s administration construction which is extremely unrepresentative of member states. For illustration, the Board of Directors consists of eight out of 24 Directors stand foring states from the European Union ( EU ) compared to 2-5 for other parts which is an overrepresentation of Europe. Potential reform includes consolidating the EU ‘s ballots and chairs to reflect a more accurate representation. This is merely one of the legion reforms that are being recommended and considered by the IMF Board of Directors and member states ; nevertheless, discoursing these other reforms is beyond the range of this paper.
Ultimately, the fiscal crisis in Greece will turn out to be a major trial for the IMF and its reform attempts since it will non be able to implement its typical cover reforms due to the state being a member of the European Union ( EU ) . The IMF will hold to work jointly with the EU in order to deliver Greece which will turn out to be a major battle. “ Because Greece is a member of the euro zone, it does n’t command its ain interest-rate and currency policies. So the IMF ca n’t state Athens to tweak involvement rates to spur investing or devaluate its currency to do exports more attractive ” ( Davis, Moffett, Granitsas, & A ; Skrekas, 2010 ) . Harmonizing to the IMF, Greece will hold to cut down its budget shortage by 11 % of GDP over three old ages ( Davis, 2010 ) . As a consequence of the conditions mandated by the IMF ( which include cuts to rewards and benefits ) , the IMF estimates a 4 % economic contraction in 2010 and an unemployment rate of about 15 % following twelvemonth ( Davis, 2010 ) . Despite the bailout understanding, Greece and the European Union are left get bying with the instability of the euro, the potency for contagious disease and the restrictions of bing policy within the euro zone. Lone clip will state what type of impact the International Monetary Fund will hold on the fiscal crisis in Greece, but there is no uncertainty that it will be a long, painful recovery procedure for Greece.