Role of the IMF
The membership of the organization increased over the years and now stands at about 186. During the 1960s, membership increased when most countries that gained independence joined the organization and again in the 1990s as the member states of the former USSR were welcomed after the dissolution of the USSR. The needs of the new independent countries and the transition countries were quite different from those of the founding members hence the organization had to have new instruments over the years. The organization has continued to develop programs and policies that are geared towards helping the member countries meet their challenges.
Role of the IMF
The primary purpose of the institution is to ensure the stability of the international monetary system. The international monetary system is the system of exchange rates and global payments that enable nations and people to buy goods and services from each other. This is very important to ensure sustainable economic growth and increasing cost of living. In order to maintain stability and avoid crises in the international monetary system, the organization reviews national, regional and world economic and fiscal progress. It provides advice to the member states on how to adopt policies that can stimulate economic stability and reduce their vulnerability to economic and financial problems and improve the living standards of people. The organization serves as a forum where the member countries can discuss the effects of their policies. The IMF also avails funds to the countries so as to meet their balance of payments difficulties. This occurs when the countries are short of the foreign exchange whenever their foreign income is less than the payments they are making to other countries. The other function of the IMF is to provide technical assistance and training to the countries so that they are able to expand the expertise and institutions required to attain economic stability and development (Danaher, p 50).
The countries that join the IMF must accept that their economic and financial policies can be scrutinized by the international community. They also make a commitment to institute policies that are favorable to foster economic expansion and price solidity. They cannot manipulate the exchange rates for undue competitive leverage and must avail their economic data to the International Monetary Fund. Through a program known surveillance, the IMF regularly monitors economies and the related technical advice offered to identify the setbacks that can cause problems. The country surveillance involves annual comprehensive discussions with the countries referred to as the Article IV consultations. During the discussions, the IMF team goes to the country to collect economic and financial information and hold talks with the government officials. The findings of the team are taken to the IMF management and the Executive Board which then gives its views to the countries in question. As a result, the views of the global and the realities of international experiences impact on the national policies. The IMF also carries out Global Surveillance reviews of world economic trends and developments based on the World Economic reports and Global Financial stability Report. The reports cover improvements, predictions and policy issues in international financial markets. There is also regional surveillance which is concerned with the assessment of policies undertaken under regional agreements within the regional blocks. The three levels of surveillance are being integrated due to the increasing interdependence of the countries economies (Danaher, p 65).
Through its oversight role of the member countries in the macroeconomic and financial sector, it focuses on the policies affecting the countries budget, the administration of money and credit facilities and the exchange rate. It also oversees the macroeconomic organization which includes state and consumer spending, the investment sector, international trade, the gross domestic product, employment and price increases. It also focuses on the balance of payment, the financial sector policies and structural policies that impact macroeconomic performance (Baumol, p 374).
All countries are free to turn to the IMF to get funds if they experiences balance of payment problems when they fail to receive adequate funding from the capital markets. It does not act as a financial institution or an aid agency that gives loans but the loans are only aimed at tackling balance of payment problems, economic stabilization and restoring sound economic development. It does not finance development projects as the World Bank and development institutions do. From the 1970s, the developing countries have been the main beneficiaries of the IMF funding programs. Today, the developing countries and countries undergoing transition are the main borrowers from the International Monetary Funds. The loans only provide a small fraction of what a country needs to finance the required balance of payments. The lending programs fall into three categories namely Stand-By arrangement, extended fund facility and the poverty reduction and growth facility. The stand-by arrangements are intended to address short-term balance of payments difficulties for countries experiencing capital account problems. The Extended Fund Facility is used to deal with balance of payment problems caused by structural problems that may take longer to be rectified than macroeconomic differences. Such a program includes actions aimed at improving the markets and the supply segment of the economy like taxation, privatization arrangements and fixing the labor market. The Poverty Reduction and Growth Facility involve concessional loans which attract interest rates of 0.5 per year and a maturity period of one decade especially to the poor countries. Apart from the above programs, the institution also provides Emergency Services to countries faced with balance of payment crisis due to natural disasters or political problems (Baumol, p, 374).
The IMF provides technical assistance and training in different areas including national banking, fiscal and exchange rates policies, taxation and management of official data. The main areas include monetary and financial policies, fiscal policy and management, management of statistics and economic and financial legislation. The advice helps to enhance the design and implementation of national economic programs. The technical assistance program was started in the 1960s when the newly independence countries required such a program in setting up their national banks and finance departments. The technical assistance is geared towards aiding the countries in strengthening the monetary system, enhance collection and release of official data, reinforce their taxation and legal regimes and improve the management of financial institutions. In the recent past, the technical assistance has been used to expand the structure of the international financial system. The technical assistance is especially valuable to countries that need to redevelop their institutions in the aftermath of civil unrest or war. The low-income and lower-middle-income nations are the main beneficiaries of the IMF technical assistance programs.
Technical assistance is provided in different ways. The IMF experts may be sent to the countries to offer advice to the governments and top financial sector officials. The IMF may also deploy resident professionals for a given time period either short-term or long-term. The institution also gives training to government and national bank officials at its main office in Washington DC and the regional offices in different parts of the world. The funds for technical assistance are availed by some of the developed countries and international agencies.
The IMF and Developing countries
In the recent past, there has been an emerging agreement that the IMF should stop its lending to the developing nations since it was not its appropriate role to play. The fund could do more if it dealt with the financial tragedies even though its performance in this area has been largely questioned. From the 1980s, most customers of the IMF comprised the low income and emerging economy countries as the developed countries depended on capital markets. Over the years, the IMF never preferred disengaging from the low income countries and its role increased in the 1990s after the initiation of the Heavily Indebted Poor Country (HIPC) policy. Through the program, the poor countries were to find a way out of the debt crisis facing them. In 1999, the program was remodeled to become the Poverty Reduction and Growth Facility (PRGF) which increased the lending to the poor countries. The lending program and the IMF supported initiatives in poor countries have come under scrutiny. The issue under contention is whether the policies proposed by the IMF have a negative impact on economic growth, welfare spending and income distribution in these countries (Bird, p 2).
The role of the IMF in the developing countries can be difficult to discuss due to their diversity. Some of the countries perpetually experience balance of payment problems while others do not. Many of them seek the assistance of the IMF to deal with their balance of payment problems but not all of them are always eager to do this. Furthermore, for those that seek IMF assistance, while some become constant users of the Fund facilities others do not. Some of the countries posses low levels of global resources while others are well endowed. In addition, while some can easily access private capital sources most of them lack this privilege but rely on foreign aid yet the level of reliance on these facilities varies. For a clear comparison to be successful, a broad statistical picture should be presented (Bird, p 3).
The IMF was originally formed to maintain a standard of fixed exchange rates but after the removal of the gold standard in 1971, its role changed to providing loans to countries in problems. Those nations that experience balance of payment problems turn to the IMF for funds to cover the existing obligations to the external creditors. The other private lenders will only give funds to troubled countries if they have a loan agreement with the International Monetary Fund. As a result, the developing countries can only access external credit facilities if they have dealings with the IMF. Some of the agreements advanced by the IMF contain preconditions that force the countries to implement structural adjustment programs before they receive the loans. Structural adjustment programs are policies connected to the neo-liberal market policies which are aimed at opening up the countries to transnational corporations especially to the workers and natural assets. The policies also try to reduce the influence of the government, increase the reliance on market forces in the distribution of natural resources and incorporate the poor countries in the world economy. Some of the policies include privatization of state owned businesses and services, reducing government spending, aligning the economies to increase exports , trade liberalization and investment regulations, increasing interest rates, and removing subsidies on basic commodities (Bird, p 5).
The model adopted by the IMF dealing with the developing countries has several pros and cons. On the brighter side, the Fund has been able to provide financial support to countries that could not have got such an opportunity anywhere else. Generally, the IMF performance in promoting a stable international exchange rate system has been hugely successful even though it has been hugely criticized. The stabilization programs have managed to prevent currency problems in most countries especially in countries with minimal state intervention in the financial sector (Dreher, p 2). The IMF is able to influence the economic policies and results in the countries through the policy conditions attached to the loan agreements. On the other hand, the lending by the IMF may lead to a long-term dependency on the loans by the countries yet they are supposed to be short-tern measures. The ability of the IMF programs to help the countries has been questioned as most of those that have been helped are possibly poorer than before. Worse still, repayment of the loans is a huge burden to the developing nations as they end up spending more money on repaying the loans instead of financing educational and health programs (Dreher, p 23).
The structural adjustment programs have only succeeded in reducing the role of governments in the market and bringing the poor countries in the world market but they have also carried serious side effects. The policies open up the poor countries to the foreign investors, a fact that mainly benefits the transnational companies. The Third World countries are forced to eliminate obstacles to foreign investment and align their economies to be export oriented which favors the transnational. The privatization programs are also dominated by the transnational that purchase most of the government owned enterprises. The loan bails out arrangements generally benefit the foreign creditors who never absorb the cost of bad debts from the poor nations and this has encouraged excessive lending from the agencies while the poor nations accumulate huge debts. Many of the countries which have undergone structural adjustment programs have not always recorded economic growth. On the other hand, those that have dishonored some of the preconditions have managed to experience considerable economic development. The countries mainly sheltered some sectors of the economy and retained state control in the economy. The two regions heavily affected by structural adjustment policies were Latin America and Africa has experienced stagnation or collapse in the per capita incomes (Selowsky, p 50).
The emphasis on the export oriented economy has led to social disruption in the rural areas of the poor countries. This affects the poor small scale farmers whose economic activities are considered unviable and are under intense pressure from the expanding agribusiness and industries. After they are pushed out of the farms, they join the unemployed groups in towns or to resettle in formerly unoccupied areas. The programs have contributed to widening income and wealth disparities in the third world countries (Selowsky, p 50).
The Asian financial crisis of 1997 was largely attributed to the dependence on short-term foreign loan by the countries in the region. When it became clear that the private businesses could not cover their payment obligations, the international currency markets started to panic and converted the Asian money into dollars. Consequently, it became difficult for the Asian countries to repay their loans and the import of goods became a problem. When the IMF intervened, it treated the situation like others where countries fail to meet their balance of payments. It gave the countries loans to help them to cover their external debt obligations with preconditions that they adopt structural adjustment programs yet the crisis was different from the balance of payment problems. Most of the countries were not running budget deficits but the institution directed them to reduce their spending, a measure that worsened the economic slowdown. The IMF failed to institute a proper change over from short-term to long term credit facilities which was necessary and forced the countries to undertake private loans outstanding to external creditors. Malaysia which declined the assistance and advice given by the IMF was able to avoid a harsh economic backlash as compared to other countries (Danaher, p 80).
A more recent case of the impact of the IMF policies can be understood by considering the case of Turkey and Argentina. The two countries were faced with financial problems in 2001 which led to disastrous social and economic consequences. The countries followed different routes in the recovery programs from the problem. While Argentina refused to take the assistance given by the IMF, Turkey recovered by accepting the intervention of the IMF. Turkey, with the outstanding assistance given by the IMF instituted a strict structural adjustment plan as per the IMF guidelines. Argentina was shunned by the external lenders including the IMF in the face of the problem. It was forced to default on the loans and restructure on its bonds. After several years, both countries recovered from the problems but with different results. In the case of Turkey, the recovery was faster yet it has not been very healthy while in Argentina was able to experience increased growth, reduced unemployment and a better balance of trade as compared to Turkey (Ozremir, p 1).
From the above discussion, it is clear that the programs endorsed by the IMF on the developing countries are leading to more harm than the available positive results. The programs are only addressing the short term problems but cannot solve the long term solutions required to take this countries from the doldrums of poverty. Instead of the Fund being a cure to the problems in these countries, it is turning out to be a big curse. The programs themselves are sound but the preconditions attached to the loan facilities are the Achilles heel. It will be better if the loans were given without detrimental conditions or simply for the IMF to concentrate on its core role of stabilizing the exchange rates.