Imf and Its Role in International Political Economy Essay Example

is a very good example. In July 1944, the IMF, a multilateral institution, was created at the Bretton Woods conference.

This institution was designed to provide stability to trade and monetary relations and oppose the ever-present potential for a rise of system-threatening economic nationalism (Goddard, 2003, P241). In the modern world, the basic functions of the IMF consist of surveillance of the stability of the international financial market, lending money to countries temporary loans to low-income countries. Under these objectives, this organization has been existed for over 60 years and is an irreplaceable part both in the post-world-war years and in the latest decades. After World War? the immediate postwar objective, restoring and fixing the exchange rate, was done well by all member countries and staff of the IMF.

However, from 1973 to 1974, a new challenge came to the IMF which is known as the price shock. In 1972, the foundation of the Organization of Petroleum Exporting Countries (OPEC) became an influential factor in setting the price for crude oil. In 1973, the Arab Oil Embargo which was triggered by the Yom Kippur War quadrupled the oil price from $3 to $12 per barrel. This dramatic rise in price had a big effect on both oil-exporting countries and oil-importing countries. For countries in the Middle East, whose oil resources had long been dominated by industrial countries, were sitting on huge gains.

The wealth of those Middle East countries accumulated rapidly since then. In contrast, the industrialized countries experienced high inflation and economic recession which then caused unemployment, a large number of poverty groups, and production-cut in factories. At the same time, developing countries, which were troubled with

the rise of importing prices and the fall in exporting prices and demands, had a balance of payment deficits. In response to these situations, the IMF took the method of ‘recycling’ of petrodollars to provide loans to countries with currency difficulties. The Oil Facility was created in1974 to aid member countries with a balance of payment deficits. Through this special facility, 45 countries borrowed $2.

4 billion from the IMF from 1974 to 1976(“International”, April 26, 2008). In addition, an Oil Facility Subsidy Account was set up for the poorest countries to decrease the cost of borrowing under the Oil Facility. Under this program, Saudi Arabia and other oil-exporting countries have provided significant resources derived from their balance-of-payment surplus to poor countries. When oil prices quadrupled in 1973-1974, the IMF used assets from the surpluses of the oil-exporting countries to provide assistance to countries that faced a significant increase in the cost of energy imports (Goddard, 2003, P249, Par. 4). The IMF also offered financing assistance, which was known as large stand-by arrangements to industrial countries like Italy and the U. K.

The reason was these countries, to some extent, could not adjust their policies to manage the price shock successfully. The widespread oil price rise would have been an unexpected negative impact on the world economy, but the situation could be much worse without the on-time policies made by the IMF. Even though the IMF played an important role in dealing with the oil price shock, defects still existed. As Anne Krueger, the Acting Managing Director of the IMF, said in a report: “Failure to heed warnings by the Fund will inevitably lead to a crisis

in some cases. Crisis in individual countries have been frequent, but they have rarely brought widespread description to the global financial system. I come back to my point: that the multilateral framework put in place in the post-war decades has served the international economy well. (Krueger, June 3, 2004)” The price shock in the 1970s was a turning point in the postwar economy history and in the IMF, as, since then developing countries became the main customers of the IMF. Developing countries or less developed countries are, without a doubt, part of the international economy. As a result of poor agricultural conditions, the devastating impact of AIDS, and international conflicts, many countries did not have the ability to develop themselves. Many countries were living on borrowing money from the international community with little hope of prosperity.

However, these countries are still important because most of them have resources. The role of the IMF here is to help the impoverished countries to establish a basis for developing world trades, for instance, offering assistance to the transformation of the economy in poor countries and offering debt relief to them. The creation of the Poverty Reduction and Growth Facility (PRGF) allowed impoverished countries and indebted countries to allocate more of their expenditures as a percentage of GDP on social, health, and education expenditures rather than on debt-service payments. In order to accomplish this, approximately 50 percent of each country’s total debt will be relieved, translating to $36 billion in debt relief. A particularly unique and new form of IMF lending is explicit of focus on poverty reduction. Also new is the effort to put countries in the driver’s seat

of their own development.

To achieve the goals, participating countries design their own master plan embodied in a Poverty Reduction Strategy Paper (PRSP) (Goddard, 2003, P262). This plan makes it easier for the IMF and other lending institutions to provide effective support. (Goddard, 2003, P262) The poverty reduction initiative has already achieved some success in reducing debt service as a portion of fiscal expenditures. The declining burden enhances the impoverished countries’ ability to increase their expenditures on social and educational development. According to statistics from the IMF, the percentage of debt service in GDP in Bolivia, Cameroon, Ethiopia, and Nicaragua kept falling from 1998 to 2005. For instance, the debt service of Bolivia in 1998 was 5% of GDP, but this figure declined to 2% in 2005.

When paying attention to helping the heavily indebted poor countries (HIPCs), the IMF also focuses on the financial stability in Asia. The outstanding economic performance of several eastern and southeastern countries was regarded miracle. ‘Prosperity’ was the most used word to describe the economic condition of Asia at that time. When most Asians and visitors were happy with the rapid growth in the economy, there still existed Asian skeptics who claimed that Asia's economic miracle was exaggerated.

Some scholars argued that there would be a long-term slowdown in growth. However, to both the skeptics and scholars, the reality was ten times worse than they anticipated. The Asia Crisis began in Thailand with a devaluation of the baht on July 2, 1997. Then contagion played an important role in rapidly spreading the crisis from Thailand to other southeastern Asian countries. In August, the Indonesian rupiah devalued more than any other Asian currency.

Relatively small depreciation occurred in the Singaporean dollar, starting in August, and the new Taiwan dollar, starting in October.

South Korea won depreciated substantially starting in November (Barro, June 2001. ). These eastern and southeastern Asian countries shared some other similar features of Thailand’s economic condition: large external deficits, which means large capital outflow, appreciating real exchange rates, declining exports, and poor quality of investment (Dash, 2003, P272, Par. ).

The Asian Crisis provided the IMF a new opportunity to play a leading role in an international backdrop to beat the crisis which would have impacted beyond Asia if not controlled. The main strategies for stopping the crisis and minimizing its impact are Financing Macroeconomic policies and structural reforms. The IMF had provided disbursement to Korea several times from December 1997 to August 1998 with an aggregate of $18 billion. Countries like Indonesia and Thailand were also provided with billions of financial support by the IMF.

The second strategy, Macroeconomic policies, is aimed at stopping the collapse of countries’ exchange rates and preventing a spiral of inflation and continuing depreciation through monetary tightening policies. According to the IMF, the economic structural reform was a long-term and controversial program. Due to the close relationship between the financial sector and government in most Asian countries, the financial markets lacked transparency among government, business, and banks which contributed to the crisis. Some essential elements in policies offered by the IMF were: the closure of insolvent financial institutions, the recapitalization of potentially viable financial institutions, and strengthening of financial supervision and regulation to prevent a recurrence of the fragilities that had led to the crisis (IMF staff, June 2000) Even though the

programs offered by the IMF were less successful at first than hoped in restoring financial sector in the crisis-damaged countries, the long-run outcomes were positive.

Financial markets stabilized in the early months of 1998 in Korea and Thailand, and significantly later in Indonesia. Exchange rates began to recover, and interest rates had declined to below pre-crisis levels by mid-1998. Economic activity then began to turn around in mid-1998 in Korea and later in the other countries. Once they started, the recoveries were unexpectedly robust, especially in Korea, where growth reached t0 75 percent in 1999 as a whole. The recoveries reflected a resurgence of private domestic demand, the collapse of which had produced the recessions (IMF staff, June 2000) Founded in 1944, the IMF’s main purpose-stabilizing the trade and monetary relations by using fixed exchange rate-was changed to a flexible exchange rate when the oil price shock broke out in the 1970s. Since then, the IMF has closely cooperated with developing countries, so it played a leading role in response to the Asian Crisis. Moreover, the Fund’s responsibilities have also been in reducing poverty in HIPCs (heavily indebted poor countries). The effective role of the IMF in the world economy makes the Fund important in the international political economy.

List of References:

1. Barro, Robert J. (June 2001). Economic Growth in East Asia Before and After the Financial Crisis. National Bureau of Economic Research. Retrieved April 19, 2008, from http://www.nber.org/papers/w8330
2. Cohen, Benjamin J. (2003). International Political Economy. Part2, International Monetary Relations. Lynne Rienner Publishers, Inc. Colorado.
3. Dash, Kishore C. 2003). International Political Economy. Part2, International Monetary Relations. Lynne Rienner Publishers, Inc. Colorado.
4. Gilpin, Robert. (2003). International Political Economy.
   

Part1, Contending views of International Political Economy. Lynne Rienner Publishers, Inc. Colorado.