The Role of the Imf in Financial Crisis Finance Essay

INTRODUCTION

The International Monetary Fund came into formation in July 1944 when representatives of 45 countries met together in the town of Bretton Woods, New Hampshire in north-east of United States. They agreed to establish a framework for the international economic cooperation after the Second World War. It was believed that such a framework for the economic cooperation was necessary to avoid the recurrence of the disastrous economic policies which lead to the great depression for the countries [1] . In December 1945 International Monetary Fund formally came into existence when 29 member states signed the articles of agreement and on 1st March 1947 IMF began its operations. The main purpose of IMF was to guarantee stability of economic growth and the maintenance of living standards and therefore to accomplish this purpose it was very important for the countries to exchange goods and services from each other. The IMF if also known as a social institution, whose central role is to provide primary social goods: access to currency reserves, cost to such access, exhaustible social resource and trade currencies. [2]

ROLE OF IMF

In 1970's the banks lent billion of dollars to the poorer nations specifically to Latin America and Asia but this process of lending of money lead to crisis. In 1982 Mexico announced that it could no longer pay the money owed until a special arrangement had been made that allowed it to postpone the payment and borrow back part of its interest. Following Mexico, Brazil, Argentina and other small countries also found themselves self caught in the same problem. If we see the position from a broader perspective it could be observed that the developments on the international economic in 1970s exposed the economic difficulties which were being faced by developing world. Both the internal and external problems of the developing countries were exposed; the internal problems of the developing countries manifested themselves in growing economic deficits and rising in external current account deficits. External factors included sharp increase in the real prices of the energy products, fluctuations in the world market prices of primary products produced by the non oil developing countries and slow growth in the industrial countries. [3] In this situation the Bretton Woods institutions, World Bank and International Monetary Fund (IMF) argued that the problems were being caused mainly by mismanagement in the developing countries. As a result of this sufferance of economic instability by the developing countries the institutions launched stabilization and structural programs to overcome the problems of macroeconomic distortions and to strengthen the economic structure in these countries. The role of IMF has been transforming vigorously since 1970s, when the gold standard fixed rate system was changed to a flexible exchange rate the original purpose of IMF to maintain the exchange rate alignment was departed. In 1980s IMF gave more attention towards the Latin America debt problem via structural adjustments. In early 1990's it was forced to play a role by helping to form market- based economies, by the end it was also dealing with financial sector reforms and systems financial crisis. However now IMF in poorer developing countries has been assisting to establish macroeconomic conditions for the poverty reduction. With the vigorously changing role of IMF the client base has also been affected; the membership has increased from 45 to 185 countries today. However the new countries which joined the IMF membership are more economically diverse and have wider needs and priorities than the existing members. Initially IMF was operating as a Credit union, all the members' states use to borrow from time to time, Nowadays the IMF have structural creditors and debtors. The developed countries are less likely to borrow from the IMF and prefer to borrow directly from the private market, which does not allow IMF to interfere in their policies. Where as the developing countries are more likely to borrow continuously from IMF and must submit to their policy demands, however nowadays the IMF programme is mostly conducted in developing countries and emerging market countries.

CRITICISM ON ROLE OF IMF

IMF plays a vital role to improve and stabilise financial crisis, however its role has been under great scrutiny and has been criticised for many reasons. It has come into discussion that IMF loan causes more harm than good to member states. Many criticised on the IMF's insistence on deflationary fiscal policy [4] and higher interest rates. [5] It was argued that IMF turned a minor crisis into a major one by creating economic recession with unemployment rates in the countries like Thailand, Indonesia and Malaysia. IMF has been demanding for the same economic policies for everyone regardless of the situation. Devaluation of the exchange rates may help many countries but it doesn't mean it's always the solution. Some policies like privatisation and deregulation may work better in developed countries but will be more difficult to be implemented in the developing countries. It has been argued that IMF takes away the political autonomy of the countries. Countries such as Jamaica states that it takes away ability for the member states to decide their national policies, instead they have to follow the economic dictates of an unelected body. IMF has also been criticised by free market economist, they argue that IMF's intervention creates moral hazard [6] . They intervene on the bases of poor information and fail to deal with economic problems; it is argued that countries should take the responsibilities themselves rather than giving their responsibilities to IMF.

ARTICLES OF AGREEMENT

The IMF's fund authority is based on an international treaty called Articles of Agreement [7] which came into existence in December 1945.The articles of agreement outline the main purpose of the fund [8] , however the articles of agreement have been amended three times in the last 47 years [9] but article one which states the main purpose has never been altered. IMF observes the compliance of its members states with certain obligations specified in the articles of agreement; it is regulatory in nature rather than financial. [10] These articles lay down the rules which are of great importance in structural growth and function of the IMF , the funds keeps a check that rules are not only being followed by the member states but also the fund is working in compliance with the rules. By laying down a complete set of rules in the articles of agreement the fund makes sure that its main purpose and procedure is straight forward without creating any confusion for the member's states. Article one states the purpose of the IMF in a very wide prospect as it was states by Lastra: "the broad record has authorized the institution to endure over the years, adjusting and re adjusting its role in response to varied economic circumstances". [11] By joining the IMF and accepting the articles of agreement member states accepts the obligations that limit their monetary sovereignty and in return they receive benefits, however if the member states comply with the required conditions of the agreement they receive financial assistance in crisis situations. However it could be seen that there is a mutual responsibility on the both sides to deal with the circumstances as required by IMF procedure, which helps for international cooperation.

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