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The Role of International Monetary Fund - IMF

Dancing around the fire is not the solution to any problem. One should try to see beneath the surface un order to grasp an idea about the basic issue. Despite a stream of strong words and announcements made by the International Monetary Fund itself and the world great economic powers, it has not achieved its declared stability in the international trade relations by helping countries in temporary balance of payments difficulties, up to the mark. Rather the situation has taken a quantum leap for the worse in most of the developing countries of the world.

The fund has been a subject of wide spared criticism throughout the world. It is alleged that its decisions are influenced a great deal by international politics; developing countries have no influence, over its policies; the fund influences deficit countries and not surplus ones; it follows doctrinaire monetarist policies; it protects the interests of international bands; its treatment with its members is not uniform. Its programrs are anti poor as they always advocate austerity; the banks and the fund colludes, and at the last but not the least, it follows one size fit all policy from Latin America to Africa, Asia and Eurasia.

The International Monetary Fund is a secretive institution which resorts to financial plumbing without providing a sounder basis for globalization. It has lacked moderation, outside review and competitive pressure to keep it up to date. The American government has found it a handy instrument of financial diplomacy and quick disbursing of funds, but do not realize that its repeated technical failures which could threaten the greater vision.

Before the collapse of south East Asia, the fund had expressed great confidence in the Asian economies citing their “sound fundamentals” such as budget surpluses, low inflation and export oriented industries. The actual reward shows that the fund, loyal to financial orthodoxy and mindful of the creditors to the neglect of the debtor countries.

In order to get access to International Monetary Fund financing the governments have to obtain so called “Washington consensus” meaning that they are effective to cut government expenditures, raise interest rates and follow foreign ownership of domestic business. The stringent reforms by fund may result in economic postponing requests for its assistance until the problem becomes severe. Moreover a nation’s desperate need for short term help does not the fund the moral right to substitute its technical judgment for outcomes of the nations political process.

The fund’s intervention results a moral hazard problem since financial investors have little incentive to exercise caution in making loans to foreign countries or companies of they believe that the fund will effectively censure these loans against default risk. It also encourages countries, not to solve their fundamental problems.

The genesis of the situation is that the great depression, followed by the world war 11 had completely disturbed international trade relations based on gold standard, protectionism was rampant and many countries were unclouded in competitive devaluation. The International Monetary Fund was designed with the primary objective to bring stability in the international trade relations by helping countries in temporary balance of payment difficulties. Its purpose was limited and well defined. Its design reflected the viewpoint of the United states of America which emerged stronger from the war, Although multilateral in nature the Fund turned out to be a tool in the hands of the dominate nations to perpetuate an international economic order which was greatly to their advantage.

As decades rolled by it assumed powers and responsibilities which were not within its original brief. Its influence spreads over to every country in balance of payment difficulties. Starting from balance of payment issue, it stepped in to macro economic issues, macro issues, governance issues and even jumped into political interference and as a result could not achieve the real declared goals.

The historical perspective of issue is rooted into the severe crises that gripped the international economic system in the inter war period the worst part of which started in the 1930’s known as “depression years. “ countries after being hit by depression resorted to competitive devaluations and protectionism. In order to meet the crises the United states of America and the united kingdom laid foundation stone of International Monetary Fund.

Some less developed countries were also invited to the inaugural conference, the undivided India a British colony was one of them India tried hard to include a reference to less developed countries in the article of agreement but it was ignored. As a compromise, a reference was made to the issues of development but there was no explicit recognition of the special needs of less developed countries (LDCS).

The Fund ignored the problems of developed countries considering them to be relatively unimportant and outside the scope of its terms of reference. The Fund’s policy during the early decade rested out the notion that monitory stability and free trade were all that were required to ensure the economic welfare of its member states.

The Fund kept on evolving in response to the economic crises in the international economy but its essential character remained the same. During the 60s, its role was being transferred away from singular pre-occupation with the problems of developed countries towards greater involvement with the developing world.

The 70s was another monumental decade in the life of the Fund. The oil price shock of 1973-74 left the non-oil less developed countries rolling from its effects. The developed countries managed to cushion the effects by passing on the rising cost of fuel to the prices of manufactured exports through the receipt of international funds from the surplus oil producing countries. The International Monetary Fund not only provided the timely switches by creating the oil Facility and the supplementary Foamed Faculty. The Trust Fund also came into existence which channeled to developing countries, through grants and loans. In the wake of the crisis the Fund assured for itself more powers than it had before.

In the 80s dent problems started exploding particular in Latin America. This problem occupied the central stage of international economic relations and the Fund supported by its industrialized members. Had to move quickly to protect the international monetary system from the danger of complete collapse. With the collaboration of the world Bank joint strategies were devised with international banks in bilateral negotiations with debar countries.

The Fund had long ago ceased to exercise any influence over the exchange relations between the developed countries. These relations are conducted in form of some organization like G-7 (Great Economic power, E.E.C and the bilateral negotiations such as US- Japan trade dialogue.

The era of globalization dawned towards the end of 20th century. During this era capital went global. Globalization of market is one of the most fascinating developments of the previous century, which is different from internationalization. This phenomenon has been felled by advancement in communication and transportation, technologies, the spread of economic growth and wealth around the world, the losing barriers to trade and the formation of regional economic blocks Development of new technologies and the proliferation of new products also contributed to the globalization of markets. It has led to irreversible economic linkage among countries, and has also shifted the focus from the nation state towards industry and the individual enterprise.

The private capital inflows have often been seen as having largely positive effects, namely overcoming foreign exchange and import constraints; smoothing national expenditure by compensating for negative terms of trade shock, raising the micro-economic efficiency and supplementing dimes tie savings and investments.

Keeping in view all the circumstances faced by the present global economy the International Momentary Fund and the world Bank have unanimously agreed for an urgent cooperative effort and to give priority to developing countries the basis for a new financial architecture. The five key elements of their new financial architecture had been defined and endorsed; transparency, sound financial system, private sector involve orderly liberalization and internationally accepted standards and code of good practice.

Poverty is the ultimate threat to stability in a globalized world and to overcome it requires reinvigorated multilateralism a new paradigm of development, named as high quality growth. The major elements of the high quality growth may be defined as: sustainable, human person at its center, continues effort for more equity, poverty alleviation empowerment of the poor people, protection of the environment and respect for natural cultural values of the poverty is handled, only then the globalization may become a major opportunity for the progress of the world.

Globalization has failed to address the central issue of the day which is disparity between rich and poor nations. This gulf between nations and within the nations is morally outrageous, economically wasteful and potentially socially explosive. All this requires such institutions that can facilitate joint reflection at the highest levels throughout the world so the governing body of International Monetary Fund must take concrete steps in this direction without any delay.

The world economic policies are shaped now in the G-8 (Eight great economic powers of the world ) and OECD meeting or in the bilateral talks between the economic super and the developing world is condemned unheard. If the new financial architecture is to be meaningful then the developing world has to be full partners at that level.

For about half century, on the one hand are the bad governments and bad domestic policies in the developing countries are being crushed between the two stones of this mill. The question is how to alleviate their suffering and relive their pain which demands the serious consideration of the United Nation Organization on human basis. One of the severest criticism that the International Monetary Fund faces is the question of moral hazard. This would be justified if there was a moral world order .one cannot be selective about morality. one cannot apply the principle of moral hazard to individual if the system in which they operate has no moral basis. The only way the Fund can escape this criticism is to create world economic relations which are based on morality.

The capital movement under globalization need to be tracked down. The movements must not be so swift that they disrupt the economies like hurricanes. Multinational agencies like International Monetary Fund and the world Bank, which have the expertise must put internationally agreed mechanism to make the capital movements steady When the countries start suffering at the hands of global forces outside their control, the Fund should be quick to come to their help without conditional ties attached.

Why have an International Monetary Fund? This may be an idea worth exploring, why not have more than one such organization either on the geographical basis or, skill, on basis of trading patterns? Should it be restricted to its original character or should it be allowed to continue to indulge in macro, micro issues and even in subjects like corruption and privatization etc. who is to monitor and regulate the fast moving private capital when national boundaries have almost disappeared. These questions are crucial not so much to the developed countries but to the developing ones who have no way to track and control the capital moving in and out of their borders. It is time that these questions should be taken under consideration.

It will be wrong to conclude that all the ills of the developing countries are because of the prevailing global economic relations and the various multilateral institutions including the International Monetary Fund. Developing countries suffer from an awful lot of bad governments, bad domestic policies, corruption, cronyism, politically short-termed, incompetence, illiteracy one criminal neglect of the helpless people by their own leaders. One may hope that these nations may have a better tomorrow only if they put their own house in order.

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