The IMF is the outcome of the Bretton Woods
Conference of 1944, where the world leaders met to discuss about post World War
2 reconstruction and promotion of international trade. Since then the IMF has periodically
adapted itself in the face of historical events and ideas to become one of the
most prominent international financial institution.
From the outset it must be noted that prior
to its creation, the IMF was influenced by events that had a major impact on
its structure and functions. These were the Great Depression of 1929 and the
failed attempt to create a similar institution under the Treaty of Versailles
of 1918. These 2 events haunted the founding fathers of the IMF not to commit
the same blunders and this resulted in the successful creation of the IMF to
control the monetary policies of nations which was at the heart of the Great
Depression that was characterised by high tariffs and devalued currency[1],
and to lend money to countries with Balance of Payment difficulties. The IMF
was created in the midst of the Second World War when the US was in virtual
control of the world economy and consequently its financial structure was based
on the US dollar that was pegged of the gold standard and the currency of all
countries were in turn pegged to it. The IMF was heavily criticised during that
period as being under US control in its lending decisions and tended to favour
US allies.
However, in the aftermath of the Second World
War, the rise of multiple economic centres around the globe saw the gradual
erosion of US hegemony over world trade. More and more currencies became fully
convertible into capital account and this exerted severe pressure on the fixed
exchange rate under the Bretton Woods system. Thus in the late 1960s the
Bretton Woods system had become unrealistic and was dissolved by 1973 due to
the Vietnam War and the overvaluation of the US dollar against US gold reserves
which were depleted. Floating exchange rates for currencies were henceforth
adopted and the IMF was given the function to control exchange rate policies.
The Cold War also had significant impact on
the IMF as the Soviet Bloc, under the command of Stalin, refused to ratify the
articles of agreement and prevented the institution from gaining universal
membership which only became possible only in 1989 from the fall of the Berlin
wall and the dissolution of the Soviet Union. Until then the result on the IMF
was that the membership to the IMF was limited to first and third countries
with the second missing. The IMF in those days was termed as being a
‘capitalist club’ helping only market oriented economies but a more serious
reason for concern was the composition of the staff at IMF and its analytical
work. Its analysis was mainly from the perspective of Anglo-Saxon economics
which did not always suit the policies of third world countries and did not
gain universal consensus. It was only the shift in universal membership in the
1990s that fuelled the broadening of the staff.
More importantly, the rise of Africa as a
continent of sovereign nations had a major effect on the size and diversity of
the IMF and called for the expansion of the Fund’s resources. The problem the
IMF was faced with was that most African countries to which it had provided financial
assistance had fallen into expanded arrears in their borrowing and to remedy
this situation the Fund required countries applying for loans to develop their
own strategies for generating economic growth and reducing poverty. In some
cases, where the IMF imposed economic and policy decisions was at times seen as
an over interference with the sovereignty of countries. It can however be
argued that the IMF was right to do so and many of these countries were and are
still LDCs and did not have the appropriate skill and logistics to draw up
economic plans. Their problem therefore was more structural than financial.
It was the Debt Crisis of 1982 in Mexico
which transformed the IMF, projecting it into the role of international crisis
manager similar to that during the Oil Shocks of 1970s where many oil importing
countries had to borrow from the Fund to cover their debts and avoid inflation
of prices. Likewise in 1989, the IMF played a major part in restructuring the
centrally planned economies of former Soviet countries into market economies.
The IMF thereafter became the central agency responsible for the resolution of
financial crises. The Asian Crisis, however, was daunting for the IMF and
criticisms against the Fund were more intense as to what was the best solution
to cope with the crisis. The Fund drew several lessons form it that would alter
its future course of action. The globalisation of financial markets minimised
the role of the IMF as financing by the fund became secondary for potential
borrowers who by the 1990s borrowed a small amount form the fund solely to
‘catalyse’ other capital inflows. The Fund was used as a mere figurehead to
convince creditors and investors that the country was a good prospect. Another
effect of globalisation was that the membership of the IMF became divided into
persistent creditor and debtor groups with no unity of interest, which weakened
the status of the IMF as a credit union.
Nevertheless, while these events were
moulding the IMF and in some cases pressurizing it to adapt to the contemporary
world, economic theories also evolved and influenced the working of the IMF.
John Maynard Keynes being one of the founding
fathers of the institution instilled within it Keynesian macroeconomic
principles with the aim of using it to prevent recessions and high unemployment
as witnessed in the past. It was also included in Article I of the IMF Articles
of Agreement. However some critics of IMF policies argued that the Fund had
drifted away from Keynesian principles by over emphasising on monetary and
fiscal discipline. Similarly the Polak model[2] of
monetary approach to the BOP developed in the 1950s was adopted by the IMF and
formed the basis of macroeconomic policy advice advocated by the Fund. However,
a decade later the Polak model was replaced by the Fleming-Mundell model as
monetary and fiscal policies were no longer seen as alternative of stabilizing
income. The emergence of monetarism as a theory of aggregate demand added
little to the panoply of economic theories already being applied by the IMF. It
only gained ascendance in the 1970s when high inflation was rife across the
world and that the IMF’s major preoccupation later in century would be
inflation targeting.
Even though the IMF’s decisions were at that
time mostly influenced by economic models and theories, Supply Side
Macroeconomics[3] never quite got hold of
the Fund. Same was the case of New Classical Economics[4]
formulated in the early 1980s. The Fund however did adopt surveillance
activities on monetary policies of countries and exchange rates thereby laying
greater emphasis on medium term policy frameworks. The fall of State Socialism[5] in
the late 1980s and bold economic reforms to liberalise the economy of
countries, literally paved the way for the IMF to ease longstanding conflicts
between the Fund and its members. It made it easier to negotiate adjustment and
reform programs to which previously met strong opposition. Still, in the 1990s
the policy advice meted out by the IMF was severely criticised as being narrow
minded with excessive zeal for ‘laissez faire’ economics. This, nevertheless,
did not impede the activities of the Fund which continued in its pursue for
price stability by using the monetary policy. It allowed the effective control
of inflation which had become by now a global phenomenon and led to the
adoption of more stable monetary policies.
All in all it is now clear that the IMF has
gone through a ‘paradigm shift’ since its creation which still continues today,
which has shaped it as one of the leading financial institution in the sphere
of International Trade and Finance. Without these adaptations to the economic
realities and events the IMF would have become marginalised. It is through
visionaries like Keynes and White that the IMF saw the day back in 1944 and has
since helped counter numerous economic problems without parting from its
original mandate. This longevity of the IMF can also be explained by the
relative flexibility of its Articles of Agreement which have from time to time
been continuously amended to provide for better legal rules and consequently
allowing the IMF to alter its mandate and objectives to suit that of the modern
world and to act fast in crises. Even today the IMF has been called to the
rescue of many countries suffering from economic difficulties due to the recent
financial crisis of 2007 that swept across the globe beginning in the US. The
IMF has been able mobilised colossal amounts from its resources in a short
period of time to help countries in financial difficulties and mitigate the
effects of the worst economic downturn since the Great Depression of 1929. Had
there not been the IMF we would have surely seen the disintegration of the
International Financial System and this eventually calls for reflection on a
new global framework for financial regulation to prevent recurrence of such
crises.
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Bibliography
Websites
·
www.imf.org
·
http://news.bbc.co.uk/2/hi/business/7725157.stm
Working Paper by
IMF
·
James M. Boughton, The IMF and the Force of History: Ten Events and Ten Ideas That Have
Shaped the Institution, May 2004, WP/04/75
[2] It provided
that a country with fixed or managed exchange rate and an external payment
deficit can resolve the imbalance by reducing domestic credit of the banking
system by either fiscal or monetary means.
[3] Advocating drastic tax cuts
and tax credits to encourage productive investments by corporations and achieve
economic targets for growth in national output and employment.
[4] An extreme form of
monetarism which argues that demand-management intervention by governments is
ineffective even in the short run, and instead advocates far reaching tax cuts.
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