Imf and Its Role in International Political Economy Assignment

Imf and Its Role in International Political Economy Assignment Words: 2021

IMF and its role in International Political Economy Political economy is not a new word for us because of the close relationships between politics and the economy. The development in politics is due to the development in society and the development in society is mostly driven by the economy. The parallel existence and mutual interaction of ‘state’ and ‘market’ in the modern world creates ‘political economy’; without both state and market there could be no political economy (Gilpin, 2003, P9). Market allocates resources to a particular group, class or region where conditions are most favorable.

As a consequence, market economies result in the uneven development both domestically and internationally. As our issue is about international political economy, the connection is the uneven development in different economic systems of nations lead to the uneven status of countries around the world. The struggle among groups and states over the distribution of benefits and costs has become a major feature of international relations in the modern world (Gilpin, 2003, P21, par. 2). It is sure that market or economy has a big influence on sovereign states. The changing market is very likely to change states.

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So the economy is crucial for a country, in a globalizing world with vast of interactivities among countries, to get a place. As a part of globalization, the globalization of finance, arguing that it has fundamentally altered the traditional monetary relationship between states and markets, ultimately undermines national monetary sovereignty (Cohen, 2003, P215). Because of the importance of finance in globalization and in the world political economy, organizations are needed to be a ‘middle man’ among the financial interactivities of countries. The International Monetary Funds (IMF) is a very good example.

In July1944, 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 international financial market, lending money to countries temporarily loans to low-income countries. Under these objectives, this organization has been existed over 60 years and is irreplaceable part both in the post-world-war years and in the latest decades.

After World War? the immediate postwar objective, restoring and fixing 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, large number of poverty groups and production-cut in factories. At the same time, developing countries, who were troubled with the rise of importing prices and the fall in exporting prices and demands, had balance of payment deficits.

In responses 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 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 wide-spread oil price rise would have been an unexpected negative impact on 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 crisis in some causes.

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, June3 2004)” The price shock in the 1970’s was a turning point in the postwar economy history and in the IMF, as, since then developing countries became main customers of the IMF. Developing countries or less developed countries are, without 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 transformation of the economy in poor countries and offering debt relief to them.

The creation of Poverty Reduction and Growth Facility (PRGF) allowed impoverished countries and indebted countries to allocate more of their expenditures as 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. Particularly unique and new form of the IMF lending is the 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 education 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 in1998 was 5% of GDP, but this figure declined to 2% in 2005. When paying attention on helping the heavily indebted poor countries (HIPCs), the IMF also focus on the financial stability in Asia. The outstanding economic performance of several eastern and southeastern countries was regarded miracles. ‘Prosperity’ was most used word to describe the economic condition of Asia at that time.

When the most Asians and visitors were happy with the rapid growth in economy, there still existed Asian skeptics who claimed that Asia 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 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 depreciations occurred in the Singaporean dollar, starting in August, and the new Taiwan dollar, starting in October. The 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 a international backdrop to beat the crisis which would have impacted beyond Asia if not controlled. The main strategies for stopping the crisis and minimize 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, aimed at stopping the collapse of countries’ exchange rate 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 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 a 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 10. 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 flexible exchange rate when the oil price shock broke out in 1970’s. Since then, the IMF closely cooperates 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 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. 5. Goddard, C. Roe. (2003). International Political Economy. Part2, International Monetary Relations. Lynne Rienner Publishers, Inc. Colorado. 6. International Monetary Fund: The Role of the IMF and IMF History. Cool Fire Technology.

Retrieved April 26, 2008 from, ;http://www. cftech. com/BrainBank/FINANCE/IMFHistory. html. ; 7. IMF staff. (June 2000). Recovery from the Asian Crisis and the Role of the IMF. International Monetary Funds. Retrieved April 27, 2008 from, ; http://www. imf. org/external/np/exr/ib/2000/062300. htm#III ; 8. Krueger, Anne. (June3 2004). Promoting International Financial Stability: the IMF at 60. Retrieved April 12, 2008 from, ;http://www. cftech. com/BrainBank/FINANCE/IMFHistory. html;

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