International monetary fund (IMF) is an international organization composed currently with around 184 member countries representing almost all the nations in the world with an exception of a few. After the failure of Breton woods it came as a substitute of a regulatory monetary authority. The organization oversees the global financial system by implementing macroeconomics policy and financial policies aimed at stabilizing the economy’s the member nations. The organization was formed with an objective of stabilizing international monetary rates and enhancing economic development among the member states.
Similarly International Monetary Fund offers leveraged loans to developing countries to stimulate their economic growth and development. At an extent IMF helps in promoting expansion, and balanced growth of international trade through co-operation with other bodies like World Trade Organization and World Bank. The organization also helps in developing a multilateral system for payment of current transactions. Despite the positive attributes from the organization it has come under severe attack from many experts and organization because of some of their inefficiency of their policies and their ineffectiveness to the targeted programs.
Some of the policies used by the organization in trying to address the economic imbalances in developing nations have been ineffective as they have caused adverse effects to the member countries especially third world countries. In certain extent the organization has been used as a tool by the developed nations to propagate political interests of their “masters” through giving out conditional loans to poor nations and proposing for poor policy changes. The paper analyzes the roles of IMF and its policies and the effectiveness of those policies.
Although other policies have used by the organization had positive results others technically contributed to economic underdevelopment in most poor nations. Roles of International Monetary Fund International monetary fund plays various significant roles in the global economy; – International monetary fund was established to help member countries improve their economies by providing guidance and monitoring economic development in those nations. IMF is also engaged in ensuring there are sound financial policies formulated and implemented by the member states.
Through extensive research and analysis the organization comes along with proposition which help in developing effective financial policies in tandem with country’s existing policies. Sound financial policies proposed by the organization are meant to strengthen the financial system of the global markets and member countries. “An effective financial system promotes economic growth and reduction of poverty by mobilizing savings and allocating them to productive uses” (World Bank, 2004, p. 72). – International monetary fund provides three types of surveillance to member countries.
That is bilateral surveillance, regional surveillance, and multilateral surveillance. Bilateral surveillance mostly involves discussions between international monetary fund, and the member country (Axel 2006, p 769-788). To begin the discussions in bilateral surveillance, IMF technocrats usually visit the member nation to collect information, and hold discussions with government officials in that country so as to gather enough information about the area. Apart from government officials, IMF experts also hold discussions with other members in the country such as labor unions and officials from the private sector and civil society.
This is to gain more knowledge on the economic status of the country, and assess opportunities and potential threats. After the mission, the IMF staff holds meeting with the authorities to inform them on the findings obtained, risks and outlook. Bilateral surveillance helps identify risks to financial stability and international monetary fund in the member country. IMF uses bilateral surveillance to provide advice to member countries on the need to adjust certain policies. Bilateral surveillance helps IMF complement multilateral surveillance. Multilateral surveillance is important as it helps IMF strengthening its surveillance efforts.
It helps IMF detect systemic risks and increase awareness of the risks in member countries. It also helps identify interdependencies in the international economy. Multilateral surveillance helps IMF identify developments in the global economy. It also helps the organization evaluate financial markets, and the outlook. Moreover, multilateral surveillance helps IMF identify changes to policy, and also effects caused by policies on member countries. IMF is working hard to enhance global discussions of economic connections among countries. This is to improve international trade among the countries (Axel 2006, p 769-788). IMF provides regional surveillance to member countries.
Regional surveillance helps IMF monitor regional developments, and policies used by supra national authorities. Regional surveillance helps complement bilateral surveillance as it provides information from more than one country. Regional surveillance is important for members of currency unions. This is because policies in important areas of IMF are determined at regional level. In regional monitoring, discussions with country officials are carried out, and the report is represented separately.
Formal procedures are used to conduct surveillance and evaluation over the monetary, and exchange rate policies of European nations. International monetary fund has strengthened its policies on monitoring measures so as to help eliminate concerns like vulnerability to balance of payment. These measures help in eliminating external sustainability and currency crisis in many countries and these are some of concerns that have affected many countries. IMF has developed several initiatives to help improve the effectiveness of bilateral trade. For example, the organization has established external vulnerability assessment.
It has also developed initiatives to strengthen surveillance in the financial sector. The initiatives used to provide surveillance in the financial sector include a financial sector assessment program, and prevention of wastage of money. Other measures include prevention of terrorism financing, and assessment of offshore financial centre. IMF has also adopted other initiatives to help in improving its efforts. The organization has improved data provision to IMF, and also analyzing surveillance systems in member countries (Axel 2006, p 769-788). IMF helps in ensuring monetary policy in member countries are utilized effectively so as to prevent inflation (Axel 2006, p 769-788).
International Monetary fund intervenes in trying to stabilize the exchange rate among member states. After the collapse of the Breton woods the main aim was to regulate the exchange rate of nations in order to avoid financial and economic imbalances IMF in this instance developed policies meant to help stabilize the exchange rate between countries. Mostly the organization favors a floating exchange rate and constant evaluates monitors and give recommendation on the appropriate exchange rate policies.
At the same time IMF tries to develop monetary and exchange rate policy proposals in line with the individual countries policies. Exchange rate is critical in determination of a country’s monetary and trade policies. Monetary policy is used by monetary authorities to determine and regulate the circulation of money in the economy thus directly influencing the financial and economic measures to be taken. Determination of interest rates comes from the monetary policies decision taken. Adjustment of the interest rates either by lowering or increasing influence the pattern of the economic growth.
Lower interest rates tend to stimulate economic growth and development. In this case monetary policy helps in enhancing economic growth, and stability in a country. IMF gives advices to countries on how to use monetary policy appropriately. Monetary policy is also used to prevent inflation in a country by raising interest rates. Monetary policy is important to member countries as it helps in improving economic status of the countries, and also enhancing development in the country. Countries with pegged exchange rates tend to unfairly compete with others in trade. Another role of International Monetary Fund is provision of loans to member countries.
The organization provides loans to member countries experiencing balance of payment problems and economic difficulties. The loans provided by IMF are important to member countries as they help countries improve their international reserves, and pay for import (Axel 2006, p 769-788). The fund also helps countries stabilize currencies, and improve economic situations in the country so as to enhance economic growth in the country by adjusting policies to correct underlying problems.
Funds provided by IMF help member countries improve national policies in the countries so as to eliminate problems. This is through restructuring of existing policies or creating new policies. IMF does not provide loans for specific projects in member countries. Member countries are encouraged to borrow from IMF if they have no enough funds to finance projects so as to meet their international payments. That is if the country cannot find enough financing to meet its net international payments and maintaining international buffer.
IMF provides loans to member countries having financial problems so as to correct policies in the country, and carry out reforms. Countries are encouraged to use funds from IMF to adjust economic policies in the country so as to overcome economic crisis. This is important as it helps countries correct their financial balance, and improve conditions in the country. The funds enable countries to continue paying for imports, improve their international reserves and stabilize currencies. A member country has to follow the right lending process provided by IMF so as to get loans.
IMF loans are provided under an agreement between the country, and IMF. The country provides enough reasons as to why it needs the money, and then economic program is established after the agreement. The program is established by country and IMF and presented to the right people. After the arrangement is approved then, IMF releases the funds in installments as the country continues to implement the program (Axel 2006, p 769-788). International monetary fund has established facilities that are customized to address specific situations of its member countries.
Developing countries use different facilities from developed countries to access IMF loans. Low income countries use extended credit facility, and other facilities to borrow loans from IMF. These facilities allow countries to borrow on concession terms. Countries can access non- concessional loans via stand by arrangements, and other facilities that offer such loans. The organization provides emergency assistance to member countries to help them recover from natural disasters and conflicts (Axel 2006, p 769-788). Effectiveness of IMF Policies
IMF uses various policies to help member countries improve their situations in the country, enhance economic growth, and financial stability. The policies include structural adjustment policies, financial crisis policies, and poverty reduction policies. Most people have criticized IMF policies for their ineffectiveness. This is because the policies implemented by International monetary organization have worsened economic conditions in member countries rather than improving the prevailing situations. The main role of IMF is to improve economic and financial stability in member countries using the policies named above.
So far the IMF policies have not helped eliminate economic crisis in many countries and instead it has been contrary to expectations. The policies have affected developing countries more than developed countries as these countries depend on funds and advice from IMF to improve their economic status. (Robert and Jong-Wha 2002, p 1245-1269). Structural adjustment Policy is a shift of policies implemented by member nation’s mostly poor nations towards those guided and advised by IMF for purposes of qualifying to get financial and economic assistance.
Structural adjustment policies have been criticized by scholars and experts as they have been seen as instruments of accelerating poverty and underdevelopment. Political shifts and governance reforms are always expected from the member nations expecting to benefit from the IMF. Most often the policies are in line with the system of governance of the developed nations (custodians of the IMF) which are deemed to be effective and efficient. Free trade and market liberalization is always encouraged by the IMF.
Structural policies force countries to slash government spending and encourage privatization which also open up countries to exploitation by foreign investors. Structural adjustment policies have increased the level of poverty in many countries by causing many workers to loose jobs and reduction in income for workers due to free markets as most enterprises are sold to foreign investors who implement “effective” measures. The policies have given debt payment and economic development priority compared to education and health services.
IMF has encouraged developing countries to lower living conditions of their citizens. This has affected provision of services in developing countries much. The policies have lead to shortage of the work force in developing countries as most companies, and health centers cannot afford to hire enough personnel (Ngaire 2002, p 83-100). IMF lending policies are condemned because of the conditionality associated with the policy. IMF forces member countries to adjust economic policies so as to overcome problems that led the countries to borrow funds from IMF.
The international monetary lending policies are used to provide loans to member countries. The funds help member countries improve their economic status. International monetary lending policies do not serve member countries well. The policies are not flexible, and countries do not get enough money. The conditionality help IMF know if the country is able to repay the loan given. Developing countries do not get enough loans to finance projects in the country. Shortage of funds in developing countries hinders economic growth and increases poverty.
The policy force developing countries cut their spending so as to have enough funds for development projects. The policies are not flexible enough to help developing countries get enough funds. In addition, the funds provided by international monetary fund are not enough to help countries eliminate problems. This prevents control of disasters and crisis in the country (Bird and Rowlands 2002, p 173-186). Conclusion The roles of IMF are very significant and critical in ensuring the stability and economic development of not only the member nations but the entire world in general.
However Economic policies implemented by International monetary are not effective as they cause stifle economic growth. The economic policies are made to help developing countries improve economic growth, but they encourage economic stagnation. This is because developing countries cut spending in other sectors to get enough funds. Member countries have to cut spending on health sector, the education sector so as to get funds to adjust economic policies in the country. IMF encourages member countries to follow conditions established be fore accessing loans.
The member countries are required to adjust policies in the country to overcome problems that have caused economic crisis in the country. This forces countries to concentrate on adjusting economic policies, but not development projects in those countries. This affects provision of crucial services in health care sectors and education. They also lead to lack of employment in developing countries. This leads to poor economic growth in developing countries (Axel 2004, p 445-464).