EASTERN MEDITTERENEAN

UNIVERSITY

PROJECT ASSIGNMENT FOR

INTERNATIONAL BUSINESS 550

NAME: OLUWABUNMI ROSEMARY AFUWAPE

STUDENT NUMBER: 135115

DEPARTMENT: MARKETING MANAGEMENT

TOPIC: SUCCESSES AND FALILURES OF THE

“IMF”

DATE: 19/12/2013

TABLE OF CONTENT

Definition of “IMF”…………………………….1

History of IMF………………………………….2

Policies of IMF……………………………….....3

SUCCESSES and FAILURES of IMF………..4

Reforms………………………………………….5

Conclusion………………………………………6

References…........................................................7

Definition of IMF

IMF is first of all an acronym but its full meaning is “International Monetary Fund”. Is

an international organization that promotes global monetary stability and monetary exchange, it also

facilitates the balance, growth and expansion of international trade and assists in the establishment of

multilateral agreements, multilateral systems of payments and lend funds to countries with balance of

payment deficits.

HISTORY OF THE “IMF”

International Monetary Fund was established in “1944” under the “Bretton woods

system” and was created formally in “1945” by 29 member countries, just after the World

War II which was due to the reconstruction of the international payment system. Although,

the quota from each member country was more like contributed, through a quota system from

which countries with payment imbalance deficits can borrow money or funds temporarily to

pay countries they owe as well as to stabilize their economy and through this means they

were able to achieve financial stability of member countries, foster global monetary

cooperation, facilitate international trade and reduce poverty thereby improving sustainable

economic growths of other countries, which was there initial goals as to why they were

created and formed in the first place. The quota from each member country contributed was

too much even though it was depended on the economy strength of each member country.

Furthermore, over the years IMF grew stronger due to the “fall of Berlin in 1989”,

the “Soviet Union” also collapsing in 1991, IMF became a “Universal Institution” and

member countries grew from 29 to 172. It was understood before that the role of the IMF was

to oversee the fixed exchange rates arrangement between countries, thus helping countries to

facilitate and national government can manage exchange rates and economic crises in their

own countries, but then it grew more active and policies were made which were guidelines,

as to ensuring an economic recovery in both countries and member countries. However the

funds that were borrowed were to ensure such after the “Great Depression” and “World

War II”, were used to boost the economy of countries and interest rates at a point were not

included so that payment by such countries will be paid easier, but then when capital outcome

became much and massive by middle income earners countries, interest rates were introduced

but at a lower cost and with time when countries couldn’t pay back the loans after the time

constraint given to them had elapsed, IMF gave room for debts to be forgiven and cleared but

still yet ensured that their economy was stable and had recovered.

Again as IMF was to ensure economic stability and monitor financial crises which

were known as “Surveillance”, it gave way still to International cooperation within

countries. So apart from helping countries that were in economic shambles, the policies

which was created by the IMF also helped to reduce poverty and corruption even though

there were not much change made initially as to why the IMF was created in the first place.

Although, due to their help to member countries in maintaining their economic status one can

say that member countries had transitional and massive economy growth after several years

of reforms and technical assistance. As it was their goal to pursue successful liberalization in

international trade and capital flows as it would necessitate the re-evaluation of fiscal policy

and countries will be able to adjust to financial crisis that they will face in future events and

yet be able to stop or reduce such crises, thereby precipitating the sudden increase in their

cash inflows by markets and as such there will not be a contraction in their economic activity,

and both domestic and international markets will not suffer loss, so attention was much given

to countries that their banking sectors had weaker macro-economy stability.

Some of the objectives of the IMF which was considered as a more focused goals and

what their intent was in achieving success in member countries can be seen below:

To promote international economic co-operation,

To reinstate and promote international trade,

Reduce unemployment,

Exchange rate stability; including making financial resources were available to

member countries so that their needing to meet balance of payments was considered

and attended to and its headquarters presently is in Washington, D.C., United States.

Likewise to become a member of the IMF, one has to undergo legal procedures in

their respective countries and upon membership each member country is given a yearly quota

to pay depending on the financial importance (status) relatively to the countries national

income and importance in its currency to world trade and the international market inclusive.

Apart from quotas been paid as seen as a subscription fee, after been accepted and now

countries are now members, the policies laid down by the IMF has to be in accordance with

the member countries economy and financial goals which is to be economically empowered

and stable, thereby increasing their economic growth as well as their voting power although

adherent to that, the population of that member country is not considered but instead on the

member country’s economic power in the world trade and international market.

IMF since 1945 has since grown in their members from “29” to the present year of

2012 to “188”, and it is considered like a “Credit Union” that contributes to the economic

strengths of its members and cuts down control on wages and gives rise to the building of

foreign exchange reserves, payments of deficits, and stabilization of foreign currency. It is

said currently that about “300 billion Dollars” is contributed by its members based on the

quota set, though depending on the member’s economic strength and growth over the years.

These interactions creates a new global power system, where sovereignty is

globalized, taking power and constitutional authority away from nations and giving it to

international bodies, thereby trying to create a more global markets and because of

globalization three institutions were created namely: Global Financial Market, Transitional

Companies and National Governments which was linked to each other in the economic and

alliances which was led by the US. “Titus Alexander argued that this system

institutionalizes global inequality between countries and the Majority World in a form

of Global apartheid in which the IMF is a key pillar” 1(e.wikipedia.org/wiki/international_Monetary_Fund).

So because of these global institutes it now created stimulus for globalization and multilateral

trade for dominance of each state and international affairs.

In addition, the IMF acts as a negotiator on conditions of lending and loans under

what they call “Policy of Conditionality”. This Policy of Conditionality was established in

the 1950s and as such low-income countries could borrow on concessional terms, which

means there are period of time where no interest rates, through the Extended Credit Facility

(ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF) give member

countries in dire need of financial and economic help. Non-concessional loans, which include

interest rates, that are provided mainly through Stand-By Arrangements (SBA), the Flexible

Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund

Facility which the IMF provides, is more like an emergency assistance via the newly

introduced Rapid Financing Instrument (RFI) to all its members facing urgent balance of

payments needs.

In regards to the above, there was a data dissemination standard process that began in

1995 and with the view of guiding IMF member countries to disseminate in their economic

and financial data to the public, the International Monetary and Financial Committee (IMFC)

endorsed these guidelines for the dissemination standards which resulted in the splitting into

two tiers:

a. The General Data Dissemination System (GDDS)

b. The Special Data Dissemination Standard (SDDS).

The International Monetary Fund executive board approved the SDDS and GDDS in

1996 and 1997 respectively had subsequent amendments which were published in a revised

Guide to the General Data Dissemination System. This system was aimed primarily at

statisticians and aims to improve many aspects of statistical systems in a country. It then

became part of the goals for the World Bank Millennium Development. As the primary

objective of the GDDS is to encourage the IMF member countries to build a framework to

improve data quality and increase statistical capacity building. In an attempt to build a

framework, a country can evaluate statistical needs, set priorities so to improve the

timeliness, transparency, reliability and accessibility of financial and economic data.

Policies of the International Monetary Fund

The main policies that were created initially by the IMF to guide and see to the success of

each member countries economic growth yet to the benefit upon membership and world trade

were:

To encourage monetary cooperation, which then provides countries to be equipped

and give access to consultation and solutions to both domestic and international

monetary crises.

To promote economic growth, stability and increase in their financial inflows and

market output in the international market, giving rise to stable exchange rates and

arrangement, so as to avoid depreciation in competitive exchange within member

countries.

To promote multilateral agreement and system of payments between member

countries so as to eliminate foreign exchange restrictions thereby increasing world

trade, expansion of international trade, increase in employments and the productivity

of such member countries are resourceful to themselves and their economic policy are

as such able to withstand crises that might arise in future events.

To make available temporary funds and loans to member countries, thus creating

adequate opportunities to adjust their balance of payment without resulting or

suffering from poverty and economic instability and thereby causing a reactive

change of disequilibrium in their economic system.

To give rights as to how and what quotas are assigned to each member countries after

upon membership and subscription of such quotas will be determined by board of

governors which will not be more than five years of general review as to appropriate

adjustment of such quotas of each member concerned.

To ensure a sustainable economic growth, exchange of goods and services on the

international market are favorable and acceptable so as to encourage continuity in the

development of each member country and exchange rates and arrangements are

orderly and monetary system are not disrupted in any way, so that the exchange

policies are no longer compactible and balance of payment become effective and

adjustable to unfairness.

Each member countries have right to borrow or lend and pay any charge obligated to

them, provided they give sufficient reasons as to what such funds will be used for and

to what benefit their economic status change will be after such funds or loans

specified was given and to the purposed it was used which must fall under such

guidelines or policies of the IMF even though at one point “Special Drawing Rights”

are given by the IMF when payments of such loans have past and was unpaid for will

be cancelled and charges dropped as well.

Successes of the IMF

In success it shows that IMF has the power to change and improve but still yet the successes

taken into consideration are:

Mexico Case: In the 80’s Mexico suffered financial crises but then towards the 90’s

they started to pick up and had financial surpluses because investors were confident enough

to invest, believing that the land had great opportunities for investments, however because of

inflation and “Pesos’” becoming a fixed denomination, the Mexican currency became

uncompetitive and because of this fact the Peso’s rate of inflation was brought to the US

inflation thereby devaluing the Peso and attracting more foreign investment. In 1994 the

foreign reserves of the Mexican kept falling and nothing was done because at that time it

envisage to be just a temporary setback and in this effect the Mexican government went on,

in issuing bonds, to have funds paid for imports even though they didn’t have the capacity to

repay the loans and this brought instability to the country but at the end Peso was devalued

and bonds were converted to foreign currencies, which in turn worsened everything and

Mexico suffered from balance of payment crisis, bring about the IMF to come to their rescue

(Peso Package) and this approach was proven to be successful for Mexico because it helped

to stop the liquidating of their assets and trade became surplus and as a result exports

increased and imports reduced.

Finally, Mexico was able to repay the loans on time and with time a healthy economy

evolved.

Kenya’s Case: Here Kenya been beneficiaries of the IMF and IMF showing the “the

will power of change” though due to Kenya’s internal government using of the funds for

unnecessary projects and thereby wasting resources, simply shows how non-chalant their

government’s attitude was towards the wellbeing of their people and because of this,

corruption of power was predominant in Kenya, which now resulted to IMF abruptly

stopping the lending or borrowing of money to Kenyan’s government, which took it turns and

the only way out was for Kenya to make power change within, so a new government change

was created and its ways of corruption was reduced resulting to an economy change, and

Kenya’s economy became better and more productive.

India’s Case: Though India was reluctant at first in allowing the IMF to help, it still

felt the need to be helped as its was suffering from instability economically and IMF felt that

the first the government as was with Kenya had to clean up its political shreds and corruption

so as to achieve a more economical stability and growth and as a result the financial distress

that India suffer will come to an end which it did but after the change in power and

government. Now India is one of the leading markets in the world today after China and with

its much more productive state, it is now the leading country in the exporting market for their

products in World Trade markets its purchased and seen in various ways efficient and quality,

therefore IMF can boast of been successful to the contribution of India’s economy success

story.

Asian’s Case: It was clearly understood that due to both the domestic and on the

International scale of things did Asia suffer particularly because of their communist way of

life along sides with investors seeing the country as a weak ground for investing and with the

“pegged exchange rates” in some case unsustainable, the response to monetary policies

became an overheating issue which gave to more excessive borrowing and lending of foreign

exchange, a risk to both financial and corporate sectors.

From the limited availability of data and no transparency, a limited and more realistic

approach on the economy, worsen the crises thereby fueling the reluctance of foreign

creditors to roll over in on short-term bases which led to pressure on the currency as well as

the stock markets. However despite the pegged exchange rate of yen to dollar and dollar

much inflated over the yen, resulted to a great loss for it gave way to less competition with

other countries, the IMF strongly gave financial support even though uncertainties persisted

and the adjustment transition in making the economy better and the working out reforms of it

financial status and policies now made the economy of Asia today; the world leading Market

in the world. Now we can say that the rapid change in Asian countries and a stronger market

economy growth is prove to the success of the IMF.

Failures of the IMF

It was assumed that the Congress will reach a compromise, through the votes and will

agree to re-open the government into raising the debt ceiling even though it was discovered

by the IMF researchers. The reason was for this, that the US economic growth for 2013, at

the rate of 1.6%, was slow. It was the same experience in India, Mexico and Russia with

growth rate of 1.8%, 1.7% and 1.5% respectively. Closing or shutting the government down

was bad, but it will be worse if the debt ceiling is not raised. This could seriously damage the

world economy, as the developed countries are seen to be taking over the market and thereby

developing countries don’t stand a chance with the growing and rapid economic state.

As we know that IMF is an Institutions that helps in giving loans to countries to foster

and help in building their economic status the conditions of loans of the IMF to both

countries and member countries have made it impossible for countries in a way to upgrade

their financial status, how? Because the loan conditions implemented are based on some

economic policies which are:

I. Structural Adjustment like Privatization of government or public sectors, to become

private sectors, deregulations and bureaucracy.

II. Allowing failing firms to go bankrupt

III. Higher interest rates to stabilize the currency

IV. Reducing the government from borrowing thereby increasing taxation and reduce

spending

The capital market liberalization as the IMF pressures countries that petition for IMF

loans to open their markets to outside investment capital rather than helping matters, they

worsen the situation, how? By destabilizes the economy of the country as well as the global

economy and paving way for investors to invest in huge sums to a country that only pulls

investments at a moment’s notice, causing acute economic crises. In Latin America, Stiglitz

argues that many of the ideas of the “Washington Consensus” were based on the experience

with Latin America and the economic growth in these countries had not yet been sustained,

therefore governments had to let budgets run out of control and loose its monetary policy

which had now led to rampant inflation and the belief of the Washington Consensus was that

this had happened as a result of excessive government intervention in the economy. So, if

government intervention was the problem, then government intervention should be limited

but it wasn’t and the policies that were supposedly adopted by these countries made their

economy imbalanced and unproductive.

The Washington Consensus encouraged policies such as capital market liberalization and

Stiglitz notes that even in this approach which was appropriate for some Latin American

countries, it did not make sense to apply this policy blindly to other countries that had very

different economic situation and crises and as such made this kind of policy made matters

much worse.

Furthermore Stiglitz notes that even though the IMF is a public institution, funded by

money from taxpayers around the world, it is not held accountable to the interests of these

taxpayers which clearly identifies the problem of governance as one of the prime

“underlying factors” and problems with the IMF for taxation without representation. Stiglitz

says that the IMF reports to ministers of finance and central banks around the world that are

in many ways insulated from the concerns of the IMF’s ultimate constituency: the global

populace as the control of the IMF is accomplished through a complicated set of voting

arrangements based on the larger part of the economic influence of the member countries,

especially the U.S. has effective veto power over IMF decisions.

The IMF and later, the World Bank as it was reduced to a “junior partner” with the IMF

was driven by the collective will of the G-7, the governments of the seven most advanced

industrial countries, open to a democratic debate over IMF policies and procedures would

best seen as a threat to the influence of these industrial giants, which would clearly not be in

their best interests so say Stiglitz. The current drivers of IMF policies, see it in their best

interest to avoid democratic accountability and dialogues and that the IMF is dominated not

merely by wealthy, industrialized nations, but more narrowly by the commercial and financial

interests within those countries and that the fact that the IMF draws on public funds to

forward the interests of a selected few, the no effective voice in the IMF’s policies, amounts

borrowed or given out to member countries, in his words was termed as “taxation without

representation”.

There are several Case Studies and examples that one can see as been the failure of the

IMF and they are:

Russian Case: After the fall of communism, Russia was in serious need of the IMF

and yet seven consecutive years of bailing them out seemed futile, for many saw the

strategy used by the IMF as not working out, because they kept making short term

loan, renegotiating and payments that were postponed even complicated matters even

worse and with German’s support and the Clinton’s administration, put IMF on

pressure that the IMF bailout now became political instead of ensuring and

safeguarding Russia’s economy. The IMF’s intervention was questionable as to what

the use of funds became, because of collective security was now at stake and IMF

therefore announced their suspension in helping out because Russia was now

producing the state of art in nuclear powered warfare submarines and this was seen by

the IMF as a less reason to help out and in adequacy of policies, although they

resumed helping out again and the funds given were used to complete the project,

Russians had started no doubt a questionable and tricky approach as to the way IMF

could not deal with the issues of what the funds they gave were used for, because it

was above them.

Greece Case: In 2012 the Greeks’ unemployment rate had increased by 25% which is

higher than the IMF projection of 15% and by 2013 it increased to 27% and this rate

is even higher in the average Eurozone more also noticeable failures in the 30% bank

loss deposits resulting from delay of the restructuring of the nation’s debt, thereby

deepening and worsening the recession of Greece and IMF was noted to have taken

more slice of blame in the Greece’s financial conditions.

Reforms

The IMF made some moves to improve the standard of the measures through

Structural adjustments. Some of the moves brought about negative results and some,

positives.

One of the moves is making the interest rate of member countries comparable to other

countries, in real terms by allowing interest rates to increase to a level comparable to other

countries. This would help them pay external debt and increase their foreign exchange.

Another move they made in the reforms was making sure that the exports of member

countries get to a competitive stage. This, they said, could be achieved by devaluating the

currencies. This move wasn’t so favorable for many country members.

The third attempt was to kick against inflation, by reducing the rate at which money supply

was growing. Also, so as not to push off borrowers from the funds of the capital market, they

tried to curb government budget deficit.

Conclusion

In conclusion I would say in my own opinion that the IMF can improve in their

reforms as well as modify their policies and not forget what their initial policies were and

why they were created, for what purpose, more also that the IMF as Sachs 2005, argues in

The End of Poverty: "international institutions like the International Monetary Fund

(IMF) and the World Bank have the brightest lead in advising poor and developing

countries on how to break loose from poverty, but the problem causing the hindrance is the

development economics". It is in the development that economics needs the reform, not the

IMF. He furthermore noted that the IMF loan conditions needs to be conjoined with other

reforms such as trade reform, productive reforms, which already going is on in developed

nations, debt cancellation, and increased financial assistance for investments in basic

infrastructure to be effective. Finally, IMF loan conditions standing alone cannot bring about

change; they need to conjoin with other applicable reforms to member countries, to create

sufficient, efficient and effective way of stabilizing economic growth were deemed necessary

so that economic growth in such member countries can be seen visible.

References

http://www.vanguardngr.com/2013/10/imf-predicts-higher-global-economic-growth-2014/

http://rt.com/business/notable-failures-bailout-greek-302/

Sachs, Jeffrey (2005). The End of Poverty: Economic Possibilities for Our Time Penguin

Press HC ISBN 1-59420-045-9

http://www.imf.org/external/

http://www.economicshelp.org/blog/glossary/imf-criticism/

http://www.imf.org/external/about/histdebt.htm

http://www.ieo-imf.org/external/pubs/ft/fandd/1998/06/pdf/imfstaff.pdf

http://www.jstor.org/discover/10.2307/3012499?

uid=3739192&uid=2&uid=4&sid=21103271287643

http://www.pbs.org/newshour/rundown/2013/10/imf-projects-slowed-growth-for-global-

economy.html