Policy Debate: What are the pros and cons of International Monetary Fund (IMF) involvement with global economies?
Issues and Background
The legitimate political institutions of the country should determine the nation's economic structure and the nature of its institutions. A nation's desperate need for short-term financial help does not give the IMF the moral right to substitute its technical judgments for the outcomes of the nation's political process.
There in neither point nor excuse for the international community to provide financial assistance to a country unless that country takes measures to prevent future such crises.
Until the Great Depression, international exchange relied on a gold standard in which each country's currency exchanged for a fixed quantity of gold. During the Great Depression, however, many nations abandoned the gold standard. With the elimination of the gold standard, the system of fixed exchange rates broke down. Many countries tried to stimulate their domestic economies by engaging in competitive devaluations of their currencies. This was not a very successful strategy since their trading partners generally engaged in retaliatory devaluations of their own currencies. The increased uncertainty over exchange rates, however, discouraged international trade, and the volume of international trade declined rather dramatically during this period.
A new international monetary system was adopted as a result of the Bretton Woods conference of 1944. Under this new monetary system, the value of the U.S. dollar was fixed in terms of gold and all other currencies were assigned exchange values in terms of either gold or the U.S. dollar. The U.S. agreed to maintain the value of the dollar at $35 per ounce of gold; other countries agreed to maintain the exchange value of their currencies within one percent of the target exchange rates. Under this system, countries could alter their exchange rates only with the consent of the other IMF members.
The IMF was created as part of the Bretton Woods conference. Each of the 182 member nations contributes an annual payment, called a "quota subscription," to the IMF. These quota subscriptions are used to provide a source of funds for loans to member nations experiencing financial difficulty. Voting rights in the IMF are allocated on the basis of the size of the quota subscription. The U.S. has the largest quota subscription and contributes approximately 18% of total IMF quotas. Currently, a proposal to increase IMF funding is awaiting approval in most member nations (including the U.S.).
The IMF was originally charged with maintaining stable and predictable exchange rates under the fixed exchange rate system that grew out of the Bretton Woods conference. By the early 1970s, however, the fixed exchange rate system was replaced with a system of flexible exchange rates after the U.S. decided to allow the value of the dollar to fluctuate relative to gold. Under the current system, countries may allow their currency to float freely, may tie its value to that of some other currency, or may attempt to maintain stable exchange rates relative to their trading partners (a "managed float").
Today, the IMF conducts "surveillance" of the exchange-rate policies of member nations. It collects information on the state of the nation's economy and recommends changes when a nation engages in practices that are expected to result in difficulties in meeting future international payments. The IMF also encourages member nations to abandon any restrictions that are placed on the convertibility among national currencies.
When member nations experience difficulties in meeting international payments, the IMF provides loans to these countries. Each member nation can withdraw 25% of the quota that it paid in the form of gold or a convertible currency. Larger amounts can be borrowed from the IMF, however, only if the country provides an acceptable plan for eliminating the problems that resulted in the payment problem. These reform plans generally include a reduction in government spending, a more stringent monetary policy, the privatization of inefficient public enterprises, and related "market-oriented" reforms.
During the last few years, the "Asian crisis" and the large IMF loans to Russia have resulted in a substantial debate over the usefulness of the IMF. Supporters of the IMF argue that IMF actions prevented these problems from becoming more severe crises. Critics of the IMF argue that the stringent reforms demanded by the IMF as a condition for loans involves an infringement of national autonomy. When faced with the prospect of such IMF restrictions, countries will only accept IMF loans when a crisis becomes severe. It is argued that this results in more serious crises than would otherwise have occurred.
Primary Resources and Data
Different Perspectives in the Debate
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