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I would like to express my special thanks of gratitude to my teacher Mrs (Dr.) Madhuri Srivastava mam who gave me the golden opportunity work on the wonderful project on the topic International Monetary Fund and Its Emergences In Worlds Economy. This is a very contemporary topic and has helped me to widen my horizon of knowledge regarding the world economy. I would like to thank you for giving me such a good topic to research on and for the help and support which give during the making of the project. Secondly, I would also like to thank my seniors and friends who helped me a lot in finishing this project within the limited time.
Index
Introduction
The International Monetary Fund (IMF) is an intergovernmental organization that promotes international economic cooperation, focusing in particular on policies that have an impact on the exchange rate and the balance of payments. The organization's stated objectives are to promote international economic cooperation, international trade, employment, and exchange rate stability, including by making resources available to member countries to meet balance of payments needs. Its headquarters are in Washington, D.C. The IMFs relatively high influence in world affairs and development has drawn heavy criticism from some sources. The International Monetary Fund was designed during World War II by nations whose worldview had been shaped by the Great War and the Great Depression. The IMF was conceived on July 22, 1944 originally with 45 members and came into existence on December 27, 1945 when 29 countries signed the agreement, with a goal to stabilize exchange rates and assist the reconstruction of the worlds international payment system. Their views on how the postwar international monetary system should function, was also shaped by their economics training and their nationalities. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF was important when it was first created because it helped the world stabilize the economic system. After the IMF began functioning as an institution,its evolution was similarly driven by a combination of political events ( Suez, African independence, the collapse of global communism), economic events (the rising economic power of Europe, the Middle East, and Asia), and trends and cycles in economic theory (the monetary approach to the balance of payments, new classical economics, the rise and fall of the Washington Consensus). As the above events happened, these forces some or the other way lead to the emergence of the IMF.
The history behind the origin of such Institution i.e. why there felt such a need to make an organization as such and what where the event that leads to the emergence of IMF. Objectives of IMF.
Origin of IMF
The first half of the 20th century was marked by two World Wars that caused enormous physical and economic destruction in Europe and a Great Depression that wrought economic devastation in both Europe and the United States. These events kindled a desire to create a new international monetary system that would stabilize currency exchange rates without backing currencies entirely with gold; to reduce the frequency and severity of balance-of-payments deficits (which occur when more foreign currency leaves a country than enters it); and to eliminate destructive mercantilist trade policies, such as competitive devaluations and foreign exchange restrictionsall while substantially preserving each countrys ability to pursue independent economic policies. Multilateral discussions led to the UN Monetary and Financial Conference in Bretton Woods, New Hampshire, U.S., in July 1944. Delegates representing 44 countries drafted the Articles of Agreement for a proposed International Monetary Fund that would supervise the new international monetary system. The framers of the new Bretton Woods monetary regime hoped to promote world trade, investment, and economic growth by maintaining convertible currencies at stable exchange rates. Countries with temporary, moderate balance-of-payments deficits were expected to finance their deficits by borrowing foreign currencies from the IMF rather than by imposing exchange controls, devaluations, or deflationary economic policies that could spread their economic problems to other countries. After ratification by 29 countries, the Articles of Agreement entered into force on December 27, 1945. The funds board of governors convened the following year in Savannah, Georgia, U.S., to adopt by laws and to elect the IMFs first executive directors. The governors decided to locate the organizations permanent headquarters in Washington, D.C., where its 12 original executive directors first met in May 1946. The IMFs financial operations began the following year.
Versailles treaty cannot be held solely responsible for these and other ills of the twentieth century, but neither can it be absolved from blame.
World War II
The third major historical influence on the IMF was the Second World War, which provided both the impetus and the context for reforming the international system. When the United States entered the war in response to the bombing of Pearl Harbor in December 1941, Treasury Secretary Henry Morgenthau, Jr., put Harry White in charge of international economic and financial policy and asked him to come up with a plan for remaking the system once the war was over. As it happened, White had already sketched out a rough plan for an international stabilization fund, and he was able to produce a first draft within a couple of months. On the other side of the Atlantic, Keynes was developing a plan for an international clearing union to be run jointly by Britain and the United States as founder-States.Though less overtly multilateral than Whites scheme, and based on the British overdraft system rather than on Whites rather complicated proposal for currency swaps (Boughton, 2002 and 2003b), Keyness clearing union was similar in its essence to Whites stabilization fund. Over the next two years of discussion and negotiation, the two plans would meld into a draft for the IMF charter. The IMF was created in the midst of the war, at the United Nations Monetary and Financial Conference, which convened 44 country delegations at Bretton Woods in July 1944. Keynes had tried to limit the involvement of countries other than Britain and the United States, fearing that a great monkey house would result if all of the wartime allies were invited. White, however, insisted on a multilateral conference, partly because he seems to have sensed that the project would otherwise fail and partly because he doubtless wanted to neutralize the force of Keyness intellect and personality. The importance of Bretton Woods as a wartime event was that it took advantage of a window of opportunity to create a multilateral financial system. Both before and after the war, there was too much suspicion and national self-interest for such a sweeping agreement to be possible. Even in 1945, when the U.S. Congress and the U.K. Parliament were to ratify the Articles of Agreement, passage was far from easy (Gardner, 1956). Again, White invoked the specter of Versailles. Asked, in a House of Representatives hearing, what would happen if Congress refused to ratify the agreement, White replied, I think history will look back and indict those who fail to vote the approval of the Bretton Woods proposals in the same way that we now look back and indict certain groups in 1921 who prevented our adherence to an international organization designed for the purpose of preventing wars.6 Such arguments carried the day in 1945. Within three years, however, when negotiators tried to complete the system by creating an International Trade Organization, the multilateralists were outmanned, and the proposal failed.
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The other major influence of the war on the IMF was that it left the United States in virtual control of the world economy. With Britain heavily dependent on American largesse, Keynes had few cards to play in his efforts to shape the postwar system to his countrys advantage. Of the other major allies, France was equally powerless and the Soviet Union was politically isolated and intellectually detached. As a consequence, the financial structure of the IMF would be based on the U.S. dollar, rather than on an international currency of its own making. Its lending power would be limited in size and scope, and the Fund would lack most of the powers of a central bank. Its headquarters would be neither in London nor even in New York, but in Washington where the U.S. Treasury could exert a strong gravitational pull. For the next three decades, the IMF would be essentially a dollar-centric institution, with the United States providing most of its loan able resources and effectively controlling most of its lending decisions.
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Objectives of IMF
Since its creation, the IMFs principal activities have included stabilizing currency exchange rates, financing the short-term balance-of-payments deficits of member countries, and providing advice and technical assistance to borrowing countries. Stabilizing currency exchange rates Under the original Articles of Agreement, the IMF supervised a modified gold standard system of pegged, or stable, currency exchange rates. Each member declared a value for its currency relative to the U.S. dollar, and in turn the U.S. Treasury tied the dollar to gold by agreeing to buy and sell gold to other governments at $35 per ounce. A countrys exchange rate could vary only 1 percent above or below its declared value. Seeking to eliminate competitive devaluations, the IMF permitted exchange rate movements greater than 1 percent only for countries in fundamental balance-of-payments disequilibrium and only after consultation with, and approval by, the fund. In August 1971 U.S. President Richard Nixon ended this system of pegged exchange rates by refusing to sell gold to other governments at the stipulated price. Since then each member has been permitted to choose the method it uses to determine its exchange rate: a free float, in which the exchange rate for a countrys currency is determined by the supply and demand of that currency on the international currency markets; a managed float, in which a countrys monetary officials will occasionally intervene in international currency markets to buy or sell its currency to influence short-term exchange rates; a pegged exchange arrangement, in which a countrys monetary officials pledge to tie their currencys exchange rate to another currency or group of currencies; or a fixed exchange arrangement, in which a countrys currency exchange rate is tied to another currency and is unchanging. After losing its authority to regulate currency exchange rates, the IMF shifted its focus to loaning money to developing countries. Financing balance-of-payments deficits Members with balance-of-payments deficits may borrow money in foreign currencies, which they must repay with interest, by purchasing with their own currencies the foreign currencies held by the IMF. Each member may immediately
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borrow up to 25 percent of its quota in this way. The amounts available for purchase are denominated in Special Drawing Rights (SDRs), whose value is calculated daily as a weighted average of four currencies: the U.S. dollar, the euro, the Japanese yen, and the British pound sterling. SDRs are an international reserve asset created by the IMF in 1969 to supplement members existing reserve assets of foreign currencies and gold. Countries use the SDRs that have been allocated to them by the IMF to settle international debts. More than 20 billion SDRs were allocated to members in successive allocations from 1969 through 1981. SDRs are not part of the quota subscriptions supplied by members, and thus they are not part of the general asset pool available for loans to members. The IMF uses the SDR as its unit of account for all transactions. Drawing on the IMF by a country raises the funds holdings of that countrys currency but lowers its holdings of another countrys currency by an equal amount. Thus the composition of the funds resources changes, but the total resources as measured in SDRs remains the same. The country repays the loan over a specified period (usually three to five years) by using member currencies acceptable to the IMF to repurchase its own national currency. Only about 20 currencies are borrowed during a typical year, with most borrowers exchanging their currency for the major convertible currencies: the U.S. dollar, the Japanese yen, the euro, and the British pound sterling. Countries whose currencies are borrowed by other member governments receive remuneration about 4 percent of the amount borrowed. Each of these loans is accompanied by a letter of intent that specifies the macroeconomic adjustments and structural reforms required by the IMF as conditions for assistance. Loan conditions, or conditionality, have been explicitly authorized by the Articles of Agreement since 1968. Typical conditionalities require borrowing governments to reduce budget deficits and rates of money growth; to eliminate monopolies, price controls, interest rate ceilings, and subsidies; to deregulate selected industries, particularly the banking sector; to lower tariffs and eliminate quotas; to remove export barriers; to maintain adequate international currency reserves; and to devalue their currencies if faced with fundamental balance-of-payments deficits. These adjustments are intended to reduce imports and increase exports to enable the country to earn sufficient foreign exchange in the future to pay its foreign debts, including the newly incurred IMF debt. Most lending programs specify quarterly targets for key economic variables that, in theory, must be met to receive the next loan installment.
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Advising borrowing governments The IMF consults annually with each member government. Through these contacts, known as Article IV Consultations, the IMF attempts to assess each countrys economic health and to forestall future financial problems. The fund also operates the IMF Institute, a department that provides training in macroeconomic analysis and policy formulation for officials of member countries.
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Conclusion
The IMF was created at a particular time in world historyduring the Second World Warand was given a structure and mandate that reflected that time and those circumstances. The institution has changed greatly in the six decades. Much of the volume of its lending has become crisis-driven, and the Funds involvement in crisis prevention and resolution has correspondingly intensified. It has effectively become divided into groups of creditor and debtor countries whose membership changes little over long periods of time. Its membership is much larger, more diverse, and nearly universal, and its responsibilities in global governance have correspondingly increased. The breadth of its involvement in policy making in member countries, especially borrowing countries, has vastly increased. If the events and ideas chronicled here had not affected the IMF along these lines, the institution would have become marginalized and even irrelevant. The evolution of the Fund has been driven almost entirely by shifts in demandshifts in world economic and political conditionsnot by forces from within seeking to reinvent the institution so as to hang onto a role once the original purpose had faded away. The challenge for the IMF has always been to hold on to its vital center (the original narrow mandate to promote orderly payments adjustment and global financial stability) while adapting its activities to new circumstances and new ideas. Meeting that challenge became increasingly difficult in the 1970s and 1980s, when the advent of generalized currency floating, financial globalization, the need for multilateral crisis management, and financial demands from low-income countries all pressed new functions and responsibilities onto the Fund. By the 1990s, when the Fund had to deal with all of those issues plus the need for rapid structural reforms in formerly centrally planned economies including Russia, with its great geopolitical importancemission creep became inevitable. Even accepting that most of the changes in the Fund have occurred for good reasons and could not have been avoided in any case, the argument for adhering to a consistent mandate and mission is not diminished.
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Institutions have limited resources and employ staff with specific skills and experience, and diffusing those resources imposes substantial costs. The recent commitments by the IMF (2001, 2002) to streamline and refocus its policy conditions and strengthen its cooperation with the World Bank were taken in recognition of that imperative. As much as the world has changed, the raison dtre for the IMFcompensating for the limited global reach of the invisible hand, the goal that first led Keynes and White to create institutions to promote multilateral cooperationremains as vital as ever.
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Bibliography
The IMF and the Force of History: Ten Events and Ten Ideas That Have Shaped the Institution ByJames M. Boughton Encyclopedia website http://www.britannica.com/EBchecked/topic/291108/InternationalMonetary-Fund-IMFhttp://en.wikipedia.org http://en.wikipedia.org/wiki/International_Monetary_Fund http://europeandcis.undp.org/uploads/public1/files/vulnerability/Senio r%20Economist%20Web%20site/Readings/Boughton.pdf http://www.imf.org/external/pubs/ft/history/2001/front.pdf
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