FREE ESSAY ON IMF

IMF

Introduction:
We are all aware of the enormous difficulty that the Asian countries have been having in
regard to their economies having large trade deficits and the devaluation of their
currencies. Asia's crisis was classified as "The Great Asian Slump that is for the record
books" ("Saving Asia it's time to get radical," 75) making the Latin America's crisis of
1995 look like a minor wobble. 
Hong Kong announced that its economy shrank 2.8% in the first quarter of 1998. Economist
forecast Indonesia's GDP to fall an overwhelming 15.1% this year. Comparing that to
Americas worst post war recession when the economy shrank 2.1% ("Saving Asia, It's time
to get radical," 75). This record-breaking crisis has had an enormous effect on our
economy as well, and had to be handled as quickly and as painlessly as possible. 
Therefore, the IMF had to step in and advise the nations on stabilizing their economies
by restoring confidence in the currencies. As well as making their currencies look more
attractive, which demanded increased interest rates, among many other actions that the
IMF implemented.
However, there are always individuals who are for and against any actions taken in an
attempt to resolve a certain predicament. As anywhere else, here we also find that there
are some who feel that IMF did a very poor job at providing the right treatment for the
'wound', and yet others who content that IMF did the best that it could and in fact
helped the "ailing tigers". 
A Brief History of the IMF
In July 1944 the United Nations Monetary and Financial Conference met at Bretton Woods,
New Hampshire, to find a way to rebuild and stabilize a world economy that had been
severely devastated by World War II. One result of the conference was the founding of the
International Monetary Fund (IMF) through the signing of its Articles of Agreement by 29
countries.
The stated purposes of the IMF were to create international monetary cooperation, to
stabilize currency exchange rates, to facilitate the expansion and balanced growth of
international trade, and to make its general resources temporarily available to its
members experiencing balance of payments difficulties under adequate safeguards. There
were 143 member nations in the IMF in the early 1980s. Most of the Communist countries,
including the Soviet Union, did not join; and, of the Western nations, Switzerland has
not participated (Compton's Interactive Encyclopedia, 1996). However there are now 182
members (www.imf.com, last updated August '98).
(www.imf.org)
On joining the IMF, each member country contributes a certain sum of money called a quota
subscription, as a sort of credit union deposit.
(www.imf.org)
IMF appraises its members' exchange rate policies within the framework of a comprehensive
analysis of the general economic situation and the policy strategy of each member. "The
IMF fulfills its surveillance responsibilities through: annual bilateral Article IV
consultations with individual countries; multilateral surveillance twice a year in the
context of its World Economic Outlook (WEO) exercise; and precautionary arrangements,
enhanced surveillance, and program monitoring, which provide a member with close
monitoring from the IMF in the absence of the use of IMF resources" (www.imf.org). 
Total Fund Credit and
Outstanding
(SDR billions; end of August 1998)
------------------------------------------------------------------------
World62.8 Africa7.1 Asia22.6 Europe19.8 Middle East0.5 Western Hemisphere12.8 
(www.imf.org)
Furthermore, to achieve its goals, the Bretton Woods Conference stated a number of
conditions with which member nations were required to comply. Each nation agreed to
establish a par value for its currency; that is, the value of a unit of its currency
would be fixed in relation to the dollar or to gold. This would prevent great
fluctuations of national currencies in relation to each other. This part of the agreement
was abandoned in 1971, when the United States removed the dollar from the gold standard.
Currencies have since been allowed to float in value in relation to each other and in
relation to the conditions of the world economy. 
Member nations also agreed upon the principle of currency convertibility. Thus, if one
nation owned the currency of another, it would be able to sell it back at par value.
(www.imf.org)
A third agreement was that member governments would contribute to the operating funds of
the IMF according to the volume of their international trade, national income, and their
international reserve holdings. Part of the contribution is in gold, the remainder in the
nation's own currency. A nation may borrow funds against the gold portion of its
contribution if it encounters financial difficulties due to an unfavorable
balance-of-payments situation. 
The IMF has other devices to assist members in balance-of-payments difficulties. The
Standby Arrangements adopted in 1954 enable nations to negotiate lines of credit in
anticipation of current needs. The General Arrangements to Borrow, instituted in 1961,
provide standby credit for emergencies. The Compensatory Financing of Export
Fluctuations, introduced in 1963, enables developing countries to cope with sudden drops
in export receipts without injuring the country's economy through currency exchange
restrictions.
The IMF makes its financial resources available to member countries through a variety of
financial windows. Except for the Enhanced Structural Adjustment Facility (ESAF)
drawings, which are loans and not purchases of other members' currencies, members benefit
themselves of the IMF's financial resources by purchasing (drawing) other members'
currencies or SDRs with an equivalent amount of their own currencies. The IMF levies
charges on these drawings and requires that members repay their own currencies from the
IMF over a specified time. 
(www.imf.org)
The Origin of the Crisis
The forthcoming of the crisis was for the most part unexpected due to the previously seen
decades of outstanding economic performance in Asia. Nevertheless, the crisis unfolded
rather rapidly and many place the blame on the weakness of the financial systems and
governance. The combination of inadequate financial sector supervision, poor assessment
and management of financial risk, and the maintenance of relatively fixed exchange rates
led banks and corporations to borrow large sums of international capital. However, vast
inflows can quickly become huge outflows. "The five worst affected Asian economies (South
Korea, Indonesia, Thailand, Malaysia, and the Philippines) received $93 billion of
private capital in 1996. In 1997, you saw an outflow of $12 billion. This shift of $105
billion in one year was the equivalent of 11 percent of their combined gross domestic
product. (" A fix for the world markets", 30)" 
Although private sector expenditure and financing decisions led to the crisis, governance
issues played a major role. Limited transparency, meaning lack of availability of fiscal
accounting and economic data has made it very difficult for investors to obtain the
information needed for investment expenditures. 
In addition to the issues listed above, what furthermore intensified the crisis was the
fact that the nations seeing all of elements that are comprising the crisis occur in
their economies have lost confidence in their currencies and the financial institutions.
However, what turned this bad financial situation into a catastrophe was the loss of
confidence that turned into self-reinforcing panic. 
Although, the world was shocked at the intensity of the crisis they - meaning the United
Nations, the IMF and the affiliated countries began getting involved in order to start
the recovery process as soon as possible. This aided Asia's troubled markets from
spreading their 'virus' onto the nearby, vulnerable markets and then to the apparently
unconnected markets. 
What did the IMF do?
Assessing the complex situation on the matter, the IMF had formulated a few propositions
to help reestablish confidence in the affected countries. They are as follows:
? A temporary tightening of monetary policy to evoke exchange rate depreciation.
? Begin structural reforms to remove features of the economy that had become impediments
to growth (such as monopolies, trade barriers, and nontransparent corporate practices).
? Initiating the reopening and / or maintaining lines of external financing.
? Maintenance of a sound fiscal policy, through the provision for rising budgetary costs
of financial sector restructuring.
Provided these factors the Asian counties should have been on their way to recovery.
However, we have only begun to see slight improvement on their part, thus posing a
question: How effective is the prescribed treatment?
Arguments for the actions taken by the IMF
There are three major criticisms that Martin Feldstein, a former presidential economist,
makes of the International Monetary Fund's remedies for the Asian crisis ("Refocusing the
IMF," 1998). First, he argues that IMF uses the same old type of medicine,
inappropriately dispensed throughout the nations. Second, he contends that the IMF went
beyond it's essential task by including structural elements in the program, the essential
task being the correcting the balance of payments. Finally, he is troubled by the bailout
issue - referring to the fact that IMF provides a safety net and countries are not as
concerned with taking excessive risk because they know that IMF will be there to bail
them out. 
Stanley Fischer, who is first deputy managing director of the International Monetary
Fund, addresses the three issues troubling Feldstein. Fischer contends that there could
not possibly be the same method used for the nations that are in need of help. He says
that the countries requesting assistance are different in the size of their current
account deficit and the stages of crisis they are in. Therefore, the design of the
programs reflected each individual country. 
When the countries approached the IMF, Thailand and South Korea had very low reserves and
the Indonesian rupiah was extensively depreciated. So, the IMF had to restore confidence
in their currencies prier to the attempt of fixing any other problems. This could have
only been achieved through the increase of interest rates temporarily, in order to make
their currencies look more appealing. Even if the higher interest rates would make the
situation with weak banks and corporations more complex. However, when confidence would
be restored the interest rates can be lowered to the normal level.
As in regard to Feldstein's criticism of the structural elements incorporated into the
reform programs, they were vital for the Asian financial sector. Due to the fact that the
underling problems stemmed from the weakened financial institutions and complicated
nontransparent relations among government and corporations, IMF had to include structural
reforms. Otherwise the IMF would have only addressed the balance of payment problem by
landing money, it would not have been effective since the underling aspects were not
considered.
Responding to Feldstein's third critique, Fischer addresses the issue of bailouts.
Feldstein claims that countries may take an excessive risk knowing that IMF will bail
them out if things go bad. Fischer says that to think that policymakers pursue risky
courses of action because they anticipate that IMF safety net will catch them is
far-fetched. Countries avoid going to the Fund, since historical precedence has shown
that policymakers whose countries end up in trouble do not do well politically.
Therefore, this proves that countries do not do take unwise actions merely because they
believe that there will be a safety net to catch them. 
What could have been done differently to contain the crisis?
Some countries believed that the remedies put forth by the IMF were inadequate because
Asian governing methods and economies are very different from ours. And furthermore Asia
would have done better if an internal Monetary Fund was formulated. In August 1997 Japan
proposed an Asian Monetary Fund to deal with the crisis. It secured pledges of $100
billion mostly from itself, China, Hong Kong, Taiwan, and Singapore ("The resources lie
within,"19).
Most importantly Asians save a lot of their income compared to western countries and
households do most of the saving. Domestic savings run about twice the American rate.
Households put their savings in to low risk banks as opposed to Americans who use their
savings to finance households' own investment in housing. Therefore, the resources to
begin the initial healing process may essentially lie within. 
Moreover, the Asian Monetary Fund would build on Asia's saving surplus, and foreign
exchange reserves. Where would the AMF get the resources to do this you may think? The
AMF would have financing from the subscribed governments. The fact that they were able to
secure $100 billion rapidly manifests that sizable sums are in prospects. 
Nevertheless the AMF never came to existence due to United States Treasury's disapproval
of Japan's proposal.
Conclusion
Looking retrospectively, we can contemplate the procedures that were done and theories
what should have been done differently. However, what's done is done and we can only
examine the origin of the crisis and it's development in an attempt to prevent another
one from occurring.
You may agree or disagree with the specific measures that IMF has implemented, but we
really do not know would it have been better if other measures were utilized or if the
IMF did not intervene at all. Asia's economies seem to be slowly coming out of the
"intensive care". The exchange rates of all the crisis economies have strengthened from
their lows, which were reached in January 1998. While the Indonesian rupiah remain deeply
depreciated, it too has recovered significantly from the low it reached in June 1998. In
addition to that, interest rates in Korea and Thailand have declined remarkably since
January as currency pressures have eased (www.imf.org).
Even though the crisis is not completely resolved there is evident progress. The IMF has
already drawn lessons from the crisis on how to strengthen the international financial
system and the importance of a sound macroeconomic policy framework, and the dangers of
unsustainable large current account deficit.
Bibliography and References
Junior, Michael ed. International Business: The Challenge of Global Competition. United
States: McGraw-Hill Companies, 1999.
I used it to obtain general information on the IMF it's functions and responsibilities.
"Asia: Still Sick and Gloomy, Now Rebellious." The Economist July 11th 1998: 41-42
This provided the information of the severity of the problem at hand
Fisher, Stanley. "In Defense of the IMF: Specialized Tools for a Specialized Task."
Foreign Affairs July/Aug. 1998:103-106
This article gave the facts I needed to understand the position of the IMF and gave
insight into the details of IMF's attempt to resolve the crisis.
Krugman, Paul. "Saving Asia: it's Time to Get Radical." Fortune Sep. 7th 1998: 75-80
The article was useful because it explained the origin of the crisis extensively
" Asia: Rx." National Review April 6th 1998: 16-17
"A Fix for the World Markets?" World Press Review Aug. 1998: 30-31
This article gave me the information on the relevance of the Asian market to the markets
worldwide - interrelated. 
"Two Views on Asia: The Resources lie within." The Economist Nov. 7th 1998: 19-21
This provided the statistics I needed to understand the larger picture of the crisis.
http;/www.imf.org/external/np/exr/facts/asia.HTM