Do Any Characteristics of the Current Global Monetary Regime Contribute to Instability - Essay Example

TITLE: International Economy and Finance International Economy and Finance Student’s Name Professor’s Name Subject Code and Name Date Submitted International Economy and Finance Introduction Over the past years, measures to ensure monetary stability in the most countries have been realized however measures to ensure a long lasting financial stability have not been successful as it’s viewed to be quite challenging to the ever changing status of the economy. Financial instability has been the top most threat towards the development of most countries in the world. The inflations or booms in an economy are viewed as the major cause of instability in a country. These are situations that can not be predicated easily and it’s the responsibility of policy makers to ensure that measures to curb the situations are realized (Borio and lowe, 2002, pp 45) The monetary authorities have the responsibility of cooperating with the prudential authorities by mending the available financial policies to make it applicable to the current economy situation. A stable economy is arrived by liberalizing the financial system so that the government also gets involved in the activity of changing the financial status of the country. (Borio et al, 2001, pp 23) Economy fluctuations are characterized by the inflation and boom. Boom period is self reinforcing and is characterized by rising productivity leading to a rise in profit, lesser international financial constraints, increase in capital investments and finally a rise in asset prices. The financial flow of the economy is determined by the central bank which is responsible of controlling the rate of inflation of a country (Bean, 2003). The central bank gets involved directly by cutting down the production costs, encouraging foreign investors who increase the amount of capital in a country and appreciating the value of currency when it is necessary. Bretton Wood system is an example of a current global monetary regime that existed from the years back but still reigns in the present economy as observed by Borio and Crockett (2000, pp 12).It is a system that takes care of the economy status of a country by monitoring its financial and monetary status compared to the worldwide expected standard of a growing economy. The term Bretton Woods Institutions refers to the International Monetary Fund (IMF) and the World Bank. These institutions were established in the year 1945(Borio and Filardo, 2004, pp 282). Actually, the original main aim of the institutions was to reconstruct Europe which was formerly destroyed due to the wars it was subjected to. To do this, it was intended to fund its reconstruction while at the same time help it to be stable. However, this vision seemed to have diverted to the poverty-driven Third World countries in that the institutions have been funding financial and environmental projects such the construction of dams, mines and roads running in these countries (Borio and Lowe, 2004) The effect of such funding to the third world countries is that it has led to debts amounting to billions of dollars thereby tying them down in underdevelopment. Moreover, such kind of projects has led to the degrading of the environment through destruction of estuaries, forests, rivers some resulting in environmental pollution. The other major aim of World Bank and IMF was to alleviate poverty of which can be labeled accomplished considering the disturbing and excessive debts these countries have incurred, thanks to the “monetary assistance”.(Borio and Mc Guine,2004,pp 80) The International Monetary Fund was started with the aim of stabilizing the exchange of trade, encourage cooperation in monetary terms at the international levels and give rise to the international expansion of trade. This institution was to achieve these objectives by challenging the economic policies of member countries that were experiencing difficulty in balancing their payments by offering advice, conditionally, on how to tackle these challenges as seen by Borio and White (2004, pp 136) Despite these well laid and sensible-looking objectives, the International Monetary Fund has been put under the lime light and accused of worsening the economic state of developing countries, especially those based in Africa. Borio and Tsatsaronis (2004, pp 115) noted that the International Monetary Fund institution was also famous for its pressure on developing countries. These was done by adopting Structural Adjustment Programs (SAP’s) as a condition to receiving its future financial support and service their debts not only from itself but also from other financial institutions that offer monetary services (Filardo and Gordon, 2001, pp 120). The shift in Bretton Woods Institution’s policies and the pressure they subject to developing countries with unstable economies leave a lot to be answered. These countries that are still developing seem to be having a lot to offer the Bretton Woods Institutions-but this remains to be uncovered as agreed by Gerlach and Smets (2004, pp 809). Developmental policy was left in the hands of international financial institutions that have enhanced the agenda of mainstream which continues to be based on the ideals of neo-liberalism (Backstrom, 2002, pp 130) Therefore, this essay argues that the interests of the Breton Woods agreement reflected its interests on the Western countries while undermining the needs of the developing countries thereby making their progress so slow and unattainable. All this can be based on the fact that it forgot its original aim of mending and raising the economies of its member countries and this was explained by Flannery (2004, pp 275). It also bases its argument on evidence about the effect this monetary help has had on these countries by giving examples and also touching on the countries with strong economies and how they have benefited, or not, from the IMF and the World Bank. Bretton Woods Agreement Delegates from 44 countries in Bretton Woods, which is located in New Hampshire, met and focused on forming an international agreement that would facilitate monetary policy among nations (Modighaniani and Cohn, 2002, pp 36) .Their aim of meeting seemed to be far reached since it was based in unstable assumptions. Each country that signed the agreement promised to maintain its currency at values within a narrow margin to the value of gold (Okina et al, 2001). The agreement was expected to work in such a way that it would base international currency to the value of gold, that was thirty-five dollars an ounce, but it did not consider other important factors in the development of a country’s economy (Tarasher, 2003, pp 60) Noted that the value of gold changed with time, the power of purchase by the dollar varied as the years went by while at the same time, the reserves for gold replenished. This resulted in the United States eliminating its currency from the standard value of gold, that is, thirty-five dollars, making this agreement unworkable. In the first place, the reason why the United States chose to use its currency as a standard was because it had dominance in Bretton Woods. It earned its credit due to the fact that it was very strong both economically and military wise (Tsatsaronis,2000, pp 13) The wars that took place in the Second World War did not occur on its soil and it therefore established its economic power by giving military aid to its partners. Since the gold standard failed to work, the United States, being the mighty nation, changed the standard to the dollar. It took the advantage of the other less stable countries by reinforcing a policy which gave them a top priority in the market compared to others. This led to using their dollar as a standard reference against all other currencies (Tsatsaronis and Zhu, 2004, pp 69). The Bretton Woods Agreement intention was to prevent devaluation of currency by ensuring progress in the Third World countries through lending and investing in infrastructure via the International Monetary Fund. These intentions, however, seemed not to have been adhered to (Issing, 2003, pp 20). The international organizations made rules and created social knowledge but being international organizations, they did not perform as what was expected of them as observed by Hoffman (2001). How the IMF Functioned Bretton Wood assistance to the less developed nations was not straight as it was intended to instead it had strings attached to it and conditions to be followed. In fact, the method that was used while carrying out its operations was found to be questionable. Issing (2003, pp 21) observed that the International Monetary Fund demanded adjustments to be made on the particular countries, especially the developing countries. Despite the fact that this institution was established with the intention of balancing deficits in the country, it seemed to have made it worse when the developing countries amassed huge debts, creating larger deficits in their balance of payments. This was such an irony, bearing in mind that the International Monetary Fund main aim was to create a favorable balance of payment in the developing country. It instilled unnecessary conditions when loans were obtained or repaid back by the developing countries as noticed by Amato and Shin (2003) Taking for instance, in the early 1990’s; the Central Bank was forced to eliminate controls over capital flows because corrupt politicians were finding it easy to transfer money from the economy into their personal accounts for their own interests. The less developed countries then suffered an imbalance in income distribution n that those who were rich got richer while those who were poor got less (Backstrom, 2003, pp 130). The IMF did not handle this matter fairly because it was basing its interest on how to obtain more of this money instead of focusing on ways of improving the economy of the country in need. The ‘giant rescue packages’ that was introduced by the IMF did more harm than good to this developing countries. The package was created in favor of the developed countries instead of the less developed and this led to a rise of conflict between the two countries. The package allowed the less developed to borrow amounts which held huge amounts of interests to be paid when paying back the loan. Those taking or receiving the money had a huge task in accomplishing the conditions that came hand in hand with the help they needed. In an attempt to improve the economic crisis of developing countries, and at least encourage rich countries such as the United States to give extra credit to the needy countries, the IMF decided to drive the banks and financial institutions of these countries to may hem thus discouraging the confidence of investors to these countries leading to their downfall as supported by (Backstrom, 2002, pp 130). By doing this, the IMF clearly indicated that it was using its power monopoly in making policies. It did not show transparency when making its policies in that it was unpredictable to those who received aid from it. Therefore, it would be sufficiently and logically sound to say that the IMF is today’s economic nightmare for developing countries given that it determines their fate economically and makes decisions for them. This has been supported by evidence from the 80 developing countries that are being governed by the institution. Their economic status have worsened following the huge debt that was being offered by the so called “rescue package.” It was hard for the government to change the exchange rate when it dint even know that its economy was in a bad condition. This was all due to the fact that they were not allowed to manage their own currencies. The IMF also introduced structural adjustment programmes whose aim was to permit the economy of the developing countries to be based more on the global market forcing them to concentrate on trading for exports in order to uplift their economy. Countries that adopted this system in their economy received financial and monetary support limiting those who did not adopt this system. The system also included planting of one type of cash crop, for example, tea or coffee, in order to use them as a means for export and privatizing government-run enterprises. Conclusion To say that the current global monetary regime has have worsened the economy of the developing countries is an understatement. What they have really done to these countries is unspeakable. These powerful financial institutions have in fact created a new level of poverty in these countries: one that involves huge debts and excessive borrowing from richer countries so that despite the aim of the Bretton Woods to improve the economy of developing countries, it has ironically worsened it (Ruggie and Gerard, 2003, pp 563) The most degrading thing that these financial institutions have had on these poor countries is lowering the dignity of the citizens (Oran, 2001). They have accomplished this by insisting that these countries lower their living standards through cutting down of costs in the health sector therefore resulting in infectious or contagious diseases and malnutrition while focusing in its attention on repayment of debts and economic policies. This is almost an abuse of human rights. The IMF and the World Bank should therefore be subjected to reforms as current forms of global monetary regimes. Instability is therefore rampant in these countries which seem to fight so hard to alleviate poor economy and reduce the level of poverty. Use of external assistance has posed to have a more native effect than the benefits it gets from them. Most of them have opted to different methods of encouraging development like encouraging more exports than imports and creation of suitable environment for investment. With the above effects on countries stability it is evident that current global regimes like the Britton Wood system are not encouraged to developing countries. This kind of measure is encouraged by Hasenclever (2000, pp 27) Bibliography Amato, J. and Furfine, C. 2003, 'Are credit ratings procyclical?', BIS Working Papers no. 129, February. Amato, J. and Shin, H. 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