The International Monetary Fund - the Bretton Woods Agreement - Case Study Example

THE INTERNATIONAL MONETARY FUND Name Course Date INTRODUCTION The International Monetary Fund is an international institution that is involved in the monitoring and regulating of economic-related matters in the international sphere. The IMF is usually associated with international borrowing transactions involving governments. However, this is just the tip of the iceberg because the IMF is involved in the more serious matters of preventing economic crisis that could cause the collapse of governments. One the tools used by the IMF to achieve its goals is the so-called surveillance system. The surveillance system is conducted on a state-to-state basis by the staff of the Executive on a periodic basis delving into domestic information related to the country’s economy. Although this seems clearly an impingement of a state’s sovereignty, the member-states have consented to by signing the Articles of Agreement for the purpose of achieving global economic stability. Nonetheless, the surveillance power of the IMF is not always effective and seems to have persuasive powers only on those states that need its favour. Those who have no need of it, tend to ignore IMF recommendations resulting from consultations during surveillance. In theory, the surveillance system of the IMF is important because of the public good it engenders although despite its tendency to infringe on the sovereignty of the state, but in practice, the system is flawed and is being weakened by the overall impression that the IMF is incapable of being independent and is ineffective in achieving the ends of its functions. HISTORY AND STRUCTURE 1. The Bretton Woods Agreement In July 1944, some 45 countries met in Mount Washington Hotel in Bretton Woods, New Hampshire. This was the time when the Great Depression – the most severe depression in the 20th century- had just eased up and countries were in the process of recovering. Before that meeting, countries scampered to adopt various measures to recover from the depression, such as more stringent foreign trade rules, competing harder and prohibiting against holding foreign exchange. This had a disastrous effect of slowing down international trade. To remedy the situation, Harry White of the US and John Keynes of the UK met and discussed economic-related measures to prevent another depression (Woods 2000; IMF 2013; Vreeland 2006). The idea of creating a body that could function as the heart of the economic framework was hatched and the International Monetary Fund or IMF was created. IMF’s original function was a regulator of exchange rates an authorised lender of money on a strictly short-term basis to countries experiencing crisis on balance of payment (Woods 2003). The Bretton Woods Agreement was initially signed by 29 countries and became effective on March 1, 1947. That very same year, it lent money to France – its first borrower. The US helped shore up the IMF’s funds through the Marshall Plan infusing $13 billion between 1947 and 1953. In the late 1980s and into the 1960s, the IMF’s membership expanded, particularly countries coming from the African continent. As the Cold War became heated, however, most Soviet allies avoided membership in the IMF. The Bretton Wood system of exchange was originally based on the gold standard and the US dollar, but this collapsed in the 1970s and the floating rate exchange was adopted in its stead. Headquartered at Washington, D.C., the IMF has currently 188 members and maintains a staff of 2,670 from 64 countries. As of 2013, it has a total quota of $360 billion with additional committed resources of $1 trillion and $233 billions of committed loans, $162 billions of which have not yet been drawn. Article 1 of the Articles of Agreement lays down the six objectives of the IMF. These include the following: promotion of international monetary cooperation; facilitation of the development and balanced growth of international trade; promotion of the stability of current exchange; assisting in the establishment of a multilateral system of payments; assisting members through the availability of its general resources; and, easing and limiting the period of imbalance in the member states’ balance of payments (Articles of Agreement of the IMF). 2. The Structure of the Organization Fig. 1 shows the organization chart of the IMF. As can be seen, the three main bodies constituting the IMF are the Board of Governors, the Executive Board and the Managing Director, all of which have attached agencies. The Board of Governors is comprised of 1 representative from each country, usually the country’s central bank governor. It is the Board that determines the acceptance of new membership into the Fund as well as their quotas. A member’s quota determines the number of votes that it can cast and the subscription size or amount it can borrow from the Fund (Mountford 2008). A look at the Fund’s quota list shows that the USA has the largest quota at 16.75, and in a descending order followed by: Japan, 6.23; Germany, 5.81; France, 4.29; UK, 4.29; Italy, 3.16; China, 3.81; Saudi Arabia, 2.80; Canada, 2.56; Russian Federation, 2.39; India, 2.34; Netherlands, 2.08; Brazil, Belgium, 182; 1.72; Switzerland, 1.40; Spain, 1.63; Mexico, 1.47; Korea, 1.37; Australia, 1.31; and, Venezuela, 1.08. The rest of the member countries have each less than 1% of quota allotted to them (IMF 2013). On the other hand, the Executive Board conducts the day-to-day business of the Fund, develops policies and is responsible for the Fund’s lending operations. Currently, there are 24 members of the Board, five of which are appointed by the members with the largest quotas or largest shares in votes whilst the 19 other members are elected by the other 180 member-states. The members of the Executive Board serve on a full-time basis and receive pay regularly (Mountford 2008). Fig. 1 IMF Organization Chart The Managing Director is the Chairman of the Executive Board and is the chief of operating staff of the Fund. Thus, it is within the power of the Managing Director to hire, organise and terminate the staff of the Fund. It is also a practice for the Managing Director to appoint a Deputy Managing Director. The staff, which is under the control and supervision of the Managing Director, is mainly a group of economists numbering about 2.630 as of 2007 (Mountford 2008). Surveillance Power of the IMF To achieve its mandate as set out in the Articles of Agreement, the IMF carries out several functions. In summary, these functions are as follows: surveillance over member-states’ economic policies; assisting in temporary problems in balance of payments; helping member-states combat poverty; stimulating the mobilisation of external financing; fortifying the international monetary system; augmenting the supply of international reserves; offering technical assistance and training to help build capacity, and; spreading information and research (fritz-Krockow and Ramlogan 2007). Of the aforecited functions, the conduct of surveillance is the most significant function of the IMF. Surveillance has the potential to prevent global economic crisis. The surveillance function has its origin in s 3(a), Article IV of the Articles of Agreement, reproduced below: Section 3. Surveillance over exchange arrangements (a) The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article. (b) In order to fulfill its functions under (a) above, the Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies. Each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies. The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members. In order for the IMF to properly conduct surveillance, Article VII grants it authority to require members to furnish it with certain necessary information. This information may include data on ‘ the balance of payments, external reserves, exchange controls, the international investment position, national accounts, prices, the central bank, and the banking system’ (cited in Fritz-Krockow and Ramlogan 2007, p. 8). As can be gleaned from the aforecited provision, the surveillance mechanism is underpinned by the greater goal of effective operation of the international monetary system and it is meant to be applied to all and every state without taking into account the quota system. The second paragraph of the aforecited provision lays down the manner with which the IMF may conduct the surveillance, which can be characterised as impinging into the sovereignty of a state despite the language being used. Thus, not only can the Fund exact information about the economic condition of a state, but imposed an economic policy which it has determined is better than the one being implemented in a given state. Moreover, it can ‘request’ a state to consult it first before coming out with its own economic policy. Aside from the statutory bilateral surveillance provided under Article IV, the IMF may also conduct multilateral surveillance, which is non-mandatory and consensual in nature as opposed to the mandatory character of the former. An example of this type of surveillance is the Financial Sector Assessment Program or FSAP and the Financial Sector Surveillance or FSS. Both these surveillance involved the investigation by the IMF of the financial sector, which became evident immediately after the Mexican crisis in the 1980s (Gola and Spadafora 2009). Another form of surveillance conducted by the Fund, which is outside the purview of Article IV surveillance, is regional surveillance. This kind of surveillance is conducted on a region, such as supranational, as opposed to a singular state surveillance. For example, the IMF conducts a bi-annual conference with the agencies of the EU tasked with the shaping of policies of the region on top of the surveillance it conducts on individual states within it (Fritz-Krockow and Ramlogan 2007). An actual surveillance conducted on a state involves a yearly, or twice a year, visit by IMF economists to the state. Talks are held not only with the government and its central bank, but even members of the legislatures, business leaders, civil society and labour unions. The topics for the discussions include the country’s exchange rate, monetary, fiscal and economic policies. The results of the discussions and consultations are put into writing and submitted to the Executive Board as their basis for the shaping of its views. Thereafter, the Board transmits their views to the state in question, which is the concluding part of an Article IV consultation (Factsheet: IMF Surveillance 2013). The Uneven Impact of the Surveillance Power of the IMF on Member-States One of the criticisms that have always hounded the IMF is its inherent weakness in enforcing its recommendations on all member-states. A glaring example of this is the dichotomy being observed of the IMF role before and after crisis events. Countries are observed to be welcoming only to IMF recommendations only after a crisis has occurred, but not when there is no crisis or when it is over. The effect of this is damaging because as a result, only short-term strategies are being implemented to ease the impact of the crisis, but long-term strategies, which are often recommended during sound economic times are hardly given importance (Alper and Onis 2012). The underpinning behind the surveillance mechanism of the IMF is noble because it seeks to foster global economic stability and prevent crisis, but it is perceived as dependent on certain countries or group of countries making it less responsive to the international community as a whole. It goes without saying that not all member states are equal and this is evident by the differences in the quotas of the member states and this in itself is perceived as affecting the impact of IMF recommendations at the conclusion of an Article IV consultation. This inequality has spawned power play amongst leading states and between them and the less well of states. The powerful states, because of the weight of their quota can throw their weight around and in effect, diminish the authority of the IMF. For example, the G10, which comprises the states of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States (OECD 2013), conducted discussions on international money matters outside of the IMF, because they felt that a small forum is better than the relatively bigger IMF. Although this produced good results, it also engendered umbrage on the part of those who are members of the G10 (Bossone 2007). This smaller-group-more-effective rationale did not stop with the G10, because in the 1980s, another group called the G%, which later on became G7, all from the large industrial states, bonded together to discuss international monetary matters outside of the IMF. The G7 was even more influential than the G10 directing the IMF to implement its own surveillance strategies and demanding IMF to abide by its own views of how assessments and policy advice are to be conducted. It has been intervening in major policies and surveillance strategies of the IMF before, during and after every economic crisis that affected the world, such as European crisis in 1992, the Mexico crisis in 1994-95, and the East Asian crisis in 1998 (Bosse 2005). On top of this, the IMF is sometimes seen as a dummy of certain world powers, such as the US. In a study made by Dreher (2007), it was revealed that those who were not allies of the US were imposed more stringent conditions when applying for loans with the IMF as opposed to those allies. US allies were not only imposed lesser conditions, but were entitled to bigger amounts of loans those non-allies and states not supportive of US political policies. The political aspect of IMF operation was observed in the case of Argentina and Mexico in the 1980s when the US succeeded in influencing the IMF to extend loans to these countries. The overall effect of the existence of groups that conduct parallel discussions on economic matters that should be in the purview of the IMF as well as the unfairness of loan processing alone has diminished its effectiveness and credibility. This has weakened the IMF as an institution particularly the Executive Board in the conduct of surveillance and the weakened effect is both from an internal point-of-view and external perception of states and other observers. Thus, states have been observed to generally ignore the Board’s recommendations at the conclusion of the consultations perceiving its views as less than effective. Even the Board itself seems to be losing confidence in itself as its recommendations have been perceived to be at times unfocused (Bossone 2007). Conclusion Despite the negativity shrouding the IMF’s surveillance process it is not entirely without weight and influence. In an analysis conducted by Lombardi and Woods (2008), it was concluded that the IMF has a definite influence over some of its members, especially the borrowers. This type of influence is engendered by the manipulation of power relations in which member-states that have a vested interest in earning the favour of the IMF are bound to abide by its surveillance procedures and views. This concession to IMF surveillance is therefore, underpinned by the economic benefits that a state can gain. Moreover, the IMF’s surveillance system is also a source of information for other states and in this respect provides utility and gives legitimacy to the system. Furthermore, the peer-to-peer review aspect of the system encourages the opportunity of communication and dialogue amongst members resulting in shared knowledge within the community of nations. Moreover, the IMF is in the process of reforming its surveillance system. In 2007, for example, in the wake of the most recent economic crisis triggered by the bursting of the US housing bubble in 2006, many countries suddenly showed interest in giving the IMF support to reform its surveillance strategies. The IMF immediately responded by coming up with the 2007 Decision on Bilateral Surveillance Over Members’ Policies and the Statement of Surveillance Priorities or SSP, both of which complemented each other and are geared towards the reinforcement and greater effectiveness of the IMF surveillance system under Article IV. The 2007 Decision was an acknowledgment of the fact that the times have changed and a new surveillance strategy must be put in place that is reflective of these changes. On the other hand, the SSP is a ‘stand-alone document’ that represents the statement of the Executive Board setting out priorities in the conduct of surveillance and an important aspect of it is the integrated accountability of the Board and the staff in pursuing those priorities (Lavigne and Schembri 2009). References: Alper, C and Onis, Z (2012) Emerging Market Crises and the IMF: Rethinking the Role of the IMF in the Light of Turkey’s 2000-2001 Financial Crises (METU International Conference VI Working Paper). Bossone, B (2008) ‘The Effectiveness of IMF Surveillance A study on global financial governance’, World Economics, 9(4). Buira, A (2005) The IMF and the World Bank at Sixty (Anthem Press). Dreher, A (2007) Independent actor or agent? An empirical analysis of the impact of U.S. interests on International Monetary Fund conditions. Fritz-Krackow, B and Ramlogan, P (2007) ‘International Monetary Fund Handbook’, International Monetary Fund. Gola, C and Spadafora, F (2009) Financial Sector Surveillance and the IMF (International Monetary Fund, Working Paper 09/02) (2013) Factsheet: IMF Surveillance. International Monetary Fund. Lavigne, R and Schembri, L (2009) Strengthening IMF Surveillance: An Assessment of Recent Reforms (Bank of Canada Discussion Paper 2009-10). Lombardi, D and Woods, N (2008) ‘The politics of influence: An analysis of IMF surveillance’, Review of International Political Economy (Taylor & Francis). Mountford, A (2008) The Historical Development of IMF Governance (Background Paper 08/02, Independent Evaluation Office of the IMF), OECD (2013) Glossary of statistical terms: G10, Vreeland, J (2006) The International Monetary Fund (IMF): Politics of Conditional Lending, Routledge. Woods, N (2003) ‘The International Monetary Fund and World Bank’, Encyclopaedia of Government and Politics 1, (Routledge, London). Read More