International Monetary Fund in Political Economy Context - Essay Example

Name Class Unit Introduction International Monetary Fund (IMF) was set with an aim of promoting financial stability and international monetary cooperation. This is in a financial world which experiences shocks and crisis. IMF has three main functions which are; provision of multilateral credit, offering technical assistance and international supervision (Gabor, 2010). The main aim is to preserve financial health internationally (Boughton, 2012). Political economy is used to study trade and production and how they are related to law, government and customs. It also looks at how national income and wealth is distributed and its relation to trade and production. Political economy also looks at the way in which political forces impact the economic policies being made, distribution conflicts and the political institutions (Marx, 2010). IMF as an organisation is affected by the political, economic context in which it operates in. this is through the interaction of politics, economics, and different social systems. For IMF, the international political economy affects its activities. This includes various dramatic economic events which include financial crisis, recession and poverty and war among others. There are also impacts caused by the economic globalisation (Gabor, 2010). This report will demonstrate the extent to which the IMF’s activities reflect the political economy context in which it operates. This will be attained through analysing IMF activities based on political economy. The paper will look at Politics economy influence to IMF surveillance, Political economy impacts on IMF voting power, IMF governance and coalitions of power and lastly IMF and the changing political economy. IMF surveillance and political economy To promote international monetary cooperation and stability, IMF uses surveillance as a tool to monitor and collaborate with the member countries (Mussa, 2008). Powerful countries have been pressing IMF to reinvigorate the surveillance activities. This includes IMF role in multilateral forum consultation. This has been based on China exchange rate and its impact on other economies. The existing global imbalances such as the US deficit and China surplus is a major threat to world economy. This has led to calls for IMF to enhance their monitoring in China (Lombardi and Woods, 2008). This is aimed at ensuring that China does not continue manipulating their currency exchange rates (Frankel and Wei, 2007). IMF is under a lot of pressure to exercise their surveillance over the exchange rates. This is to ensure that Asian countries such as China do not engage in a breach of conduct through manipulating the exchange rates (Mussa, 2008). This is proof that IMF activities are prone to political economic context. IMF has been asked to concentrate more with monitoring of the exchange rates, macroeconomic policies and global economic trends. This has been associated with the need to have strong surveillance by the IMF (Lombardi and Woods, 2008). IMF as a multilateral can influence the judgments made by member countries. Based on the international relations theory, IMF can coerce some of their members hence influencing their behaviour. It can also exercise their capacity and resolve collective action problems from its members. IMF agreements forbid the member states from carrying any form of currency manipulation. IMF has the jurisdiction in the exchange rates (Mussa, 2008). In cases where there is monetary manipulation, IMF is forced to act. This is aimed at ensuring that no country gains unfair trade advantage. Despite this, IMF cannot compel a country to change its exchange rate (Bergsten, 2010). It cannot also force the commercial dealers in foreign exchange to change their trading rates (Frankel and Wei, 2007). IMF in these cases is forced to offer economic advice to the affected countries and shows them how changing their exchange rates can be of their interest. Through the executive discussion boards, a country can be urged by other countries to change their exchange rates. However, the final decision rests with the country alone (Mussa, 2008). IMF voting power and political economy IMF voting power is based on the size of the member country financial contribution. This is also known as quotas (Gabor, 2010). Based on their large quotas, rich countries have large voting powers while the poor countries are left with little influence on IMF policies and programs. This has led to a distributional conflict between the rich and poor states who are members. In the past, there was a cleavage at IMF based on the industrial countries which acted as the creditors and developing countries who were the borrowers (Barro and Lee, 2005). Countries such as the USA provided IMF with a lot of financial resources but failed to make use of the lending facilities. This has made countries such as the US be net creditors. On the other hand, poor countries have been using IMF for financial assistance and providing very little resources making them net borrowers. This has made the poor countries subject to IMF policies in a conditional manner. The division has led to tensions based on the governance issues (Boughton, 2012). This is where the rich countries creditors have varying interests based on IMF terms and conditions used in lending among other policies. Giving a greater control to the developing countries has been met with scepticism by developed countries (Barro and Lee, 2005). It is important to note that developing countries make up to 85% of IMF total membership. Despite the large membership, they have a small voice at IMF. This depicts a world made up of rich and poor countries where IMF acts as an international government engaging in redistribution through taxing the economies (Leech and Leech, 2013). Based on the political economy, IMF is highly divided among the income lines (Gabor, 2010). This is where the rich countries fund IMF while the developing countries utilise these funds to balance the payment deficits and also their development. This is what creates tension on who have the control of IMF (Boughton, 2012). Creditors and debtors have varying and opposing interests on the IMF policies (Barro and Lee, 2005). IMF can be treated as a political system which has ability tax and transfer incomes among the rich and poor countries. Based on the political system, it is determined who should vote and who are the decisive voters in the economy. Through imbuing the rich countries through voting power, it becomes possible for IMF to use quota system and finance the organisation redistributive processes (Leech and Leech, 2013). Linking the taxes and voting power leads to an increase in the income gap between the rich and poor. This implies that there is an increase in transfers from the rich to the poor (Boughton, 2012). In this case, the power moves to the poor. IMF governance and coalitions of power Europe plays a major role in any key reform that is carried out by the IMF (Gabor, 2010). At the moment, IMF distribution of quotas and votes is diluted. The United States has a share of 17 % in voting and also a veto power in decisions which requires having 85% majority. The rest of the members in IMF have a low voting power which is less than 7% (Smaghi, 2006). For the rest of the members to reach a necessary majority, they are required to build a coalition. This has led to some of the members countries to come up with groupings which can help them in enhancing their influence on the body decision-making process (Barro and Lee, 2005). Based on the political, economic theory, it is possible to gain insights on the working and importance of coalition building. One of the main insights is effective to influence where the actual voting power is increased. The ability of the European countries to make their partners form coalitions determines their voting power (Smaghi, 2006). The voting power of the European nations is based on the structure of the decision-making the body. The voting power within IMF has been influenced by the ability of the constituents to create coalitions (Boughton, 2012). This makes it possible for countries with less voting power to enhance their contribution through coalitions. The spreading of the voting shares within EU has acted as an explanation on why some of the member states have come up with coalitions (Leech and Leech, 2013). One of the most relevant coalitions is the G7, which has become a winning coalition in IMF. Small EU countries which are not members of the G7 have very little influence in IMF (Smaghi, 2006). IMF and the changing political economy It is important to note that global political economy changes constantly (Copelovitch, 2010). This has made IMF to carry out changes and reforms to meet the demands of the international monetary system. In some instances, IMF has been forced to adjust their institutional fund design to reflect the economic conditions of its member states (King, 2006). In some cases, IMF has been hesitant to change. Despite this, the current realities have challenged the institutional design of IMF leading to calls for reform in the fund governance. The first factor is the emerging markets and developing countries who have been demanding for equitable representation based on their new economic strength (Broome, 2010). The second factor is based on the legitimacy issue. Power politics have been used in the defining of IMF institutional design of the fund. Reforms at IMF have become a reality where politics still has a role in the governing of the fund (Bordo and James, 2000). An example is great recession which started in the US. This showed how fragile developed economies were due to an increase in linkages between national economies and financial globalisation (Copelovitch, 2010). The rise of emerging markets and an increase in Globalisation, regionalisation, and lack of a single clear economic guideline to regulate global economy has led to legitimacy issues. The global economy is made of complex and interconnected financial markets (Broome, 2010). The fast flow of capital in the global economy has made economic crisis to move from one economy to another. Before the recession, IMF was facing a crisis due to the fact that it was losing customers hence facing cash flow problem. This was putting IMF in a risk of losing its legitimacy (Copelovitch, 2010). During the recession, there was high demand for assistance from the wealthy and middle-income economies (Broome, 2010). When facing volatile financial situations, IMF acts as a lender of last resort. This is aimed at maintaining financial stability globally. This makes IMF one of the most powerful institutions globally (Broome, 2010). IMF has been forced to respond to the changes in the world political economy. This is through making reforms to IMF internal governance and meeting the challenges of financial architecture which is changing (King, 2006). It has also been made to respond to the power politics which are associated with the international organisations. IMF has been made to draft and facilitate mutually beneficial agreements. There have been reforms aimed at reducing the gap between the rich and poor countries in IMF (Bordo and James, 2000). The legitimacy issue is still a major hurdle in IMF. The current political economy has led to pending reforms aimed at reducing the members of developed economies in Europe from the board. This is another proof that political economy has a great impact on the IMF operations. The activities of IMF reflect the political economy in which it is operating from (King, 2006). The role played by the political economy issues in IMF cannot be ignored. Through the government reforms, it becomes possible to have a strong fund (Boughton, 2012). This has benefits for the wide global community. However, these reforms have high individual costs in some of the rich countries (King, 2006). Giving out their relative power with an aim of reinforcing IMF is made complex by the country’s political considerations. It is thus correct to say that current reforms in IMF are all based on the political economy. They reflect the organisation interaction with the political economy in context (Bordo and James, 2000). Conclusion For IMF, its activities reflect the political economy in the context in which it is operating. Looking at IMF surveillance, it is shaped by the political economy in place. This can be well explained in the case of China who has been accused of manipulating the foreign exchange rates. IMF has been called to enhance their monitoring on China to ensure there is a fair trading ground. When there is monetary manipulation, IMF is made to act. The organisation activities at this time interact with the current context of political economy. Another activity at IMF which reflects the influence of political economy context is voting power. This is due to fact that quotas are based on the country financial contributions making the USA have great voting powers. This has led to a distributional conflict between the rich and poor states who are members of IMF. The political economy context makes IMF be divided between the income lines. With the changing political economy, IMF activities have been highly affected. This has forced IMF to carry out reforms aimed at meeting the demands of the international monetary system. Changes in the world political economy force IMF to make reforms which affect their activities. This shows that activities of IMF reflect the context of the political economy. References Barro, R.J. and Lee, J.W., 2005, ‘IMF programs: Who is chosen and what are the effects?’ Journal of Monetary Economics, Vol.52, no.7, pp.1245-1269. Bergsten, C.F., 2010, Correcting the Chinese exchange rate, Testimony before the Hearing on China’s Exchange Rate Policy, Committee on Ways and Means, US House of Representatives. 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Smaghi, L.B., 2006, ‘IMF governance and the political economy of a consolidated European seat’, Reforming the IMF for the 21st century, Vol.19, p.233. Read More