International TradeInternational Monetary Fund
... I. Changes and Problems around the world „X Changing role of the IMF Prior to 1973, the IMF had a clear role: the world¡¦s currencies were tethered to gold and the fund bailed out countries running out of dollars. But since President Nixon eliminated the gold standard, countries have had the option of letting their currencies float in value, helping to eliminate persistent balance-of-payments deficits without outside support. The fund had to scrounge for a new mission. By the early 1980¡¦s, it had settled into lending to countries hit by massive capital flight. During the large debt crisis in that years, the I.M.F. helped many less developed countries (LDCs) out, in correcting their balance of payments and by supporting their economic situation, but many if these countries are still very poor and suffering from a slow economic growth. This leads to the doubt in the effectiveness of the International Monetary Fund¡¦s way of lending to less developed countries and that it does not support LDC¡¦s to recover from their economic difficulties. Many less developed coutries, which used loans from the Fund, are still in an underdeveloped situation and are not able to create a stable economic system and some of them are even less developed that less developed countries who did not receive any loans from the fund. This also shows a change from the original role and intention and purpose of the International Monetary Fund. Today, however experts discuss whether the IMF should limit its role or grow. Its structure harks back to its founding 50 years ago and ill serves the today¡¦s needs argues one side. And even if the I.M.F has the will to change, it no longer has the way to impose its views. Almost every economist agrees that it cannot perform its current mission with the sums, currently down to well under $100 billion, left for operations. This is not even enough to bail out Brazil without imposing a severe recession. If the members of the I.M.F could settle the issue of exchange rates, many of other policy issues would fall quietly into the line. Countries adopt a fixed exchange rate, a pledge to convert currencies into dollars at a present rate, in part to reassure investors that their money is safe. But fixed rates get countries into financial trouble when, for whatever reason, investors get spooked and all rush for the exits at the same time. With trillions of dollars cirulating around the world capital markets, the dollar reserves of nearly every country can be decimated in days or even shorter. The result is that countries that pledge to preserve fixed rates at any cost are sometimes forced to do exactly that: Sweden in 1993, Brazil today and scores of other countries whose currencies have come under attack have been forced to raise domestic interest rates to 40, 50 or 100 percent or more to convince investors to stay (NYT 9-30). High rates can stop the outflow of dollars, but they also crush the domestic economy. The leading decision makers in the International Monetary Fund won¡¦t have the luxury to rebuild the financial system until they stop the crisis. That is why specially now Brazil is so crucial. Latin Anerica¡¦s largest economy lost third of its hard-currency reserve in September and now has just $45 billion (BW Oct 19) to defend the real. The $30 billion rescue would but time while newly re-elected President F.H. Cardoso reins in a soarung budget deficit. Brazil¡¦s trouble arose partly form unlucky timing, its victory over inflation was still unconsolidated when the Asian crisis struck, but mainly because its politicians had seen no urgency in tackling the fiscal deficit as long as foreigners were ready to finance it. Indeed, the fund is criticized for strangling a few economies last year by needlessly insisting they impose sky-high interest rates as part of their fund-approved packages. Furthermore, professionals argues that fixed rates do not work well with unlimited capital flows. In this case a possible answer to solve this problem would be, to let currencies float freely. The result would be that the possibility of sudden currency collapses, like in Argentina and Brazil, would be minimized. The fund would only help when the currency is set free. The money would be used to mitigate the impact of devaluation on the poor and to reassure investors that the country¡¦s finances would be sound and its currency unlikely to plunge much further. Another and different conclusion of economists believes in minimizing the role of the fund, whose bailouts have done a lot of harm (NYT 9-30). However, economists who tie themselves to fixed rates also tie themselves to the I.M.F. The world simply needs some institution to lend money to countries whose reserves are temporarily under attack. Another major problem is that, relatively few empirical studies have attempted to estimate potential output for developing countries, owing mainly to the lack of reliable data. In addition, the concept of potential output is less meaningful for countries in which a large proportion of output is accounted for by primary commodities whose production is supply-determined, or which are experiencing large inflows or outflow of labor.(IMF WP/97/177) „X Background on the Asian Financial Crises In today¡¦s increasingly intertwined global economy, most developed and industrlized countries have an important national interest in working to stabilize the economies of its trading partners around the world. Failure to act could result in serious harm to different economies. It is of nobody¡¦s interest to see East Asia¡¦s capacity to purchase ones goods collapse in the wake of their current financial crisis. Further, reductions in Asian purchasing power mean lower profits for foreign companies operating in Asia and fewer high-paying jobs in countries export industries. The Asian economic crisis of 1997-98 has posed some interesting questions for the economics profession in general and the I.M.F. in particular. The I.M.F. came into being as one of the post-war ¡§Bretton Woods¡¨ institutions. Its mandate was to provide emergency finance for countries struggling with severe balance of payments problems. It became, more or less, the receiver to ¡§bankrupt¡¨ nations. And it was dominated by its shareholders, the largest western economies. In Asia, as was strongly noted at the IMF¡¦s recent annual meeting in fall in Washington DC, the IMF model seems to be unworkable. The governments of Asia ¡V of South Korea in particular ¡V had already played the correct game. The financial problems were rooted in the private sector, but not in the private household sector. Asians were and are famous for their high rates of personal savings. East Asia had severe balance of payments problems despite rather than because of Asians¡¦ savings behaviour (Asia, New Zealand & the International Monetary Fund Keith Rankin, 1 June, 1998). The problems arose because investors in the west saw Asian economies as being miracle economies, and they invested much of their money in Asia, believing that Asia offered some of the best short-run returns on offer. Thus Asia, with a capital account surplus driven up by bullish sentiment in the west, ended up with an accumulation of current account deficits and a whole lot of poor quality investments*. While each of the Asian countries enjoyed decades of strong growth and rising standards of living for their people, they also had deep seated common and individual problems. At the core, for all of them, close links between governments, banks and corporations led to fundamentally unsound investments by corporations funded by unsound lending by banks. Their financial system lacked transparency, which masked the extent of their problems. They had inadequate financial regulation and supervision. In short, the essential underpinnings to a modern financial system were weak or did not exist. Additionally, several economies had large current account deficits, fixed exchange rates and inadequate monetary policies, simple speaking an unsustainable combination. When these crises began, foreign investors started to withdraw capital, local companies sought to hedge hard currency exposures, exporters stopped bringing their export earnings home, and citizens moved their savings abroad. It is now commonly accepted that most of the pressure on these currencies came from local sources and not foreign investors (IMF source). This process brought stock prices and land values down sharply across the region, imposed severe strains on Asian banks and companies, and led to acute depreciation of exchange rates and greatly reduced or negative economic growth. For each of the affected economies (the Philippines, Thailand, Indonesia and Korea have requested and received assistance from the I.M.F.), the question of when their financial and balance of payments situations will stabilize depends, first and foremost, on whether and how aggressively they implement their policy commitments. „X Currency & Inflation The IMF policy of lending increases the risk of inflation and has a significant influence on the exchange rates and currency values of the borrowing countries. This makes it even harder for these countries to get their economy going. In order to participate in a so called ¡§Structural Adjustment Program¡¨ a borroing country has to increase prices for agricultural products as well as commodities. Because of the required devaluation of the country¡¦s currency the prices for imports increase drastically. To by goods from foreign countries the borrowing country has to pay more of its own currency in order to purchase the foreign currency. This increases the risk of inflation and has a significant influence on the exchange rates of the less developed country. A price increase causes an increase in consumer prices, which also leads to an increase in the inflation rate. Very often borrowing countries already have very high inflation rates and therefore there is no interest in increasing it any further. It is necessary and important to work towards a lower inflation rate. Furthermore, lay-offs in the workforce will increase the unemployment rate and result in less investment in the national economy. „X Theory and Praxis The International Monetary Fund only lends money to a country, if the borrower agrees to impose structural changes in its political and economic environment, which are edited or have to be authorized by the I.M.F. These structual adjustments should support the borrowing country in establishing a working economic and political system, which can provide the people with all necessities and stabilize the nation in the long term. Therefore, does every country have to agree to such structural adjustments and has to accept a free market policy in order to be eligible to receive loans. Structural adjustments include the following conditions (50 years is enough). First, to become more efficient the government has to sell state enterprises to private sector. This will dissolve the monopolistic position of the government and will support the development of more competitive companies and therefore of better produced goods. The second condition is an increase in prices for agricultural goods to encourage farmers to expand their business and to enlarge their production. This will reduce the shortfall in food supply for the people. The third requirement is the devaluation of the national currency to let exports become more competitive in foreign markets. A higher demand for the exported products will cause an increase in production and will also decrease the unemployment rate. Fourth, the International Monetary Fund requires the reduction in the government budget deficit by decreasing consumer subsidies and the charge of user fees concerning health care and education. Additionally, to that should trade barriers and regulations be reduced in order to ensure a free trade system and to encourage more trade. It is also important for a developing country to attract foreign investors to abet the inflow of foreign capital to support the own economy. The purpose of all these reforms is to develop a stable economic and political system. The International Monetary Fund¡¦s objective is to support a country¡¦s economic development to solve balance of payments difficulties, and to create a growing economic system. Since the Asian financial crisis, four of the countries in the region (the Philippines, Thailand, Indonesia and Korea) have requested and received assistance from the IMF. In each instance the ...