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Show Hinckley Journal of Politics Spring 2000 International Monetary Fund Reform By Corbin Cowley Recent expansions in trade, investment, and technological capability to transfer financial resources internationally, have led to much larger capital flows. But the major economic problems in many countries, raise questions about the IMF's capacity to handle larger-scale economic crises and widespread investor panic, such as were rampant among international markets in J 997 and J 998. The IMF was created to ensure stability of exchange rates and support international trade and investment, not to manage economic problems of such magnitude. IMF practices generate "moral hazards" inhibiting financial prudence and needed reforms, and tend to involve massive subsidies to borrowing countries. IMF decision making lacks transparency, and the IMF is not really acting as a "lender of last resort." This essay analyzes these problems and proposes major changes. Introduction While serving as a trade intern for Senator Orrin G. Hatch (R-UT) from August to December 1998, I studied in depth, the economies of many countries and the possible effects that the International Monetary Fund (IMF) has on them. Research has led me to believe that the IMF, even with its sound policies, needs to change certain aspects to keep up with an ever-changing world economy. Recent events have raised significant questions about the IMF's ability to slow down a global financial crisis. The international economy has changed drastically since the time the IMF was created and implemented into the global financial system. As international trade, investment, and technological capabilities have grown exponentially and have led to much larger capital flow, more pressure has been placed on developing economies. The IMF does not seem to be able to keep up with the pace of the growth and does not have the resources to help many struggling countries. It is not clear that it should be expected to have an effect on financial markets around the world when faced with widespread investor panic, as we saw in 1997 and 1998. This raises a number of questions regarding how to minimize volatility in the international financial markets, which is considered to be critical in ensuring long-term global economic stability. This essay discusses these questions, drawing upon recent economic and political thought about the ongoing problems that the IMF has faced. Research for the essay has mainly involved j ournal and newspaper articles, IMF documents, and especially documents from the U.S. Congress. Corbin Cowley earned a Bachelor of Arts Degree in Economics from the University of Utah, and currently worlis for Fidelity Investments. History and Purposes of the IMF The IMF was created in 1944, to help countries with balance of payments problems during a time of fixed but adjustable exchange rates. One of the major goals of the Bretton Woods agreement was to ensure the stability of exchange rates to support international trade and investment. Another goal was to provide financial resources for countries with short-term balance-of-payments problems. When countries faced heavy demand for their own currencies, the IMF was available to provide short-term liquidity. This supported fixed exchange-rate values and domestic economic policies, reinforced confidence in the global financial system, and provided the foundation for growth in free trade and investment worldwide (Hornbeck 1998b, 1). While war was still raging in Europe and Asia, representatives from the United States, Great Britain, and other Allied countries met at Bretton Woods, New Hampshire, in 1944 to reach a final agreement on the postwar international monetary system. The delegates at the conference were very well aware of past international monetary systems that had failed. These delegates were convinced that only within an unprecedented degree of international monetary cooperation, could countries hope to forestall a repeating of the condition of the 1930's. The outcome of their conference was the establishment of the International Monetary Fund, an international agency to administer a code of fair exchange practices and provide compensatory financial assistance to member countries in balance of payments trouble (Root 1990, 459). At the close of World War II there was a desire to reform the international monetary system to one based on mutual cooperation and freely convertible currencies. The agreement required that each country fix the value of its currency in terms of gold. This was done to establish the "par" value of IS |