| OCR Text |
Show International Monetary Fund Reform Corbin Cowley each currency and was to ensure parity across currencies. The U.S. dollar was the key currency in the system, and $1 was defined as being equal in value to 1/35 ounce of gold. Since all currencies had a defined gold value, all currencies were linked in a system of fixed exchange rates (Melvin 1985, 43). For 25 years after World War II, this international monetary system was based on stable and convertible exchange rates, with occasional devaluation of individual currencies to correct "fundamental" disequilibria in the balance of payments. "This system had many strengths, but it also had many flaws that would sooner or later prove to be fatal." The Bretton Woods agreement, because of mounting pressures in the 1960s, collapsed in 1971 (Root 1990, 458). The IMF situation changed in 1971 when the dollar gold standard was abandoned and the exchange-rate system that the IMF was intended to support came to an end. Soon after, countries started to develop and adopt various types of exchange-rate regimes. Most of the industrial nations opted to float their currencies (Hornbeck 1998b, 1). Many new problems arose for developing countries because of some of the exchange rate arrangements that were implemented. In many cases, they adopted crawling peg exchange rates as part of their stabilization programs. This entailed pegging their currencies to a major world currency such as the U.S. dollar, the Japanese yen, or the German deutschmark. This system was required because of inflation differences between the two countries involved. This policy helped countries reduce high inflation, but it required that other macroeconomic policies be supportive of the exchange rate (Hornbeck 1998b, 2). The IMF is "designed to support global trade and economic growth by helping maintain stability in the international monetary system, primarily by providing technical assistance and financing to countries with balance of payments problems." The IMF initially served primarily industrialized countries by supporting currency convertibility and providing financing needed to defend their pegged exchange rates (Hornbeck 1998a). The mission of the IMF is different from that of other international economic institutions. The IMF is not a development bank, such as the World Bank, Asian Development Bank (ADB), and other regional development banks that focus primarily on lending to poorer nations for specific development projects. It also differs from the Bank for International Settlements (BIS) which is an international bank that is owned and controlled by central banks. BIS provides specialized central banking services, promotes cooperation among central banks, and fosters financial stability among the major industrial countries. The IMF also has a different mission from the World Trade Organization (WTO) which deals primarily with trade in goods and services (Nanto 1998, 11). In Article I of its Articles of Agreement, the goals given the IMF are defined: "1. To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. 2. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. 3. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. 4. To assist in the establishment of multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. 5. To give confidence to members by making the Fund's resources available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in the balances of payments without resorting to measures destructive of national or international balances of payments of members" (quoted in Root 1990, 459-60). The IMF was established to help economies on the verge of economic meltdown. However, as international trade, investment, and technological capabilities have grown exponentially, more pressure has been placed on the IMF. With current policy, the IMF does not seem to be handling this new economy very well. The IMF and the New International Economy The IMF continues to adapt itself to a much different international economy from what it faced when it was created. At one end of the spectrum, some believe the IMF is simply dwarfed, if not made irrelevant, by large private capital markets operating in a world of floating exchange rates. Many suggest reducing the role of the IMF by simply abolishing it. Others believe that it should be merged with the World Bank in recognition of its increased support of developing countries (Hornbeck 1998a, 6). As Martin Wolf (1998) said in his writings to the Financial Times, "the IMF is, it seems, doomed to unpopularity." The responses by the IMF to the Mexican crisis and the recent Asian crises have been very counterproductive. The suggestion that the IMF's capital and facilities should be expanded to permit it to engage in more such activity in the future seems to me very troubling. The IMF is in need of definite reform. Most observers, including UK Prime Minister and head of the G7 group of leading industrial countries Tony Blair, agree that reform is essential (Wolf 1998). The world needs a set of rules and principles to guide economic policies; a vehicle for spreading best practices; a source of technical support; and a body capable of collecting information and providing high quality analysis. These are things 16 |
