International Monetary Fund
| the IMF
International Monetary Fund |
|
last updated 2005
Nov 07 (2007 Oct 10 added 2 examples of IMF forecasts at the end)
read
also http://www.boston.com/news/nation/washington/articles/2007/10/01/india_loses_to_canada_italy_for_imf_policy_post/
| INTRODUCTION | This unit discusses
|
Russian flag |
What
does the IMF do to help countries in trouble, particularly trouble with
exchange rate fluctuations?
"When Russia was facing severe economic challenges in the wake of the Asian Financial Crisis, the IMF stepped in to provide some financial assistance. It provided a loan of $4.5 billion to support the government's 1999-2000 economic program." Here is the "kicker" - the IMF, by virtue of providing the loan, required quarterly reviews and the Russian government had to meet certain performance criteria. The IMF challenged the Russian government to be more effective at collecting taxes since it was the absence of revenue from taxes that caused the Russian government to be short of money. "The
IMF negotiates with a country to provide financial assistance if the country
will agree to adopt certain policies to stabilize its economy"
|
| KEY
POINTS |
The old MGTC44 textbook
only discussed the IMF on two pages, with some other references scattered
around. This is too brief for the role that the IMF has come to play in
2004 and 2005. We will therefore use the IMF's own web page, and some articles
online, to allow you to understand the current issues - some which are
very controversial and effect the sovereignty of particular countries in
Africa and Asia-Pacific.
In International Business courses taught in the early 1990's, the IMF, WTO, World Bank etc. only merited brief mention. In the late 1990's and the early part of the new millennium, the IMF and the other large NGO's have activities and circumstances which result in significant effects on countries and companies - at both the macro and micro level. (added Oct 2007from www.imf.org/external/news/
WTGR |
The best explanation of the IMF is the first paragraph on their "about.htm" page, seen in the screen capture below
 |
"The IMF is 0 an international organization of 182 member countries, 0 established to promote international monetary cooperation, 0 exchange stability, and orderly exchange arrangements; 0 to foster economic growth 0 and high levels of employment; 0 and to provide temporary financial assistance to countries 0 to help ease balance of payments adjustment." |
IMF
vs. World Bank
 |
MGTC44 student
David Dallaire sent Prof. Richardson an email in October 2005 saying
"The
differences between the IMF and World Bank are difficult to grasp when
initially introduced, and consequently easily confused. I found
this link on the IMF site and thought it may be of help to those students
having difficulty differentiate the two"
WTGR replies
|
| IMF
vs. World Bank |
from
www.imf.org/external/pubs/ft/exrp/differ/differ.htm
"The fundamental difference is this: the [World] Bank is primarily a development institution; the IMF is a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations" "To help nations ... the IMF administers a pool of money from which members can borrow when they are in trouble. The IMF is not, however, primarily a lending institution as is the Bank. It is first and foremost an overseer of its members' monetary and exchange rate policies... It receives frequent reports on members' economic policies and prospects, which it debates, [and] comments on..." "IMF is not a bank and does not intermediate between investors and recipients. Nevertheless, it has at its disposal significant resources, presently [2005] valued at over $215 billion. These resources come from quota subscriptions, or membership fees, paid in by the IMF's 182 member countries. Each member contributes to this pool of resources a certain amount of money proportionate to its economic size and strength (richer countries pay more, poorer less). While the Bank borrows and lends, the IMF is more like a credit union whose members have access to a common pool of resources (the sum total of their individual contributions) to assist them in times of need.." |
"What are the sources of IMF finance?" - Special Drawing Rights SDR
The SDR is an international
reserve asset created to supplement member's existing reserve assets. SDR's
serve as the IMF's unit of account and are used by the IMF for transactions
and operations"
Daniels
" The bulk of the IMF’s resources
derives from members’ subscriptions (called quotas) that are based on each
member’s relative size in the world economy. Quotas determine the maximum
amount of financial resources that a member is obligated to provide to
the IMF, voting power in IMF decision-making, and a member’s share of Special
Drawing Rights (SDR) allocations (the international reserve asset
created by the IMF). The financial assistance a member may obtain
from the IMF is also based on its quota."
| KEY
POINTS |
In order to lend
money to someone - you have to possess money yourself. If you want to lend
a large amount of money - you need to possess an equally large amount of
money.
It sounds simple but it is a fundamental way of looking at how the IMF works. The IMF itself does not have under its own control enough money to lend to those who need it - so - what it does is hold money given to it my wealthier nations and with this money it in turn lends it out to those that need it. WTGR |
In what form does the SDR exist?
"Initially, the value of
the SDR was defined in terms of one US-$, which in turn was defined in
terms of an ounce of gold: $35/oz until 18-Dec-1971; Since July 1974 the
SDR has been defined in terms of a basket of currencies. This basket consisted
initially of 16 currencies and was reduced to 5 in 1981." [WTGR - it was
further reduced to 4 currencies in 2000]
http://pacific.commerce.ubc.ca/xr/SDR.html
The SDR is not physical
money like gold or some other currency - it is a value unit composed of
the
"weighted average of five
[now 4] currencies"
| KEY
POINTS |
Because the SDR is composed
of 4 currencies, its value changes all the time because the value of those
4 currencies is always changing on the world market in relationship to
each other - so the IMF posts a page on its site identifying this value.
WTGR |
These currencies that make up the SDR are
| (5 currencies in the 1990's)
o U.S. dollar o Euro (Germany) o Japanese Yen o Euro (France) |
(changed to 4 currencies
in the Millennium)
o U.S. dollar $ o Euro o Japanese Yen ¥ o British Pound £ |
Since 1981, the weight of
each of these currencies has been changing every 5 years. The table below
shows the weights for the present, and immediate past periods.
Old weighted
values 1991 - 1998
|
New weighted
values 1999 - 2005
|
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The Dec 2000 press release
on the IMF web site, explaining this,
[witiger added in the coloured
lines for emphasis]
IMF has a surveillance program
"The IMF has a surveillance
program where it monitors the economic policies of countries that would
affect those countries exchange rates".
Daniels
From the IMF website http://www.imf.org/external/np/exr/facts/banking.htm
"The IMF seeks to improve
a country's macroeconomic environment and policies through a regular dialogue
with its national authorities. As regards financial system surveillance
in particular, the IMF, in cooperation with other institutions and
as part of its adaptation to the demands of the global economy, is
deepening its surveillance and emphasizing its quest for transparency by
a further increase in the coverage of financial system issues. Such
efforts are designed to lessen the frequency and diminish the intensity
of financial system problems in the future, through better identifying
financial system strengths as well as potential weaknesses
that could have major macroeconomic implications."
.
| KEY
POINTS |
The best way to understand
something is to understand it in the context of a real circumstance - so
in this course we will look at the IMF's involvement with 6 countries.
WTGR |
| IMF |  |
"Pakistan gets IMF bailout,
but problems persist "
is the title of an East-Asian newspaper story in Oct 2000 |
This example serves to explain the great extent to which national government leaders are trying to accommodate IMF requirements in their national policy making.
In Pakistan in 1999, Nawaz Sharif was overthrown by General Pervez Musharraf.
Despite the fact that it was a military takeover the General has been quite aware of the power of the IMF in the context of his country's sovereignty and is doing his best to appease the IMF.
The article says "... The economic policies of the Musharraf government have focused on meeting the IMF conditions."
Pakistan has been trying
hard to stay solvent, as a country and receiving money from the IMF has
been key.
"Finance Minister Shaukat
Aziz announced a $3.5 billion bailout package from the IMF to help
keep Pakistan from defaulting on foreign debt repayment. However,
final approval from IMF is still awaited. "This could be a turning point
for Pakistan's economy because it is seen as validating the country's
policies and building investor confidence," Aziz said about the deal."
.
| IMF |
 |
South Korea
the Positive & Negative Impact of the 1997 IMF bailout plan on South Korea |
Positive Impact
"Since the implementation
of the plan, Koreans have by and large engaged in less over-consumption
and have been shifting towards the purchase of cheaper and domestically
produced goods. Imports of foreign goods like automobiles and liquor have
also fallen, which has helped alleviate their huge trade deficits."
.
| KEY
POINTS |
The problem of over-consumption
is said to be a consequence of the world-wide marketing drives of North
American and European consumer products companies. These marketing activities
has caused a demand among people (in many countries of the world)
that do not have the money to afford the products - so they borrow in order
to acquire, what many consider, non-essential items.
WTGR |
CNN reported the situation
in South Korea in November 1997 saying
www.cnn.com/WORLD/9711/22/s.korea.imf/
"South Korea announced it
was asking the IMF to organize a bailout package. In exchange, the
IMF is likely to order deep spending cuts, lower import tariffs,
higher domestic taxes, the elimination of shaky banks, and the forfeiture
of some national decision-making power to lenders"
.
How did the situation
develop in South Korea that required the IMF?
CNN says "the answer seemed to be unanimous: corrupt politicians and businessmen who wheeled and dealed during South Korea's boom years."
"South Korea's stunning economic
growth rates -- averaging 8 percent annually over the past two decades
-- were largely fueled by the fast expansion of a dozen family-controlled
conglomerates. Past military governments provided cheap loans, tax
breaks and other benefits to help the corporate giants expand and mass-produce
cars, television sets, microchips, petroleum products and other goods.
The business groups account for half of South Korea's industrial output
and lead its export-driven economy. They supply one-quarter of the world's
computer memory chips and account for about 30 percent of the commercial
shipbuilding orders. The economic boom also had negative impacts,
triggering unbridled land speculation and environmental exploitation. Bribes
to police and public officials became common. The problems came to
a head this year when the economy slowed down, sales dropped, and some
of the weaker conglomerates went belly up, saddling banks with $26 billion
in bad loans."
.
| IMF | |
Russia and the IMF
www.cnn.com/WORLD/9611/21/russia.economy/ |
| KEY
POINTS |
The point being, if the
IMF lent money to the Russian government - how could they be sure the government
will in turn be able to collect money (which is why state's tax their citizens
and companies) to pay back the loan.
WTGR |
"The Russian financial
crisis demonstrates the failings of the IMF on several fronts:"
http://www.heritage.org/library/lecture/hl626.html
| IMF |  |
Mexico 1995 |
How did Mexico get help?
"IMF pledged up to 17.8 billion
dollars in financial assistance in the form of a stand-by arrangement to
be disbursed over an 18 month period. Additionally, the Bank of Canada
pledged 1.5 billion Canadian dollars (approximately 1.1 billion US dollars)"
.
| IMF |  |
Indonesia
"Under heavy pressure from wealthy nations that control its policies, the fund demanded a king's ransom from Indonesia as the price for its $40 billion assistance package." |
"Study Says IMF's Hand Often Heavy"
Kahn writes an article based on a [2000] study of how the IMF made decisions on several countries. The study was done by Morris Goldstein, who is now an economist at the Institute for International Economics
Kahn writes "Terms for rescuing nations from economic oblivion around the world during the emerging-market financial crisis of the late 1990's, was often criticized as the International Monetary Fund's equivalent of imperial overstretch. Now a new study using the fund's own unpublished data suggests that the critique may have actually underestimated the fund's commandeering approach.
Kahn says "Indonesia was
told to raise taxes on state-owned companies; cancel 12 road, bridge and
port projects; remove protections on dairy farmers; and eliminate price
controls on cement — part of a long list that at one point included 140
items, the study shows. The idea was to convert Mr. Suharto's
Indonesia, which had a partly capitalist economy plagued by corruption,
into an open, competitive and stable free market economy. Even though few
mainstream economists argue with the goal, the methods are coming
under new scrutiny. "I think it's clear that both the scope and the
depth of the fund's conditions were excessive," said Morris Goldstein.
Goldstein said that the recent push for radical overhauls of nations that
borrow money has undermined the fund's reputation and strained its competence.
"They clearly strayed outside their area of expertise," Mr. Goldstein said.
"If a nation is so plagued with problems that it needs to make 140 changes
before it can borrow, then maybe the fund should not lend."
.
| IMF |  |
Argentina
"Argentina secured a US$4- billion lending package in December, 2000, that was led by the IMF" |
Jacqueline Thorpe wrote a
story in the Financial Post, in July 2001 that said "... International
Monetary Fund said it was not studying plans to grant Argentina more funds
to help it through its financial crunch."
| KEY
POINTS |
The Argentinian government
has publically stated a variety of plans to solve it's crumbling economy
- but one of the stumbling blocks (which was also a problem in Russia)
is collecting tax: - tax evasion remains a big problem. The IMF expresses
concern about Argentina's problems collecting taxes from businesses because
if the government cannot collect money to pay the debt, then the economy
will collapse completely.
WTGR |
McMahon's article explains how Argentina developed problems and how those problems are compounded today by situations that will be difficult to change.
"... Argentina has huge policy problems, especially at the micro level. That's led to trouble with costs and productivity...The economy is highly politicized and corruption is rampant. Key government duties, like education and infrastructure, get neglected..."
McMahon's complete text is
at
http://www.witiger.com/internationalbusiness/IMF~argentina.htm
Fred McMahon manages the
Economic Freedom of the World report at the Vancouver-based Fraser Institute.
E-mail: fredm@fraserinstitute.ca
.
| IMF |  |
Japan
examples of IMF commentary on large economies |
| KEY
POINTS |
The reason for mentioning
Japan is that Japan is the second largest trading partner with Canada -
therefore things which negatively effect the ability of the Japanese economy
will impact on Canada.
WTGR |
 |
article from the Toronto Star about the IMF's concern about the global implications of a recession in Japan [2001] |
 |
An earlier article in May
2001 about the IMF concern for Japan.
IMF states that "Japan needs
to ease monetary policy"
|
| IMF
commentary |
Leaders of
NGOs like the IMG, World Bank, OECD often seek to gain publicity for their
organizations by issuing statements about world events and commentary on
the development of situations.
The head of the IMF and the World Bank are often quoted in major newspapers and online media sources for their statements on current issues In November of 2005, Rodrigo
Rato, current Managing Director, was quoted by Associated Press as saying
|
| IMF
forecasts |
NGOs like the
IMG, World Bank, OECD often seek to publicity for their publications, reports
and forecasts. Many times these reports are used by other governments and
organizations around the world to support various conclusions.
|
| IMF
forecasts |
NGOs like the
IMG, World Bank, OECD often seek to publicity for their publications, reports
and forecasts. Many times these reports are used by other governments and
organizations around the world to support various conclusions.
|
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Prof. W. Tim G.
Richardson © www.witiger.com 
