Q38+-+Development

//**Outline the operations of the International Monetary Fund in the world economy.**//

__ The International Monetary Fund (IMF) was established in Washington DC, 1945, with 39 members. __ The functioning of the IMF involves member states submitting annual membership fees – the amount of which determines their respective voting powers.

Initially, the International Monetary fund was responsible for stabilizing currencies that were unable to maintain the Bretton Woods fixed exchange rate. In doing so, the IMF would monitor the balance of payments and intervene in countries where the balance of payments suffered from downwards pressure. In periods of current account deficit, the IMF allowed countries to borrow money and thus survive such deficits without currency devaluation. The IMF was an international lender, but only of last resort and only to members of the Bretton Woods fixed exchange rate system. In theory, it was to stabilize exchange rates internationally. When the Bretton Woods system collapsed though; debt crises, stagflation, current account deficits, and instability caused a change in the role of the IMF.

What the IMF began to do was assist by connecting lenders in developed nations to indebted nations and enabling loan rescheduling – borrow more for longer periods to amortize current debts. The intervention of the IMF benefitted borrowers too by acting as an insurance that money would be repaid since failing to do so “would pretty much lock the country out of future loans and IMF assistance.” Nonetheless, much conditionality for debtors would be associated with the involvement of the IMF. Today, the IMF still focuses on currency stability and convertibility. It has also been involved with much lending and development projects.

The aforementioned conditionality associated with the IMF is termed stabilization policies. Such policies are market-oriented and are claimed to resolve balance of payments issues, lead to sustainable growth, and allow loan repayment. Policies include the eradication of foreign exchange controls and overvalued currencies, the establishment of freely convertible currencies, raising of interest rates and lowering of government spending to combat inflation, tax increases for improvements in government budget, reduction of foreign direct investment regulations, as well as various supply-side policies and the encouragement of free trade.

//** Photo cred ** **it:** http://en.wikipedia.org/wiki/File: //International_Monetary_Fund_(art.VIII).png

In the above graph ic, countries in dark green are IMF members whereas countr ies in light green are either partial members or non-members. I nterestingly, stability in these light green countries is not particularly high.