Business Environment-9 Institutions for sustainable economic globalization: International Monetary Fund 1

The past experience Till the second world war, there were ups and downs in international trade. Uninterrupted progress in trade was not possible because: (1) There was occasional trade war. The countries which imported more and exported less blamed the trading partner for trade imbalance. They often resorted to high tariff to protect their interests. The trading partners retaliated. This resulted in frequent trade wars. 2

The past experience (2) There was no institution to address the problem of payment imbalance stemming from trade imbalance. (3) There was no institution to enforce standards and to comply with fair trade practices. (4) Financial instability contributed to political instability which resulted in major wars like two world wars during and

Bretton woods Conference Two important initiatives were taken to build durable peace in post war world. UN was set up to address political issues. Bretton woods conference was held in 1944 to establish order in economic sphere. The conference identified three areas for international cooperation. They recommended the creation of three institutions: 4

(1) IBRD which later was known as World Bank for providing cheap credit for infrastructure and development (2) IMF for ensuring smooth functioning of international payment mechanism (3) GATT or General Agreement on Trade and Tariff to address the problems of trade. WTO is the natural offshoot of GATT. 5

Two main agencies of global economic surveillance 1. WTO 2. IMF 6

IMF (International Monetary Fund) The IMF was created as an independent international organization by the UN Monetary and Financial Conference in Bretton Woods in It is a cooperative of 187 member countries whose objective is to promote world economic stability and growth. 7

Functions of IMF 1. Financing Temporary balance of payment need. IMF lends to member countries that have a balance of payment need to provide temporary respite and enable countries to put in place orderly corrective measures and avoid a disorderly adjustment of external imbalance. These are done within framework of conditionalities of adjustment programs. 8

Functions of IMF 2. Combating Poverty in Low Income Countries. It works closely with multilateral donors in helping poor countries. 9

Functions of IMF 3. Increasing the global supply of international reserves. The IMF is authorized to issue an international reserve asset called the Special Drawing Right. These allocated SDRs are part of net international reserve of members and can be exchanged for convertible currencies. The SDR is also IMF’s unit of account. 10

Functions of IMF 4. Mobilizing external financing. IMF’s endorsement of a country’s policies serves as an important catalyst for mobilizing resources from bilateral and multilateral lenders and donors. IMF assessment is also used by investors and financial markets 11

Functions of IMF 5. Strengthening International Monetary System. It works as a forum for consultation and collaboration of members in international financial and monetary matters. 7. Technical assistance to developing countries and research on international economics. 12

Advantages of IMF 1. It provided a mechanism for smooth monetary transaction in international trade. The creation of SDR supported a larger world trade. 2. It provided balance of payment support to countries in distress. 3. It provided a framework for operation of financial institution. 13

Weaknesses 1. The conditional ties of IMF intensified crisis. For example, East Asia Crisis. 2. The conditional ties impose high social cost– retrenchment, cut in welfare cost, subsidies etc. 3. Partial to multinational companies. This was the main focus in debt crisis. It is also indifferent to environment. 4. Undemocratic. The rich countries own most shares and dominate. No democracy. 14

Main Issues 1.Discuses the main functions of WTO. What are its main weakness? 2.Discuses the advantages and disadvantages of IMF? 15