International Finance

The international financial organizations were created on the basis of the interstate agreements for the purpose of the regulation of the currency, credit and financial relations between the countries, promotion of the economic development of the countries and credit aid. The International Monetary Fund (IMF) and the World Bank belong to such organizations. The International Monetary Fund (IMF) is a special agency of the United Nations founded by 184 states. The IMF was created on December 27, 1945 after the signing of the treaty between 28 countries; the agreement was developed at the Conference of the United Nations on currency and financial questions in Breton-Woods on July 22, 1944.

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IMF’s Financial Role

The IMF is the international organization which unites 184 states. The fund was created for ensuring the international cooperation in the monetary sphere and maintenance of the stability of the exchange rates; supports of the economic development and employment rates in the world countries; and providing this or that state with additional funds in a short-term period. The main function of the IMF and the World Bank includes the supervision of the world economy, financial and technical assistance to the developing countries, providing them with the necessary financial assistance.

The main financial role of IMF consists in granting of the short-term credits to the members experiencing difficulties with the balance of payments. The members borrowing the IMF’s means, in their turn, agree to fulfill the political reforms with a view of the elimination of the reasons which have caused such difficulties. The amounts of the IMF’s loans are limited in proportion to quotas. The fund also provides the help to the member countries with a low level of the income on the favorable terms.

Globalization brought a huge advantage to many world countries. The integration into the world economy is an integral part of any strategy directed at the giving the chance to raise a standard of living by the states member of the IMF. However, having increased the volume of the international streams of capital and the speed of these streams, it also led to the increase of the risks of financial crises. At the same time, there was a risk of a bigger backlog of the developing countries to which globalization did not bring a considerable advantage as the standard of living will raise in the other countries.

IMF’s Policy in the Financial World

The financial crises in the developing markets reminded the risks connected with globalization even for those countries which derived huge benefit from this process and which in many respects have well adjusted economic management in the middle and late nineties. In particular, for several decades, the international trade, direct foreign investments and access to more and more integrated international financial markets have brought huge advantage to the economy of the countries, affected by the Asian crisis of 1997 – 1998.

The financial help of the IMF to the member states, which had problems with the balance of payments, considerably increased from the period of 1993 – 2003 and is still increasing. During the given decade there were different forms of crediting. All loans of the IMF have a form of the sale of currencies of other his members by the IMF for the corresponding sum of the national currency of the borrower.

The Fund frequently became depicted as a development agency offering concessional assistance to developing countries. Even some of its staff bemoaned what they saw as the loss of its monetary characteristics and consequently much of its financial reputation. The least subtle criticisms of this type tended to use the phrase ‘development agency’ almost as a term of abuse. What the Fund was doing was perceived as being bad in and of itself. The more subtle criticism was that the Fund had largely been pushed by political pressure into lowering its own financial standards.

If the country faced the problems the decisions of which demands a longer time, it can obtain the additional loans on the system of the expanded financing. The means, allocated by the agreements on the expanded access, are usually allocated by parts within three years and are intended for overcoming of the difficulties of the balance of payments caused by the structural problems. The repayment of each part of the loan is made within 4 – 10 years. In 1997-1998 the IMF approved 9 new agreements on the expanded access for total amount of $ 10.1 billion; the IMF had such agreement with 15 countries by January 1, 1999.

Starting from 1993 there was a number of large economic crises which mentioned various regions of the world: Latin America, Africa, East Asia, and Russia. The Mexican financial crisis of 1994, which extended on the other countries of the Latin America, became the first such crisis. This crisis arose owing to many reasons, namely: the deficiency of the balance of payments, artificial support of the exchange rates, insufficient restructuring, a low share of the added cost in the export, prevalence of the development of external sector over internal, danger underestimation of the increase of an external debt, etc.

It is necessary to note that the numerous countries and even separate continents did not feel more or less appreciable positive results from the introduction of the IMF’s programs on the implementation of the effective assistance. Thus, in 1994 the countries of Africa entered the transitional period of stage-by-stage realization of policy of the structural transformations and economic stabilization, offered by the IMF and the World Bank. This policy was called to accelerate the formations of the mechanism of the so-called “economy of offers” as more effective economic model compared to the semi-colonial one.

The share of the IMF’s credits for the structural transformations increased to the record-breaking high mark – 64 % of total amount of the credits in 2002, in comparison with 38 % in 2001 and 47 and 63 % during 1998 and 1999 fiscal years at the times of the Asian crisis. Argentina, Brazil, Jamaica, Tunisia, Turkey and Ukraine are among the countries which were supported by the IMF and the World Bank. They provided the above-mentioned countries with the credits for the purposes of mitigation of the adverse effects of decrease in demand for the goods exported by these countries, the prices for the raw material resources and restrictions of the access to the capital markets.

For some, at least, the IMF’s programme effects were so severe that the Bank and the Fund should be wound up; others preferred the route of radical reform, including, for example, the phasing out of the ESAF.

Analyzing the policy of the IMF in different parts of the world, it is necessary to remember the Asian crisis of 1997. As well as the Mexican crisis, it became a consequence of the deficiency of the balance of payments. The Asian financial crisis became a striking example of the fiasco of the IMF’s financial policy, the organization which was created for the purpose of the overcoming of similar crisis phenomena, but it appeared incapable to stabilize the situation, and even, on the contrary, became one of the factors of the crisis deepening. Some economists began even to call for the termination of the activity of the IMF in general in the view it exists now.

If the Asian and Latin American crises were caused by the similar factors, the Russian crisis of 1998 had another basis. After the disintegration of the USSR the country became on the transitional way from the administrative to the market economy and it required the considerable funds for the implementation of reforms. Up to 2003 Russia attracted the international financial resources; therefore, the external debt began to increase with the fast rates. Owning to the fact that the Russian government could not execute the program of the structural reform developed together with the IMF, the suspended payments promised to restore the financing in case of return of the Russian government to the reforming economy according to the IMF’s recommendations.

Thus, theoretically the IMF is perfect in its effectiveness; however, its practical value is not always effective. The weak spot of the IMF’s effectiveness includes huge social expenses: property stratification of society, deindustrialization and unemployment, decrease of the standards of living of population, growth of the internal and external public debts, etc.

Though the IMF action is welcomed, it is imperfect. Some flaws are minor, while others are inherent to the IMF itself and are incurable regardless of the specific plan. A fundamental flaw in the proposal is the IMF Creditor Problem: the IMF cannot be an objective and unbiased arbiter in cases where it has a substantial financial interest as a creditor.

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