Throughout history, the world economy has been significantly influenced by financial institutions and rules in the international monetary system, in ensuring financial stability. In particular, these institutions have played major roles, during financial crises, witnessed in recent years.
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Even though there are numerous financial institutions, it has been argued that the International Monetary Fund is one of the most influential organs, with immense impact on the world economy (Peet 2009, p. 56). This can be proved by the manner in which it responds during critical financial moments, like during the Global Financial Crisis and the current Euro zone stalemate.
Since its establishment in 1944, at a United Nations conference held in Bretton Woods, IMF has initiated a wide-range of reforms in the global financial market. Importantly, only forty-four governments were represented as they agreed to develop a framework, aimed at enhancing economic cooperation among members.
This move was mainly triggered by devaluation errors, which had resulted into the Great Depression that was witnessed in 1930s (Peet 2009, p. 71). In addition, IMF stepped-up organized exchange arrangement, which was essential in promoting stability among its members. This further sought to eliminate competitive exchange depression, which had dominated the world at the beginning of the 20th century.
Moreover, IMF wanted to eliminate restrictions within the international market, which would hamper expansion of trade around the world. To achieve this, members agreed on the establishment of a multilateral payment structure that streamlined transactions among member states.
It is worth noting that these reforms aimed at stabilizing the international monetary system, which remains crucial in shaping the world economy. These initiatives have also been applauded for promoting economic growth, reduction of poverty and improvement of people’s living standards around the world (Peet 2009, p. 67). Based on ever-changing financial challenges, IMF has considered reviewing its mandate in responding to global financial crises.
This essay focuses on how the role of the International Monetary Fund has changed since its establishment in mid 1940s. More importantly, the analysis will explore some of the factors, which have contributed to the restructuring of the institution, on the basis of the world financial issues.
Based on this, the paper will also cover the body’s response to recent economic crises, which have had significant implications. Lastly, the essay will discuss the future of IMF, in terms of its functions as it enhances the stability of the international monetary system.
How the role of the IMF has changed since 1945
In understanding the role of the International Monetary Fund since its establishment, a lot of attention has always been put on how its role has continued to evolve. In fact, some people argue that what IMF does today, differs completely from what it used to do immediately after its formation. How has this evolution occurred?
Are there factors, which have contributed to the change of the body’s original roles? These are some of the questions addressed in this segment of the analysis. For better understanding, a chronological performance of the institution will be reviewed, in order to create a link between the past and the current status, of one of the most influential financial organs in the world today.
IMF after Bretton Woods
According to the history of the International Monetary Fund, it is believed that Bretton Woods’ agreement, which was signed in the 1945, was abandoned in 1970s. This period was primarily characterized by floating exchange rates, which led to a sharp rise in the exchange rate volatility, leading to a disrupted global financial system (Underhill et al. 2010).
Additionally, the institution appeared to have survived its significance and was unable to contain the bouts of financial volatility which surged frequently. Volatility was highly unpleasant to the market even though it was not easy to realize stable rates.
In addition, there was a high likelihood of reduced pressure due to the high level of uncertainties, and looming inflation that was to escalate as a result of intense devaluations. In this regard, most of the member states were not prepared to cope with uncontrolled floating rates. Nevertheless, developed countries played a major role in coordinating exchange rate policies, even though it was done without involving the IMF and undeveloped countries.
Furthermore, this period saw the International Monetary Fund shift its attention from member states to developing countries. For instance, it terminated the financing of the payment imbalances of developed countries, as its financial support gradually shifted to developing countries (Underhill et al. 2010). To be more specific, the last programs to be financed by the IMF in developed countries were carried out in the United Kingdom and Italy in 1977. This was mainly after the general move by countries to float exchange rates.
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Unfortunately, the Fund’s shift to support developing countries did not have any impact on its overall view towards the causes and solutions for balance of payment crises, which had dominated the international monetary system. Even after the great crisis, which was witnessed in 1982, and left Mexico, Brazil and other developing countries Bankrupt, the IMF did not initiate any reforms, which would have helped the affected economies to recover easily (Kirshner 1995, p. 34).
The problem persisted until mid 1980s, when the Fund merged efforts with indebted countries to adopt structural reforms. Importantly, there is a new image that emerges by focusing on the adjustment programs, which were negotiated by the Fund in 1990s. In fact, the Fund’s help was mainly based on the structural reforms as opposed to the immediate measures of fiscal restraint.
This was clearly evident in 1997, when the IMF was authorized to take care of East Asian countries; fiscal restraint was temporarily terminated during the implementation of structural reforms (Eichengreen 2008, p. 134). This was the determining condition for the IMF to continue supporting the care-program. The following segment of this analysis discusses the role of the International Monetary Fund in the 90s.
The IMF in the 1990s
Unlike the previous period, 1990s was characterized by stable exchange rates among most member states. Despite the fact that floating exchange rates played a major role in defining the relationship between powerful currencies in the world, most countries remained obedient to fixed rates as they struggled to stabilize their exchange rates (Eichengreen 2008, p. 134).
This group comprised of several developing countries, which targeted to use stable exchange rates at the moment to tame inflation or eliminate trade uncertainties that were common for export-oriented economies. This environment of fixed and semi-fixed exchange rates favored the thriving of the International Monetary Fund.
By this time, it was clear that the functions of the IMF had tremendously changed, including its original mission, which had served as a major driving force in early years of its establishment (Eichengreen 2008, p. 172). There was uneven flow of capital in countries, as private capital flows became more dominant compared to public and multilateral flows. Additionally, a conservative anti-government ideology found its way in most Western nations, resulting into massive deregulation of private transactions and numerous privatization initiatives.
Consequently, the views of the IMF with regard to capital controls were treated with a reversal shock. Moreover, the Fund got concerned with not only the efficiency of capital controls, but also their desirability. On the other hand, it paid more attention to the efficacy of domestic financial sectors as it dealt with high volume of resources (Eichengreen 2008, p. 210).
Similarly, the Fund embarked on championing the cause of financial freedom, in order to allow free circulation of capital around the world by eliminating controls and restrictions, which were in place. Additionally, the IMF got interested in improving the financial sector in most developing countries, by allowing them to have access to foreign banks. Furthermore, the Fund went on to interfere with domestic financial policies of its members, through direct support of changes in domestic policies (Dodge & Murray 2006).
From the above analysis, which featured the performance of the International Monetary Fund after its original mission was abandoned in 1970s, it is evident that the period was a true testing moment for the famous financial institution. Equally, the players involved found it to be the most challenging time in the history of the Fund (D’Arista 2009, p. 633). The crises, which were witnessed, served as reminders of how the world had significantly changed, with regard to the international financial system. From these experiences, the world appreciated the need of establishing a workable macroeconomic framework, with the potential of promoting economic growth and sustainability.
Another lesson borrowed from the experiences during this period is that every country is supposed to nurture an exchange rate scheme, which is more flexible to respond to financial shocks within the global market. Importantly, fixed exchange rates expose a country to several challenges due to high dependence on policies, which are either structural or fiscal (D’Arista 2009, p. 634).
In addition, the performance of the IMF demonstrated the interplay between a given financial sector with economic development in terms of growth and stability. This concept has played a major role in redefining the work of the Fund in a volatile financial environment.
A new Role for IMF
Unlike the last century where predictions were accurately made, the current financial system is characterized by several uncertainties, which cannot be explained. Several debates revolve around exchange rates and the ever-increasing reserves that have been witnessed in most emerging economies of the world. Additionally, most countries doubt the capability of existing financial institutions to confront major crises, like the ones that have threatened several countries in the recent past.
As a result, leaders have seen the need of implementing reforms in the Fund to make it more applicable and independent of political influence, which dominated its early years after establishment (D’Arista 2009, p. 633). Nevertheless, some of the suggested reforms have been viewed as impractical. Importantly, some of the new roles of the IMF draw significant support from the initial agreement, even though they have been perfectly aligned to the current changes and trends in the financial market.
While the International Monetary Fund is charged with countless functions within the global financial market, it is important to note that management of crises remains its core objective in the world today. This is based on how the institution responded to the crisis, which was experienced between 2007 and 2009.
During this period, the Fund stepped up efforts to offer support to all its member states. Several approaches were adopted, including increased lending and advising of countries on various economic policies, based on the Fund’s experience in dealing with an array of issues in different countries (D’Arista 2009, p. 633).
Stepping up crisis lending
In 2010, the Fund took a swift move towards the global crisis, and made several lending commitments, which totaled to $250 billion. This represented an increase of the money that was to be borrowed. The Fund agreed to quadruple the amount, which was given to low-income countries in order to help them out of the crisis that threatened several member states (International Monetary Fund 2012).
In other words, the International Monetary Fund strengthened its lending capacity and adopted significant changes on its lending policies to allow countries to borrow large amounts, depending on their abilities and existing financial situations.
In addition, the IMF launched a flexible credit line that was meant to address the issues that were facing strong economies of the world. In essence, a flexible credit line is mainly used in the management and prevention of crises, by allowing access to the Fund’s resources with a lot of ease. Importantly, a country, which is approved to join the facility, is never exposed to any conditions that may undermine its borrowing (International Monetary Fund 2012).
For the purpose of making the flexible credit line to be more effective, the tool was strengthened in August 2010. This made it more flexible and predictable. It benefited countries like Poland, Mexico, and Colombia, which were awarded a total of more than $100 billion.
As a way of stepping up crisis lending, the International Monetary Fund allows countries to access liquidity by applying flexible terms and conditions. This is based on the fact that extreme global stress may end up affecting countries, which have the least likelihood of being affected by the crisis (International Monetary Fund 2012). Recognition of such countries augments market confidence and mitigates the impact of the financial problem. This support is sometimes channeled to countries, which are less exposed to financial crises.
Furthermore, the IMF has implemented reforms, which are aimed at making lending to be more affordable by its members. For instance, the Fund terminated structural performance criteria for the purpose of securing loans, even in cases where the borrowing country is considered to be a low-income state.
Essentially, these reforms have remained significant in programs, which are supported by IMF, though most of its efforts have been redirected to areas that play a crucial role in the recovery of a country’s economic status (International Monetary Fund 2012). Furthermore, the IMF currently puts a lot of weight on the social protection of countries.
For instance, the Fund has actively been involved in supporting its members to guard and expand their social expenditure, coupled with social assistance. The institution is involved in encouraging higher expenditure and promotes the establishment of social programs, which are capable of reducing the impact of a given financial crisis in a society that is exposed to financial crises.
Supporting poor countries
As a way of responding to the financial crises, the IMF reviewed its policies, with regard to low-income governments. Due to this, the Fund’s programs are considered to be more flexible as they accommodate the needs of these economies. They have more flexible conditions and encourage the protection of a country’s social spending (Underhill et al. 2010).
The IMF also enabled the accessibility of resources to these nations through the Poverty Reduction and Growth Trust, between 2009 and 2014. This move was in line with the position taken by G-20 members in April 2009, which endorsed the doubling of concessional lending. By the year 2009, the IMF’s concessional lending was valued at $3.8 billion, with 2011 registering a total of $1.9 billion (International Monetary Fund 2012).
More importantly, the IMF’s flexibility has considerably increased, through increased spending and inclusion of deficits in recent years. As a result, Sub-Saharan Africa experienced an increase in fiscal deficits in the year 2009.
The IMF also plays a major role in responding to catastrophes, which hit its members around the world (International Monetary Fund 2012). This was conceived through the creation of a fund, aimed at addressing the aftermath of calamities around the world. In the year 2010, the Fund registered a total of $268 million as relief expenditure.
Providing analysis and advice
As much as IMF has played a leading role in responding to crises, it has also been involved in efforts to prevent future crises. This has been possible by engaging several governments around the world. As a result, there has been significance improvement in the manner in which risk analysis is carried out, based on warnings and international collaborations.
There are continuous efforts to analyze the relationship between economic stability and the entire financial system (Underhill et al. 2010). Other efforts, which have been initiated, include an understanding of the role of surveillance and how different factors exhibited in one country can influence the results in another. Lastly, the Fund is revisiting the issue of global monitoring of financial markets and its role in maintaining economic stability.
IMF Governance Reform
In order for the IMF to improve its legal performance, it has embarked on major restructuring efforts. According to the changes, which were proposed by G-20 countries, the Fund is likely to undergo enormous transformation in terms of its service delivery. They include transfer of voting power and doubling of the IMF quotas (International Monetary Fund 2012).
This was reached in December 2010, through a review process, which was conducted by the Fund’s board. As stipulated in the package, 6% of the quotas will be channeled to developing economies, without undermining the voting power of weak countries.
The Future of IMF
As an institution with over six decades in operation, the question most people ask is how the IMF will execute its mandate in future. Will it be able to confront crises and maintain stability of the international financial system? It is doubtless that the IMF will have to put in place strategies in order to strengthen its mandate in regulating global financial markets.
With the current crisis in the Euro Zone, the Fund has stepped up its efforts in containing the situation as the leading economic stabilizer in the world. On the other hand, mounting pressure from its members may result into future changes, which are likely to have significant impact on the world economy (Ingves 2009).
For instance, G-20 members believe that IMF has to shift its approach from crisis management to prevention in order to maintain a stable global financial market. As a result, IMF may consider establishing structures, which will allow it to issue warnings, identified within the financial system, that are potential threats. This can be made possible through partnerships with other organizations. A good example of this is the Financial Stability Board, which is likely to be helpful to the Fund in future.
In addition, the IMF is likely to adopt a system that links economic development in a given member state, with events in the global market through surveillance. In this respect, the Fund may have to develop the Financial Sector Assessment Programs further to improve its surveillance and ensure that its members adhere to set conditions.
Moreover, the role of the IMF is likely to be extended in order to cover capital flows and capital liberalization (Ingves 2009). The current system is limited in funding foreign trade. This expansion of the Fund’s mandate should be based on immense growth in international financial markets.
From the above analysis, it is doubtless that the role of the International Monetary Fund has continued to change since it was formed in 1945. Importantly, these changes have been necessitated by several factors, including financial and political. Nevertheless, it has been applauded for its active role in crisis management, with members pushing for its restructuring in order to offer preventive solutions to financial problems to its members.
D’Arista, J 2009, ‘The evolving international monetary system’, Cambridge Journal of Economics, vol. 33 no. 4, pp. 633-652.
Dodge, D & Murray, J 2006, ‘The Evolving International Monetary Order and the Need for an Evolving IMF’, Global Governance, vol. 12 no. 4, pp. 361-372.
Eichengreen, B 2008, Globalizing Capital: a History of the International Monetary System, Princeton, New Jersey.
Ingves, S 2009, Future role of the IM F in focus at the 2009 Annual Meeting in Istanbul. Web.
International Monetary Fund 2012. Web.
Kirshner, J 1995, Currency and coercion: the political economy of international monetary power, Princeton, New Jersey.
Peet, R 2009, Unholy Trinity: the IMF, World Bank and WTO, Zed Books, London.
Underhill et al. 2010, Global Financial Integration Thirty Years On: From Reform to Crisis, Cambridge University Press, London.