Historical background of IMF
After the American Great Depression of 1930s, in the 1944 at a United Nations conference held at Bretton Woods, New Hampshire, United, States the IMF was conceived. The purpose of it was to develop a framework for economic cooperation to avoid the duplication of parents that caused the Great Depression. But the actual establishment was a little bit later, in the year 1945 on December 27. At that day another organization also started its work - it was International Bank for Reconstruction and Development (IBRD). The purpose for establishment of these organizations was to oversee stability in the international monetary affairs, to promote an international monetary cooperation, to facilitate and develop the world trade, and what has become the major purpose of IMF, to lend money to member countries that cannot make loan payments. Now IMF has 184 member countries. Since the establishment of IMF its purpose stayed unchanged but its operations have been developed to arrange its abilities for changing needs of member countries. These operations are the following: surveillance (maintaining a policy dialog with the members), financial assistance (providing credits and loans to member countries which have balance-of-payment problems), technical assistance (helping member countries to strengthen their human and institutional capacity by offering technical assistance and training, plus designing and implementing effective macroeconomic and structural policies).
Basic policies/procedures of the IMF in order to grant funds to other countries
There are special stipulated conditions or member country which wants to receive the financial assistance from IMF. First of all the member country should agree to implement changes in its fiscal and monetary policies that IMF experts suggested. The conditions usually involve detailed changes in national policies. After the country agrees through the “letter of intense” the INF distributes funds in phases to ensure that the country is moving in the right direction and all reforms are implemented correctly. (CSIC 2002) Each phase has a specific evaluation process that corresponds to the conditionality in the IMF. The first conditionality is a performance criteria. This criteria consists of two parts: quantitative and structural. A quantitative performance criterion refers to the quantitative targets that agree with key macroeconomic variables that are expected to be reached during the member’s program. A structural performance criterion refers to the structural measures that are very important to the success of the program and that should be implemented in the progress. This condition often involves legislative reforms in the country. In order to receive the financial assistance the country has to demonstrate that the appropriate performance criteria have been met. It can also happen that performance criteria won’t be met and that payments will be interrupted. In this case Executive Board decides whether to continue the program. If non-observance will be minor and essentially self correcting the payment normally will be granted. On the other hand, the member will be prepared to take additional measures to bring the program back on track. The next condition for receiving funds is a program review by Executive Board in which the Board evaluates the implementation of the program more generally. This review normally involves the examination of observance of the conditions that were specified in the arrangement. Until the evaluation is completed, the member can’t make any purchases, and the Broad will complete the review only then when it will be satisfied with the results and will see that the program is on track. Then there is a third important feature of conditionality. It is called the prior action. During the prior action the Board decides whether to release further purchases. In this phase it may ask a member to take special structural measures without which the further financing is impossible. Prior actions are relied on the points where the performance of the member wasn’t good and where the Fund doubts the member’s bond to its program. If the necessary measures were made and the Board is sure in the good implementation of the problem then the country continues to receive the financial assistance. If not, then the board grants waiver for non-observance of the program. (Leckow, 2005)
There are special stipulated conditions or member country which wants to receive the financial assistance from IMF. First of all the member country should agree to implement changes in its fiscal and monetary policies that IMF experts suggested. The conditions usually involve detailed changes in national policies. After the country agrees through the “letter of intense” the INF distributes funds in phases to ensure that the country is moving in the right direction and all reforms are implemented correctly. (CSIC 2002) Each phase has a specific evaluation process that corresponds to the conditionality in the IMF. The first conditionality is a performance criteria. This criteria consists of two parts: quantitative and structural. A quantitative performance criterion refers to the quantitative targets that agree with key macroeconomic variables that are expected to be reached during the member’s program. A structural performance criterion refers to the structural measures that are very important to the success of the program and that should be implemented in the progress. This condition often involves legislative reforms in the country. In order to receive the financial assistance the country has to demonstrate that the appropriate performance criteria have been met. It can also happen that performance criteria won’t be met and that payments will be interrupted. In this case Executive Board decides whether to continue the program. If non-observance will be minor and essentially self correcting the payment normally will be granted. On the other hand, the member will be prepared to take additional measures to bring the program back on track. The next condition for receiving funds is a program review by Executive Board in which the Board evaluates the implementation of the program more generally. This review normally involves the examination of observance of the conditions that were specified in the arrangement. Until the evaluation is completed, the member can’t make any purchases, and the Broad will complete the review only then when it will be satisfied with the results and will see that the program is on track. Then there is a third important feature of conditionality. It is called the prior action. During the prior action the Board decides whether to release further purchases. In this phase it may ask a member to take special structural measures without which the further financing is impossible. Prior actions are relied on the points where the performance of the member wasn’t good and where the Fund doubts the member’s bond to its program. If the necessary measures were made and the Board is sure in the good implementation of the problem then the country continues to receive the financial assistance. If not, then the board grants waiver for non-observance of the program. (Leckow, 2005)
IMF also grants assistance through several lending programs. Stand-by arrangements are granted over 12 to 18 months for specific amounts to deal with short term problems. The Extended Funds Facility deals with the member-countries who have “structural” economic problems which have historical context. To receive this assistance the country must agree on strong conditions which IMF attaches to this facility. The loan is usually given for 3-4 year terms. The Poverty Reduction and Growth Facility programs are granted to the poor countries with a low interest rate. There is also the Supplement Reverse Facility is given during crises for a short term, but it also discourages too much borrowings by adding a surcharge. Contingent Credit Lines are also granted during crises but only for those who can be spread from one country to another. And the last type is Emergency Assistance with is granted to the countries that have military conflicts of other unexpected disasters. If the member-country wants to take a loan the IMF will decide which program is more appropriate. For each program there are special policies, conditions and procedures that the country will have to follow to receive a grant. (CSIC 2002)
Historical background of Asian Financial Crisis
The economy of Asian region, which include Korea, Thailand, Indonesia and Malaysia for many years, was considered a miracle. The average growth rate in these countries was really big since 1970, Indonesia- 6.9%, Korea- 8.4% annually. But in the middle of 1997s the region entered economic crises. Because of inability to defend the currency, the Bank of Thailand allowed the baht to float. The recession that has been already obvious by the year 1998 was the deepest since World War 2. In Indonesia GDP declined by 13.7%, in Thailand – by 9.4%, in Malaysia – by 6.7%, and in Korea – by 5.8%. First of all crises hurt the financial system of the region, then the economical. (Berg 1999) The country became very risky for foreign investors and they started to pull money out of the region, which led to even worth consequences and faster decline. Economists believe that the crises happened because of the hard competition with Mainland China. Since 1990s, after implementing a number of export-oriented reforms, China started to effectively compete with Asian exports. China also became the more favorable country for western importers because it had a depreciated domestic currency, which made their products and labor force cheaper. In the Asian region, on the contrary, the currency of Thailand and Indonesia was closely tied to dollar, which was at that time appreciated. Therefore the situation for Asia was unfavorable. It has a strong competitor, which offered better conditions for customers and good quality of the products. In addition the Asian region had big current account deficit, which led to big external borrowings and made the country risky. (CSI 2000) According to the IMF causes, which led to the crises, were the following: macroeconomic weaknesses, domestic financial vulnerabilities, external vulnerability, and changes in the external environment. Indonesia, South Korea, and Thailand were the countries that suffered the most because of the crises. The Asian Financial Crises affected currencies, stock markets, and other asset prices not only Asian countries but of many others. Japan, for example, suffered a big decline in GDP and in the 1998 sank into recession. Because big part of Japanese export went into Asia (40%), after the crises country suffered from bankruptcies. But not only bad consequences can be outlined. For example Asian governments have understood that the expansion of investment and trade was a basic element for economic recovery. The financial crises should also speed up the reforms in the financial sector. The crises revealed many weaknesses of the financial system in the region, which now are hardly analyzed. Governments make necessary changes to prevent the crises in the future, which will make the region less risky and give a hope for the faster recovery.
Policy response of IMF
In such critical situation when the country floated its currency and in the same way suffered from big capital outflow, it was the hardest part for IMF to decide what policies should be adjusted. The decision was to provide a region with official external finance, to make a fundamental systemic reform, and to adjust monetary and fiscal policies. The purpose of the external finance was to take up shock of the blow of the rapid capitals. As the weaknesses of financial and corporate sectors were the main problems that caused the crises, the fundamental systematic reforms in the financial sector were a necessity. In different countries the different measures took place. In Thailand, Korea, and Indonesia the heart of the program were the closure of an insolvent banks, recapitalization of financial system, the close supervision of weak institutions and increase in potential for foreign participation in domestic financial system. The result was that banks became stronger or in Indonesia they moved from weak institutions to the currency for foreign exchange. IMF also implemented such policies which were intended to establish a clear mechanism by which the authorities could inject recourses to take over, manage and sell the bad assets of the banking system. And finally, the last component to strengthen the financial system in the region has been a composition of reforms to provide the basis for the strong performance in the future. There were also other policies that were intended to set a new direction to the economy. As for the macroeconomic policies, we can divide them in two parts, monetary and fiscal. They are intended to decrease inflation and to make the region less risky, to stable its economy. Generally, IMF responded quickly to the crises. First of all it provided assistance for the countries that were most affected by the crises (Indonesia, Thailand, and Korea) and arranged programs that are described above. IMF provided a financial support of total about $118.3 bill and enhanced consultations with the countries in the region as well as with those who also suffered from the crises.
The results of IMF policies/procedures
The IMF reached several positive results in the Asian region due to its program. The exchange rates of the countries in the region have strengthened from their lows and now ensure more stability to these economies. Although in Indonesia the currency still stayed deeply depreciated, it too has recovered significantly. Korea and Thailand have made a significant progress in the macroeconomic stabilization, their interest rates apparently declined and the currency pressure have eased. The current account position changed from debit to surplus and equity price rose significantly. So generally we see that the situation in Asian countries stabilized. The governments already started to allocate part of the budgets for social programs and to care not only about the macro economical situation. But there are also opinions, which stay that IMF didn’t help to resolve the problem but even worsen a situation. It is argued that IMF had made three key mistakes. The first one is that it imposed excessively contractionary monetary and fiscal policies. Then it encouraged unnecessary changes in the economic structure of countries that suffered from the crises. The changes were really radical and lead to political instability. The criticism on the general operations of IMF is that it wants to remove every weakness in the economy of afflicted country all at once. And the last mistake was that IMF undermined the confidence of global lenders in their financial stability. While the currencies in the region were under speculative prices, IMF ordered to removal of price control, which lead to the increase in prices on food and fuel, causing the malnutrition and suffering of people. Although IMF admitted that the financial crises became even worth it didn’t scale back its operations. (Keith 2005)
Role of IMF toward Asian Financial Crises
The basic role that the IMF played in the resolving of this crisis was a financial assistance and the inflow of money in the economy of afflicted countries. When foreign investors started to draw money back the situation in the region became worsen. IMF financial assistance helped to support the economies of the region and to stabilize them. The technical and assistance and consultation made the process of recovery to be faster and more efficient. IMF’s specialists lead the process of recovery and assisted the countries with the point of view of macroeconomic science, which made the recovery not very painful. By helping to stabilize the financial system in the Asian region the IMF helped to ensure safety and less risks to the foreign investors who then started to invest their money again in the economies of afflicted countries. IMF also pointed out the mistakes that were made and how they can be prevented in order to avoid such crisis again. The development of program for the future periods for the Asian region countries can ensure the stable and long tern positive development in the region that make the country stable.
The basic role that the IMF played in the resolving of this crisis was a financial assistance and the inflow of money in the economy of afflicted countries. When foreign investors started to draw money back the situation in the region became worsen. IMF financial assistance helped to support the economies of the region and to stabilize them. The technical and assistance and consultation made the process of recovery to be faster and more efficient. IMF’s specialists lead the process of recovery and assisted the countries with the point of view of macroeconomic science, which made the recovery not very painful. By helping to stabilize the financial system in the Asian region the IMF helped to ensure safety and less risks to the foreign investors who then started to invest their money again in the economies of afflicted countries. IMF also pointed out the mistakes that were made and how they can be prevented in order to avoid such crisis again. The development of program for the future periods for the Asian region countries can ensure the stable and long tern positive development in the region that make the country stable.
Other aspects and concerns
By analyzing the work of the IMF we could conclude that several improvements still should be made. Some policies, for example monetary and fiscal, are not always appropriate and lead not always to good consequences. For some countries the conditions that should be applied and the changes that should be made in the economy are to radical and require long period of time. As we read the critics of the IMF it is seen that the changes that IMF suggests to implement are not always rational and can cause bad results. But still the conditions to receive the grant are quite strict and could be changed in order not to make a big pressure on the country that is in need. In future the Fund conditionality will probably be focused only on areas within the Fund’s core mandate such as monetary, fiscal, and exchange rate policies, or a design of social safety net and privatization.
Nevertheless, there are still a lot of countries that need the help of IMF and its financial and technical assistance. The consultations that IMF provides are also very important so this international organization is a real need in the global economical system.
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