Saturday, November 8, 2008

IMF - Advantages and Disadvantages

With economies around the world on the verge of collapsing. Some are pointing to the IMF as a potential saviour of the world economy. They argue that the IMF can play a key role in avoiding financial crisis and restoring confidence to a battered international economy. Yet, at the same time many view the IMF with disdain, arguing that their intervention causes more problems than it solves. (see: Criticism of IMF)
  • What does the IMF actually do? and Why is its role so Controversial.
The IMF was founded in 1944, to facilitate the post war economic recovery. In particular the IMF was to play a role in stabilising exchange rates and balance of payments, whilst its sister organisation the World Bank would provide loans for long term development.These days the IMF plays a role in:
  • Compiling statistics and evaluation of its member countries economies (Nearly all in UN are members of IMF)
  • Intervening in Financial crisis to provide loans and conditions for restructuring the economy to avoid future crisis. In recent months this has involved
  • $2.1 billion to Iceland
  • $15 billion to Hungary
  • $16 billion to Ukraine
  • An emerging markets fund of $200bn to stabilise financial systems.

Advantages of the IMF.

  • IMF can be seen as lender of last resort. When a country is seeing an exodus of currency due to a balance of payments crisis, the IMF can provide crucial loans to stabilise the economy and prevent a collapse of confidence.e.g. Recent loans to:
  • Supporters argue that the IMF can also impose necessary reforms on an economy. Reforms such as privatisation, fiscal responsibility, control of Money supply, and attacking corruption. These policies may cause short term pain, but, are essential for preventing future crisis and long term development.
  • Provides an external assessment of the economy, which helps the government to implement popular ideas.
Yet, despite the potential benefits of having a monetary fund which can provide an effective counter to financial crisis, the role of the IMF has proved very controversial.
It's critics argue the IMF is dominated by the perspective of the G8 industrialised nations. They argue the IMF insists on blanket policies of structural adjustment which may actually harm the economies they are intervening. See: Criticisms of IMF

Yet, whilst it is easy to criticise the doctor which prescribes a bitter pill, there is a consensus that, now more than ever, we need an effective international organisation which can deal with the many financial crisis that are occurring around the world.

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