Political Science Notes the IMF a Cure or a Curse Kapur What is the IMF and what are its short comings What are the four main conclusions of the Kapur article 1 The International Monetary Fund and the World Bank was established in the Bretton Woods agreement of 1944 a The purpose of the IMF to promote international monetary cooperation exchange rate stability and the expansion of international trade by acting as a lender of last resort when a member country faced with en economic crisis b A member s contributions to the IMF quotas are based on its weight in the global economy i The weight also determines the member s voting power and borrowing capacity drawings c Quotas amount to an exchange of assets with little direct cost to taxpayers US its contributions entitle it to an equal amount of US claims on other currencies d A member country facing financial crisis has access to the fund s resources and advice i A country s drawings voting power and borrowing capacity becomes relatively larger to its quotas contributions to the IMF it must meet more exacting standards or conditonalities typically significant changes in economic policies to ensure that the country s domestic and external deficits are drastically lowered or even eliminated ii Failure to meet those conditions resylts in suspension renegotiation or even cancellation 2 The IMF short comings a The IMF has become the debt collector for commercial banks i The costs of adjustment were borne asymmetrically by debtor countries the IMF as the creditor community s enforcer shows that the fund has a biased towards shareholder pressure creditors versus debtors ii The Fund s economic projections are malleable to major shareholder pressure iii This leads to decrease in client trust 1 Raises the question of whose interests is the fund supporting b The IMF expanded its mandate to promote structural reform absence of risk sharing political taxation without representation i The IMF is a bureaucracy an thus wants to expand its power and influence 1 The IMF has overstepped its function and has used its power of advice giving to engage and mandate policy decisions for debtor countries 2 Loan conditions are beyond fiscal and monetary adjustments ii This is a problem because the countries that are most likely to need aid from the IMF are usually LCDs and so their policies are being shaped by the advanced industrialized countries who promote specific forms of polity iii IMF demands more transparency from debtor members but this can adversely affect the markets of the country iv Financial liberalization is a critical part of US agenda and not necessarily good for the LDCs who need to be integrated in to the global financial markets c Moral Hazard the propensity in both borrowing countries and creditors to take excessive risks because of the implicit insurance offered by bailouts i Debtor the costs to their citizens and polities exceeds the financial inflows from the bailouts 1 LCD leaders will use IMF and external forces to steer domestic discontent away from their own machinations ii Creditor moral hazard associated with banking segment of the financial sector 1 IMF and the major shareholders steady expansion of institutional objectives and loan conditions occur because borrowing countries bear a disproportionate share of the political economic and financial risks of IMF programs 2 This means that the member countries are divided into structural creditors and debtors LCDs knowing that they the creditors are unlikely to borrow money the major economic powers do not object to eth expanding role of the IMF 3 The four main conclusions a 1 the financial system seems to facilitate the transmission of financial disturbances far more effectively than ever before i Foreign financial flows that are unregulated can damage LCDs ii LCDs should be incorporated into the open global markets at a pace that can commensurate with their capacity to develop sound regulatory and institutional structures 1 Tighter limits on short term foreign borrowing b 2 Moral Hazard the propensity in both borrowing countries and creditors to take excessive risks because of the implicit insurance offered by bailouts see notes above c 3 Expansion of the IMF s power and mandate is bad for debtors for the global financial system and for the IMF itself i Increasing loan conditions mean that in a financial crisis the IMF should take over more of a country s decision making process without any accountability no constituency political taxation with out representation ii Today financial crises can spread rapidly widening of loan conditions takes time by negotiations or implementations which can make a bad situation worse iii The widening of the IMF agenda has made it less effective and more vulnerable to politicization 1 Tarnishing its credibility of its prescriptions d 4 Because adjustment is solely on debtor countries the fund s actions relieve any pressure on creditor countries to change the status quo i The principles the IMF stands on are at odds with the way it conducts its own affairs