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The International Monetary Fund And Global Economic Crises

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Introduction

The International Monetary Fund And Global Economic Crises Focus Area: Argentine Crisis Why was the IMF set up? The International Monetary Fund is a cooperative international monetary organization whose members currently include 184 countries of the world. The IMF was set up in 1944 at Bretton Woods, along with the World Bank, to supervise the newly established fixed Exchange Rate system. After this fell apart in 1971-73, the IMF became more involved with its member countries' economic policies, doling out advice on fiscal policy and monetary policy as well as microeconomic changes such as privatisation, of which it became a forceful advocate. In the 1980s, it played a leading part in sorting out the problems of developing countries' mounting debt. In the 1990s, it several times coordinated and helped to finance assistance to countries with a currency crisis. What are the functions of the IMF? The IMF assists member countries in the implementation of monetary and fiscal policies that promote stability, reduce vulnerability to economic crises and improve living standards through the functions of surveillance, lending and technical assistance. Surveillance In today's globalized economy, where the economic and financial policies of one country may affect many other countries, it is essential to have an international forum that can monitor economic developments on a global scale. With its nearly universal membership of 184 countries, the IMF plays that role. The importance of effective surveillance has been underscored by recent financial crises, which in some cases have spread from the originating country to other countries and regions. In response to those crises, the IMF has taken several measures to strengthen its capacity to detect vulnerabilities and risks at an early stage. During the past decade in particular, the IMF has sought to respond to the challenges of globalization, including the dramatic expansion of international capital flows. Surveillance today covers a wide range of economic policies, although the emphasis given to each policy area varies according to each country's individual circumstances. ...read more.

Middle

Technical Assistance The IMF provides technical assistance in its areas of expertise, which include fiscal policy, monetary policy, and macroeconomic and financial statistics. Assistance is normally provided free of charge. About three-quarters of IMF technical assistance goes to low and lower-middle income countries. Sub-Saharan Africa is currently the largest beneficiary of technical assistance. The following are the areas in which technical assistance is provided. Fiscal policy Monetary policy Statistics 1. Tax policy 2. Tax and customs administration 3. Expenditure policy 4. Budgeting and public expenditure management 5. Fiscal management 6. Fiscal federalism 1. Central banking and currency arrangements 2. Monetary and exchange policy operations, and public debt management 3. Financial market development, focusing particularly on money, government debt, and foreign exchange markets 4. Exchange systems and currency convertibility 5. Payment systems 6. Bank supervision and regulation 7. Bank restructuring and banking safety nets 8. Implementation of international standards 1. Multisector statistical issues 2. Balance of payments and external debt statistics 3. Government finance statistics 4. Monetary and financial statistics 5. National accounts and price statistics 6. Data dissemination standards The recipient country is fully involved in the entire process of technical assistance, from identification of need, to implementation, monitoring, and evaluation. What are the safeguards for IMF resources? The IMF adopts policies that will establish adequate safeguards for the temporary use of the organization's resources. These safeguards can be divided into those aimed at protecting currently available or outstanding credit and those focused on limiting the duration of, and clearing, overdue obligations. Safeguards to protect committed and outstanding credit include: 1. Limits on access to appropriate amounts of financing, with incentives to contain excessively long and heavy use; 2. Conditionality and program design; 3. Safeguards assessments of central banks; 4. Post-program monitoring; 5. Measures to deal with misreporting; and 6. Voluntary services and supplementary information provided by the IMF, including technical assistance; the transparency initiative, comprising the establishment and monitoring of codes and standards, including statistical standards and codes for monetary and fiscal transparency and the assessment of financial sector soundness; and the improved governance initiative. ...read more.

Conclusion

* Launching of reform of major taxes. External Sector * Devaluation and transition to a market-determined exchange rate. * Phased reduction of import licensing (quantitative restrictions). * Phased reduction of peak custom duties. * Policies to encourage direct and portfolio foreign investment. * Monitoring and controls over external borrowing, especially short-term. * Build-up of foreign exchange reserves. * Amendment of the Foreign Exchange Regulation Act (FERA) to reduce restrictions on firms. Industry * Virtual abolition of industrial licensing. * Abolition of separate permission needed by "MRTP houses". * Sharp reduction of industries "reserved" for the public sector. * Freer access to foreign technology. Agriculture * More remunerative procurement prices for cereals. * Reduction in protection to manufacturing sector. Financial Sector * Phasing in of Basle prudential norms. * Reduction of reserve requirements for banks, notably the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). * Gradual freeing up of interest rates. * Legislative empowerment of the Securities and Exchange Board of India (SEBI). * Establishment of the National Stock Exchange (NSE). * Abolition of government control over capital issues. Public Sector * Disinvestment programme begun. * Greater autonomy/accountability for public enterprises. Conclusion While IMF-led reforms led to large-scale poverty and unemployment in Argentina, India's recovery from the oil crisis has become IMF's greatest success story. The IMF is criticized the world over, including India, as the hand-maiden of the US Treasury department. There has also been a much-publicized spat between the IMF and Joseph Stiglitz, the Chief Economist of the World Bank from 1997 to 2000. Stiglitz believed that the IMF 's structural adjustment programs are often unduly deflationary, imposing tight fiscal and monetary policies. The abolition of the IMF has been called for. But the sympathetic maintain that the IMF should retain the role that it was formed to perform - the lender of last resort. It remains to be seen whether the IMF which has now found a Indian voice in Dr. Raghuram Rajan, the Chief Economist now, will reinvent itself as a champion of developing and poor countries with its latest programmes. ...read more.

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