The Role of IMF in International Monetary Macroeconomics

The "first age of globalization" came in 1816, from the outbreak of the First World War, and lasted until 1914. During this period, the world enjoyed a well-coordinated financial order. Monetary unions that existed helped member countries to accept currencies from other countries as legal tenders. Then, unions like the Latin Monetary Union and the Scandinavian Monetary union served as important handlers of these financial processes that encouraged the use of foreign currencies. And where union did not exist, there was still sharing of transactions through sharing of gold standards by independent nations and their colonies. And by then, Great Britain held the most prominent economic position.

Between 1919 and 1939, the world economy faced a major blow resulting from the Second World War. This period was then referred to as de-globalization. Compared to the subsequent years, there was a huge decline in international trade and capital flows. Countries had already abandoned the gold standard, compared to the period before WWI, only returning to it briefly, except for the US. During this era, Great Britain and several other countries held that gold standard ran counter to the need for domestic policy retention autonomy. Countries then needed to raise interest rates as well as follow a set deflationary policy to protect their reserves. There was then a great need in a downturn, where leaders would prefer lower-rated to motivate economic growth.

The Bretton Woods era between 1944 and 1973 marked a whole new level in international money markets. Here, British and American policymakers started establishing a post-war global monetary system from the early 1940s. They wanted to create, and order that involved the combination of benefits of an integrated and somehow liberal internal system that makes it easy for governments to follow local policies that encourage employment and social well-being. John Maynard Keynes and Harry Dexter White were the initial architects of this plan, which was accepted by 42 countries that were present in the Bretton Woods conference of 1944. In this plan, countries were supposed to have exchange rates so that their currencies were pegged against the dollar, where the dollar could be converted into gold.

With the new exchange system, countries under economic distress would devalue their currencies up to 10% against the dollar, or more where the IMF approved. This process forced them into inflation, keeping them into the gold standard. The biggest issue with this system was that the US was forced to run into a constant trade deficit. Hence, there was reduced confidence in the dollar. Prior to this, Keynes had argued that the dollar had a very critical role in the world economy, which was then overruled by many nations. Apart from this issue, the emergence of a parallel gold market where the price soared above the official US-controlled price, led to the running down of gold reserves in the US. And because of this, the Bretton Woods financial system was no longer sustainable, hence its collapse.

The Washington Consensus (Bretton Woods System) came to an end in 1989, paving the way for a more sophisticated economic system that affected the years that followed. Even so, the Bretton Woods seems was still associated with a lot of what happened between 1980 and 2009. As historians record, the system hard already lost its grip in 1970 when it was broken down into sections like Nixon suspending the dollar's convertibility into gold. This was followed by the US abandoning capital controls in 1974, and letter the UK ended capital controls in 1979, a move copied by many other major economies.

As the developing world continued to witness more changes, there were notable benefits from liberalism, that touched a large section of the population. In general, there was a much slower growth, echoed by unemployment in industrial economies than before. Hence, experts like Professor Gordon Fletcher felt like the Bretton Woods system brought up a golden age in international markets. Ever since its collapse, the world has witnessed so many fluctuations in the economy. There has been an intense financial crisis, increasing up to 300%. The most significant one came in 2008, leaving many economies in devastating situations. Many markets fell, with many others facing near collapse. But there a positive side to this too that at least until the beginning of the crisis, many investors had frequently enjoyed high returns on their investment, with workers receiving better salaries and bonuses. The financial sector reached levels higher than what was anticipated before.

Facing the Globalization Issue Today

Since the fall of the Washington Consensus, the global monetary system has been facing two confliction concepts. On one side, there is the concept of flexible exchange rates, which is much stronger and is based on the idea of economic liberation, which gives it its legitimacy. On the other hand, it is a weaker concept than argues against total flexibility in exchange rates. It argues that doing this will be harmful to economic growth and free trade. These ideas have brought up may empirical attempts to stabilize the system, most importantly, leading to the creating of the euro.

Even with the current development that seems to make things more transparent, it is still evident that these two conflicting ideas will not find common ground any time soon. Globalization is fast become a primary concern for modern macroeconomics, making certain the urgency to define the possibility of the global economy functioning in the long run. 

There are two alternatives that bring out even more debates among economists. First, there are the dynamics of globalization with respect to the establishment of a global monetary system. This has always been a major concern for many years across economies. Secondly, some are concerned that monetary fragmentation may finally trigger a reserve gear in globalization. This is one debate that has caught enough fire among academicians and economic experts.

Let's face the truth, though, that the world may see a monetary calm because of globalization is just an illusion. There are always imbalances that need clearing, and which, if not handled, may be the beginning of more serious issues. Emerging and transition economies offer a reminder by showing the negative results of the current shortage of international monetary corporations.

The Asian Market Crisis

It is up to every country to come up with policies that try to convert their domestic economies into an international market. There is no denying that we are all affected by other nations' actions in one way or another. Globalization seems to be, in many instances, a solution to holding up emerging economies.

Some experts consider the condition on the Asian markets’ crises of market principles and unrestricted capital movement. There are others, though, who feel it is a crisis of government interventions, while there are those who look at it as an issue of global financial institutions. This means the global market, public policies, and many other conditions are involved depending on how one chooses to interpret it. There are different schools of thought that try to expound on this issue, from which there may be a good reason why the Asian market crises may be a result of a relationship between the collapsing domestic markets and the limitations of the international monetary system. 

Many have argued that the international market has a role to play in the Asian crisis. For instance, international investors, especially commercial banks, agreed to invest in the region without considering the risks. As such, they encourage the build-up of speculative bubbles that were very attractive to men as the emerging Asian market seemed to be exploding. The region was suffering a loss of competitiveness and exploding credit. And when the crisis came calling, the investors – as expected – with the commercial banks pulled out abruptly. This move has a huge negative impact on local exchange rates, extending to real economies, making Asian countries lost approximately 7-8 points of GDP. The situation was connected just after a few months, indicating that these investors may have reacted poorly.

By far, this is a good example of the globalization issue. It is a call for rational capital movements together with their stabilizing virtues to offer more support to the markets. Markets are always imperfect, and so is the information they give. This means relying on one source to make decisions may not be a good way to react.

Note, however, that the government also carries a huge responsibility in this crisis. Asian governments had introduced economic distortions that attracted many international investors. For instance, they introduced unsuitable exchange rates, defended by monetary policies, promising guarantees to investors where sector-policies were absent, and tax breaks, among other promises. Such factors would, without a doubt, attract huge interest from the international market. And just the same way markets collapsed in 2008; the Asian market went through the same process.

Then there are the multilateral institutions, who must also bear the blame. They came up with interventions that were not always appropriate in preventing a crisis or even solving them. And because of this, they may have encouraged international, local, and government investors to take unnecessary risks. Applying a predetermined solution could have fueled the situation more. As the G-7 declines, recently, echoed by the issues resulting from the international monetary corporation, the international community is more open to interventions.

When these three issues are put together, they explain why a crisis occurs and by what intensity. The international community has a large part to play in every economy. Besides, many have felt like the G-7 decline, and the monetary corporation can be held responsible for such developments. Because of the decline, the scope of preventive action by multilateral financial institutions has been weakened.

And when these issues happen, governments and international players are compelled to take action, either trying to prevent the future occurrence or by trying to rectify the current situation. Looking at the history of globalization and the Asian crisis is clear that globalization is a significant aspect of international macroeconomics. Even without these, we can already tell how currency stability affects the economy of one country. When crisis strike in any of the major economies, the impact flows down and can be felt even in the developing countries.

Can the IMF solve these problems?

There are many issues to international economies today. Far from globalization and international corporation, there are other issues like inflation rates and exchange rates that happen within individual economies. And these are some of the reasons that led to the creation of the International Money Fund (IMF). The body has had a huge role to play in the successes and failures in its mission as a watch-over for the monetary system, guaranteeing exchange rate stability and elimination of restrictions where slow trade is imminent. The IMF was started because of devastations caused by the Great Depression and WWII.

The IMF has, therefore, been helping countries sail through different economic difficulties. And that is not all; it has been evolving over the years to adapt to changing world economies. It has been the organization to turn to when there are serious economic threats in a given country. There are many other duties in that body. Here are several other functions:

- Lending. A country can request the IMF for funds to rebuild or stabilize its currency, as well as to continue buying imports. It also offers money for specific functions through services like Poverty Reduction and Growth Facility loans, Exogenous Shocks Facility loans, Stand-by Arrangement loans, and Supplemental Reserve Facility, among others.

- Surveillance. The IMF keeps watching on member states' economic and economic policies, by country surveillance and multilateral surveillance.

- Technical assistance. A country may ask for assistance from the IMF to administer their economic and financial affairs. The service is available for any country that needs it.

The IMF is funded through a quota system whereby a country pays based on its size and economic stability. Among the 189 member states, the US and Europe are the major influencers within the IMF. The IMF does not have a very important role in the global economy, but it can help, through its function above, a country to become a contributor to the global economy.

Author: James Hamilton