10. Discuss the following:

1. Efforts to Save Jobs.

2. Job Recovery: a Must or a Whim?

Unit 5

The International Monetary Fund

Read the text and decide whether the sentences are true or false:

Since its inception after World War II, the International Monetary Fund has become far more powerful than its modest staff and budget would suggest. Reaching beyond strictly monetary matters, it now manages the economies of more than eighty developing countries, pushes for their fiscal austerity, affects their money supply, and ultimately shapes the financial lives of their citizens. From taking the dollar off the gold standard in the early 1970s to Argentina’s financial meltdown in the late 1990s, from the second oil crisis in the late 1970s to the sovereign bankruptcy debate in the early 2000s, IMF’s influence has always been visible.

But not always welcome. Opponents in social and environmental movements as well as in conservative think tanks have raised fundamental questions about the organization’s premises and policies.

The IMF, like the World Bank, emerged from the UN Monetary and Financial Conference at Bretton Woods in July 1944. With the disastrous interwar period –massive unemployment, hyperinflation, trade wars, and economic disintegration—still burned into their minds, representatives of forty-four countries sought to design a stable monetary framework that would foster price stability without dampening international trade.

According to its Articles of Agreement, the IMF exists to promote international monetary cooperation; facilitate the expansion and balanced growth of international trade; promote foreign exchange stability; create multilateral system of payments between members; assist in the correction of maladjustments in members’ balance of payments; and reduce the duration and severity of disequilibria in members’ balance of payments. Bretton Woods set up fixed exchange rates against the US dollar and unchanging price of gold at $35 an ounce. This gold standard with the dollar as its principal reserve currency played a key role in the monetary stability the world saw after 1945. Member governments committed themselves to the rules of monetary regime as long as other countries in their region did so too, and tended to keep their commitments if their region valued the rule of law domestically.

But this regime did not last. Stability received a serious blow when the United States unilaterally decoupled the dollar from the gold standard. In August 1971, to rein in excessive spending on the Vietnam War, US president Richard Nixon announced that US Federal Reserve would no longer automatically sell gold to foreign central banks for dollars. This surprise led to the end of the stable dollar-centered fixed rate regime. A new agreement was reached in December that year at the Smithsonian Institution of Washington: on average, the dollar was devalued by 8 percent, and the United States imposed a 10 percent import surcharge to force the realignment, which eventually led to the floating of all major currencies, financial deregulation, and an explosion of cross-border short term capital flows. Although a temporary measure to correct for speculative capital movements, free floating has survived until today.

In 1978, an amendment in its Articles of Agreement led to the Fund’s growing role in policing the world economy in general and the economic performance of individual member states in particular. So-called Article IV consultations are currently completed with almost all member states. In 1987 the IMF launched the Structural Adjustment Facility (SAF) and Extended Structural Adjustment Facility (ESAF). All these packages imposed conditionality: the Fund expects members to implement certain structural policies to qualify for funds. So-called high-conditionality requirements include further trade liberalization, deregulation of capital markets, across-the-board privatization of publicly owned industries, a shift of social security from the state to the market, fiscal reform, and slashed government budgets.

IMF membership rose sharply from 62 nations in 1960 to 184 by 2004. Staff numbers quadrupled from 750 in 1966 to almost 3,000 in the late 1990s. Besides its head office in Washington, D.C., it has opened offices in New York, Tokyo, Paris, Geneva, Vienna, and Singapore. In addition to granting loans, it has increasingly been involved in training and technical assistance activities. Starting in 1964 these trainings were organized out of Washington, after 1992 out of Vienna, and since 1998 they have been offered out of Singapore. Now Fund staff carry out over 600 technical assistance operations each year.

After the fall of the Berlin Wall, the IMF found itself at the front lines of the effort to rebuild Eastern Europe and the former Soviet Union; in the second half of the 1990s, massive bailout packages for Asian, Eastern European, and Latin American countries followed. It became a so-called lender of last resort; by 2000 it was extending some sixty loans annually, each running into the billions of dollars and lasting up to fifteen years. More than half its member states have borrowed money from the Fund. In 1999 the IMF broadened its scope once again: conditional lending now included an explicit focus on poverty reduction—but still in the context of growth-oriented strategies. Based on its Poverty Reduction Strategy Papers, the IMF set up the Poverty Reduction and Growth Facility (PRGF), with an emphasis on good governance; as of March 2005, eighty-four low-income member countries were eligible.

Most mainstream political parties in the United States and Europe, from Social Democrats on the left to Christian Democrats on the right, support the Fund’s neoliberal approach: they see the global free market as the best framework for liberty, democracy, and prosperity. Significant support comes from the investment banks, chambers of commerce, business schools, mainstream mass media, and policy think tanks.

To its credit, the Fund has substantially reformulated its conditional lending policy and has encouraged “social safety nets” to lessen the harmful effects of structural adjustment in developing nations. It has paid attention to children and the elderly in education and healthcare programs. In a shift from the past, it has committed itself to targeting more spending on poverty reduction. And thanks to NGOs like Transparency International, it has also paid more attention to sound governance. For example, it halted credit disbursements to Kenya and Colombia in 1996 due to corruption charges, has urged both India and Pakistan to curb military expenditures over the years, and in September 2005 threatened to expel Zimbabwe unless it paid interest on its loans.

An increasingly accountable IMF would have to legitimize its actions, which would in turn improve them. Constructive dialogue with outsiders has enhanced the accountability and effectiveness of IMF policies. But much remains to be done. The highly informal appointment process for top IMF leaders pulls for manipulation by the great powers. An open selection process in which candidates present their intentions and proposed policies is a sine qua non for democratic accountability. The unequal voting weights of the member states may have worked in the past but no longer reflect global realities. A greater voice for developing and debtor nations is not needed just for democracy; it also means adapting the IMF to the realities of interdependence and interconnectedness under globalization. Large emerging economies like China, India, and Brazil deserve a bigger voice in debates. The current voting structure, which gives China about as many votes as the Netherlands, makes no sense. Some developing nations have campaigned for a one-country, one-vote rule like in the UN General Assembly, but such a rule would make the IMF ineffective. To mitigate the democratic deficit at the heart of the IMF, a dramatic reform of the voting formula and rules is needed. In one proposed revision, a member country’s voting weight would based on three variables: its population, its economic potential, and its Human Development Index. Under such a rule, no country alone could exercise an effective veto, and the standing of developing nations would be greatly improved.

Strengthening the Fund’s accountability and independence is a major challenge. The solution is not to abolish the IMF but to reform it. Reform is all the more warranted because IMF policy failings are not just random blunders; bad outputs are directly correlated to undemocratic inputs. These changes are crucial if the IMF is to deserve the vast influence it wields over the global economy.

1. The IMF has become one of the most powerful organizations.______

2. It emerged from the World Bank.______

3. The organization exists to promote international monetary cooperation._____

4. Bretton Woods set up fixed exchange rates against the U.S. dollar.______

5. After the fall of the Berlin Wall, the IMF found itself at the front lines of the effort to rebuild Europe._____

6. In the 1990s massive bailout packages for Asian, European and Latin American countries followed._____

7. The Fund has reformulated its conditional lending policy._____

8. It has paid attention to children and the elderly in education and health care programmes._____

9. Strengthening the Fund’s accountability and independence is a major challenge.____

10. The solution is to abolish the IMF, not to reform it._____

Choose the most suitable word combination and fill in the gaps:

1. The IMF exists to __________.

1. fight poverty

2. promote foreign exchange stability

3. support peace initiative

4. strengthen the U.S. dollar

2. An amendment in its Articles of Agreement led to the Fund’s growing role in policing __________.

1. the world economy

2. the world business

3. the world policy

4. the world financial system

3. So – called Article IV consultations are currently completed with almost all __________.

a) companies

b) member states

c) citizens

d) banks

4. The Fund encouraged “social safety nets” to lessen the harmful effects of structural adjustment in ___________.

a) developed countries

b) Third World countries

c) Asian countries

d) developing countries

5.__________ is all the more warranted.

a) Voting

b) Reform

c) Conference

d) Brainstorming

Exercises and Tasks

1. Complete the text with the following words: liberalization, challenge, poverty, voice, voting, enhanced, policies, matters, framework, influence.

1. Reaching beyond strictly monetary ________ , the IMF now manages the economies of more than eighty developing countries.

2. The IMF’s __________ has always been visible.

3. The countries sought to design a stable monetary __________ that would foster price stability.

4. The Fund expects members to implement certain structural __________ to qualify for funds.

5. High conditionality requirements include trade __________, fiscal reform, slashed government budgets.

6. The Fund committed itself to targeting more spending on __________ reduction.

7. Constructive dialogue with outsiders__________ the effectiveness of IMF policies.

8. The unequal __________ weights of the member states may have worked in the past but no longer reflect global realities.

9. Large emerging economies deserve a bigger__________ in debates.

10. Strengthening the Fund’s accountability and independence is a major__________.