Globalization And Economic Meltdown The Role Of International Monetary Fund

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Globalization and Economic Meltdown the Role of International Monetary Fund

Introduction

Globalization is the growth and development of economies all over the world. This is integration and interactions of world’s greatest economies and the development of the emerging market economies. Globalization is not new, since it has existed for thousands of years in terms of the oldest long distance trade across Asia and Europe. Many large corporations have invested in businesses in other counties (multinational businesses) implying that the current characteristics of globalization existed even before the First World War. The recent technological developments (especially ICT-information and communication technology) and economic policies are the major stimulation factors that contributed to increased globalization. Despite the advantages of globalization, there are still some problems that face important world economics. Economic meltdown has been very consistent in this regard. It can simply be defined ad the economic go-slow or economic slowdown causing prices of products on the international market to fall and also to result in unfair trade practices.

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Globalization and Economic Meltdown the Role of International Monetary Fund

The Role of the IMF in Global Economic Crisis

Current economic policies in many nations are aimed at bringing about disinflation have significantly open up countries’ economies both locally and globally. This is because after the Second World War, most nations were motivated to start developing their economies again since they had lost most of the resources in the war. The most effective policy was the adoption of free market systems which significantly improved the rate and volumes of productivity in their regions of origin and opened up numerous international markets as many barriers to free trade and commerce had been reduced. Exploiting the new freedoms, many business ventures built their branches abroad and established production, distribution and marketing (Mishkin 2006)

There are problems still that are affecting the economy even more that the great depression did. The economic meltdown for instance has been very critical to the economies of most of the nations of the world. This is particularly so because large economies have suffered it meaning that the effects are spread out to the developing countries as well. However with better monetary and financial policies that are cantered on developing the people and are reciprocally supportive, the kind of protectionism and competitive exchange rate depreciation that aggravated economic distressing the great depression (Mishkin 2006). Important monetary organizations like the World Bank, World Trade Organization (WTO) and the International Monetary Fund (IMF) are set in place to try and stop occurrences of such events like inflation and economic depression in the economic history of the world. Giving a special consideration to the IMF, we realize that the success of such international bodies comes as a result it’s of integrated effects on individual countries (Ramos 2008). This has not been so hence three points are critical to note in this view;

First, The IMF is the chief institution of the international economic governance established to assist in dealing with the current economic and financial problems. Unluckily, the fund’s authority and significance has been undercut in the recent past. Furthermore, even in the Best of the situations, the Fund can only be as thriving as its key members make it to be.

Second, in the near future, the Fund should be able to;

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A). loan money to the nations that have been negatively impinged on by the prevailing economic crisis (Mishkin 2006)

B). Assist in establishing an approved approach for recovering economic and financial standards (Mishkin 2006)

C). keep an eye on the realization of the nationalized economic and financial policies; in certain exchange rate policies; to mitigate the negative consequences and overflow outcomes to the neighbouring countries. (Mishkin 2006)

Third, in the long-run, IMF should come up strongly to support its supervision of the national finance systems and the global funding system and assist in developing improved structure for macro-prudential supervision. (Macro-prudential supervision is simply a concern for the control of the monetary progress on then international economy and likewise essential, vice versa). (Mishkin 2006)

The initial, objective of forming the IMF was to assist disadvantaged countries to come out of the economic depression by lending to them. The Word Bank and the IMF were established in 1944 to address the economic and financial problems that were affecting poor countries and spreading to the developed countries. The IMF was designated a role of promoting international economic cooperation and to also to provide its members loans on short term basis so that they could improve their trade with other nation to attain a balance of payment. However this has not been possible since that IMF plunged itself into a debt as well and since the 1980s, the IMF has taken on another role of bailing out nations (offering financial guarantee) during economic crises which is in most cases as a result of monetary speculation in the global economic arena (Mishkin 2006). The loans are however conditional to compliance with what is known as Structural Adjustment Policies (SAPs).

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The IMF has been very critical in developing globalization from at least the 1980s; the IMF has pressed many nations to open up their borders to the foreign investors, novel technology, and free trade as a way of attaining economic growth and was able to channel their loans to those nations that heeded to their advice (Ramos 2008). The result of opening up the boundaries to free trade and foreign investment has been achievement of economic growth; the world market opened up with the opening of free market in the individual states that had split from the former Soviet Union plus other nations of the Eastern Europe. The Eastern Europe was very critical player for increased globalization in the 1990s. Most of the nations in the region joined The World Trade Organization (WTO) and played a significant role as a supply foundation in to the western countries. China’s role in the cold war was a swift one and by the time the cold war was culminating, it had established itself in Asia as the economic stronghold serving as a market and supplier to Japan and other developed nations in the region. China by that time exported about 15% of the total world export (Maddison 2001).

Reduced Poverty Rates: Most developing nations have improved considerably since 1980s and have found a place in the world economy as critical players. These countries have actually increased the value of global economy as they are rapidly developing in terms of industrialization and are being termed as emerging market economies as well. Examples of emerging economies are china an India, which have invested in Multinational firms that accommodate information technology and have a greater influence on the world economy, which is also supported by worldwide economic connection (Ramos 2008).

Reduced Inflation Rates:

Structural changes in the global financial market have influenced the international, market environment in terms of prices of consumer products. In 1990s the world experienced a change in disinflation rates reflected by a notable increase in the supply of products to the world market as a result of the rapid industrialization in the emerging market economies. Development and innovative technology plus anti-inflation policies adopted by many nations also played a significant role in the disinflation development. The inflation rates in the Group of eight (G-8) countries declined by about 3-4%. These countries are the greatest economies in the World of all nations and they include; United States, Germany, Japan, Italy, Canada, Britain, Russia and France (Maddison 2001).

Due IMF restrictions, many nations are force to comply with the regulations or guidelines of the IMF. The IMF has become an international loan monster, using gigantic leverage over

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economies of over 60 nations. These nations are forced to observe the policies set by the IMF for them to obtain the loans, international help, and debt aid. In this regard, the IMF is the one which decides how much a nation can spend on their healthcares systems, education systems, environmental protection etc (Maddison 2001). IMF is hence among the most powerful institutions the world has to offer. Instead of acting as a credit union helping countries in attaining balance of payment, the IMF has changed to become a detractor to the countries macro-economic policies and offer loans only upon acceptance of raft of free market gauge.

The intentions of the IMF worked well in the post war period owing to the fact that it was established if a state was going to shield its exchange rate from external devaluation forces related for instance to the trade deficit, it would be appropriate to provide financial aid, via the IMF to prevent the external adjustment from affecting that country. Domestic macro-economics were to be used basically to attain the outcomes. Another significant subsidiary objective of the IMF is to assist the removal of the exchange controls so as to expand the world trade (Bordo & James 2000).

The IMF system was quite successful for some time during the post war period. However the United States currency, the dollar which was the key player became overvalued. Furthermore global capital mobility increased and exerted a lot of weight on the fixed exchange rates. As a consequence the IMF system collapsed and there emerged other system with considerably much flexibility in its exchange rates in the major currencies of the world and eventually most currencies (Maddison 2001).

The IMF and the Economic Meltdown

In essence the IMF has been on the top of the multicultural reaction, promotion on the global scene and developing economic stability. On the eve of the economic meltdown, the global economy had been integrated with the flourishing trade and extensive financial connections. All this was stopped in many parts of the worlds and greatly reduced in the major economies when trade buckled and investment stream dried up, IMF Staff. (2005). Most of the emerging economies and low income nations were faced with difficulties in financing their needs. This was critical for the IMF to step in to the breach; realizing that the IMF had a significant role in

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managing economic meltdown of 2008, world leaders pledged it to increase the loans amounts it was issuing by triple and increase the concession resources to the developing countries, IMF Staff. (2005). The IMF is dedicated to make use of the funds as efficiently as possible with prominence on the upfront financing in larger capacities, more emphasis on preventing and more flexibility on lending.

The role of the IMF goes beyond that of lending to the needy countries. The IMF adds value with the way they do the forecasts and the advice on policies. The IMF proved its worth by the accurate forecasts it made and the production of the credit growths and losses. In the same way, the policy advisors have been helped to emphasize in certain need for common, coordination accomplishment. For instance, pinpointing the policy responses that have currently become part of the conventional wisdom, particularly the fiscal stimulus and need for restructuring the monetary/banking system. This economic meltdown is the next big financial crisis after the great depression and countries have been advised by IMF not to repeat the mistakes that lead to it for instance resorting to protectionism or boundary closure could rebound and aggravate the collapse of the global business and growth and cause everybody to worsen, IMF Staff. (2005)

War has been a serious problem causing many countries to remain in poverty. The IMF does not just concentrate on economic growth but also on the welfare of the nations by safeguarding them from war. War brings about deaths, disabilities, displacement and diseases, as a result, the countries are less productive. The effects even spread to the neighbouring courses as they have to take care of the refugees. War torn countries have been helped by IMF to consolidate their economies (Bordo & James 2000). The provision of financial assistance is the best way IMF can help without which administrations will be required to slash social security nets and critical public services. The IMF is offering support to low income countries and it has promised to increase the amount of money to be given out to about triple inn the next three years. Furthermore, the fund will be charging zero rates on concession funding by the year 2012, IMF Staff. (2005)

IMF funding to such countries emphasizes on programs fro poverty reduction, and safeguard the most susceptible since many people in such nation, food and jobs are the major problems. Low income counties are able to budget for higher expenditure supported by IMF fund, IMF Staff. (2005).

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Criticism of the IMF and Globalization Effects

The INF has bee criticized as being a modern day way of colonialism the poor countries. Compliance with the Structural Adjustment Policies for instance has ensured the loan repayment is done by cutting spending on healthcare, education, do away with food subsidies, devaluate their currencies for the exports to be cheaper and to privatize nations assert among other things. Such strict demands actually increase poverty and oppress the ability of the country to develop their domestic economies. Argentina’s loan for instance tied reductions to doctors and teacher’s wages and reduction of social security imbursement (Strauss-Kahn 2009).

IMF has also been criticized for enforce deeply defective development model. Unlike the conventional model followed by the developed nations to reach where they are; the IMF forces developing countries to prioritize export over developing domestic products. Over 80% malnourished children come from areas where farmers have shifted from food production to cash crop farming as a directive by the IMF.

The IMF has also been blamed for being very secretive and lacks accountability. This organization is financed by tax payers yet in runs its deals behind a secret veil. Members from the nations in need are not involved in designing the loan packages. Also being encouraged to experts, by offering tax breaks and subsidized exports to the industries, eventually the poor countries will end up selling of f their government utilities like phone lines and electricity firms or forest to the foreign investors at the very low prices. Other criticism are that IMF hurts workers, the environment, IMF bailouts intensify, rather than work out, economic crisis and IMF bails out rich bankers, generating a moral vulnerability and bigger insecurity

Globalization: As much as the Globalization Phenomenon has been praised for the improved economies of the world, On the other hand, it has been criticized for economic problems and

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financial crises in other nations could easily be transferred to other countries as a result of these interactions. This was evident with the Asian currencies crisis of 1997 that affected the major economies of the Asian region including China, South Korea and Japan; the Russian financial crisis that saw countries of former Soviet Union suffer an economic depression and the disintegration of the long-term capital management in 1998(Strauss-Kahn 2009).

Many countries have now undertaken a process of finding a solution to such occurrences in future and the most notable research is that conducted by the Japanese central bank. Globalization has been blamed for unfair trade by the emerging economies who introduce fake products to the international market especially the Chinese companies. It has also been argued that Globalization has brought about in equality in economies and environmental deprivation. Globalization includes interaction of communities, a concept that has been found to have a negative influence on the environment, culture as well as on political administration of some countries discriminately. Economic development has been found to be uneven around the world. Opponents of globalization argue that the creation of free markets only benefits the multi-national companies that are already established from the western nations at the expense of the local companies and people in the developing countries (Strauss-Kahn 2009).

Conclusion

IMF has played a greater role in advancing globalization. The finances it has offered to many nations have seen them increase investments while the compliance with SAP has opened free trade among nations. Globalization has greatly affected business around the globe and many businesses have benefited from it while others have suffered a down fall. Third world countries have been brought to the international market while inflation in some countries has been transferred to their neighbours as a result of free market. Globalization is a sign that many nations are coming together to cooperate on the international stage. At the centre of this phenomenon is the IMF, this institution was established to offer solution to economic crises. It hence forms the central dogma of the multilateral efforts to attain economic stability between nations and within their boundaries. Looking at the economic meltdown, the effects could have been worse than those of the great depression; however, the involvement of the IMF was able to salvage the situation from the brink. IMF is certainly playing its role though some negative consequences due to its operations have been noted in some of the countries it has dealt with.

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References

Bordo M.D & James H. (2000). The International Monetary Fund. Its Present Role IN historical View. Working Paper. National Bureau of Economic Research.

Maddison A. (2001).The World Economy: A Millennial Perspective. Organization for Economic Co-operation and Development Centre

Mishkin F.S (2006). The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich. Princeton University Press

IMF Staff. (2005). Strengthening the IMF’s Support for Low-Income Countries. Retrieved on 8th October 2009 from

Http://www.imf.org/external/np/exr/ib/2005/092105.htm

Ramos. F. (2008). An IMF success story. Retrieved on 8th October 2009 from http://www.geocit ies.com/CollegePark/Pool/1644/ramos2.html

Strauss-Kahn D. (2009). Multilateralism and the Role of the International Monetary Fund in the Global Financial Crisis. Speech- IMF. Retrieved on 8th October 2009 from http://www.imf.org/e xternal/np/speeches/2009/042309.htm

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