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The International Monetary Fund (IMF) is an international organization that was initiated in
1944 at the Bretton Woods Conference and formally created in 1945 by 29 member countries.
The IMF's stated goal was to assist in the reconstruction of the world's international payment
system postWorld War II. Countries contribute money to a pool through a quota system from
which countries with payment imbalances can borrow funds temporarily. Through this activity
and others such as surveillance of its members' economies and the demand for self-correcting
policies, the IMF works to improve the economies of its member countries.
The IMF describes itself as an organization of 188 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty around the world. The organization's
stated objectives are to promote international economic co-operation, international trade,
employment, and exchange rate stability, including by making financial resources available to
member countries to meet balance of payments needs. Its headquarters are in Washington, D.C.,
United States.
Upon initial IMF formation, its two primary functions were: to oversee the fixed exchange rate
arrangements between countries, thus helping national governments manage their exchange rates
and allowing these governments to prioritize economic growth and to provide short-term capital
to aid balance-of-payments. This assistance was meant to prevent the spread of international
economic crises. The Fund was also intended to help mend the pieces of the international
economy post the Great Depression and World War II.
HISTORY
The International Monetary Fund was originally laid out as a part of the Bretton Woods system
exchange agreement in 1944.During the earlier Great Depression, countries sharply raised
barriers to foreign trade in an attempt to improve their failing economies. This led to the
devaluation of national currencies and a decline in world trade.
This breakdown in international monetary co-operation created a need for oversight. The
representatives of 45 governments met at the Bretton Woods Conference in the Mount
Washington Hotel in the area of Bretton Woods, New Hampshire in the United States, to discuss
framework for post-World War II international economic co-operation. The participating
countries were concerned with the rebuilding of Europe and the global economic system after the
war.
There were two views on the role the IMF should assume as a global economic institution.
British economist John Maynard Keynes imagined that the IMF would be a cooperative fund
upon which member states could draw to maintain economic activity and employment through
periodic crises. This view suggested an IMF that helped governments and to act as the US
government had during the New Deal in response to World War II. The International Monetary
Fund formally came into existence on 27 December 1945, when the first 29 countries ratified its
Articles of Agreement. By the end of 1946 the Fund had grown to 39 members. On 1 March
1947, the IMF began its financial operations, and on 8 May France became the first country to
borrow from it.
The IMF was one of the key organizations of the international economic system; its design
allowed the system to balance the rebuilding of international capitalism with the maximization of
national economic sovereignty and human welfare, also known as embedded liberalism.[29] The
IMF's influence in the global economy steadily increased as it accumulated more members. The
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BENEFITS
The loan conditions ensure that the borrowing country will be able to repay the Fund and that the
country won't attempt to solve their balance of payment problems in a way that would negatively
impact the international economy. The incentive problem of moral hazard, which is the actions
of economic agents maximizing their own utility to the detriment of others when they do not bear
the full consequences of their actions, is mitigated through conditions rather than providing
collateral; countries in need of IMF loans do not generally possess internationally valuable
collateral anyway.
Conditionality also reassures the IMF that the funds lent to them will be used for the purposes
defined by the Articles of Agreement and provides safeguards that country will be able to rectify
its macroeconomic and structural imbalances. In the judgment of the Fund, the adoption by the
member of certain corrective measures or policies will allow it to repay the Fund, thereby
ensuring that the same resources will be available to support other members.
As of 2004, borrowing countries have had a very good track record for repaying credit extended
under the Fund's regular lending facilities with full interest over the duration of the loan. This
indicates that Fund lending does not impose a burden on creditor countries, as lending countries
receive market-rate interest on most of their quota subscription, plus any of their own-currency
subscriptions that are loaned out by the Fund, plus all of the reserve assets that they provide the
Fund.
CRITICISMS
In some quarters, the IMF has been criticized for being 'out of touch' with local economic
conditions, cultures, and environments in the countries they are requiring policy reform. [6] The
Fund knows very little about what public spending on programs like public health and education
actually means, especially in African countries; they have no feel for the impact that their
proposed national budget will have on people. The economic advice the IMF gives might not
always take into consideration the difference between what spending means on paper and how it
is felt by citizens.
The view is that conditionality undermines domestic political institutions. The recipient
governments are sacrificing policy autonomy in exchange for funds, which can lead to public
resentment of the local leadership for accepting and enforcing the IMF conditions. Political
instability can result from more leadership turnover as political leaders are replaced in electoral
backlashes.[6] IMF conditions are often criticized for their bias against economic growth and
reduce government services, thus increasing unemployment.
Another criticism is that IMF programs are only designed to address poor governance, excessive
government spending, excessive government intervention in markets, and too much state
ownership.[18] This assumes that this narrow range of issues represents the only possible
problems; everything is standardized and differing contexts are ignored. A country may also be
compelled to accept conditions it would not normally accept had they not been in a financial
crisis in need of assistance.
MEMBER COUNTRIES
The 188 members of the IMF include 187 members of the UN and the Republic of Kosovo. All
members of the IMF are also International Bank for Reconstruction and Development (IBRD)
members and vice versa. Former members are Cuba (which left in 1964) and the Republic of
China, which was ejected from the UN in 1980 after losing the support of then US President
Jimmy Carter and was replaced by the People's Republic of China. However, "Taiwan Province
of China" is still listed in the official IMF indices. Apart from Cuba, the other UN states that do
not belong to the IMF are Andorra, Liechtenstein, Monaco, Nauru and North Korea. The former
Czechoslovakia was expelled in 1954 for "failing to provide required data" and was readmitted
in 1990, after the Velvet Revolution. Poland withdrew in 1950allegedly pressured by the
Soviet Unionbut returned in 1986.
QUALIFICATIONS
Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar period,
rules for IMF membership were left relatively loose. Members needed to make periodic
membership payments towards their quota, to refrain from currency restrictions unless granted
IMF permission, to abide by the Code of Conduct in the IMF Articles of Agreement, and to
provide national economic information. However, stricter rules were imposed on governments
that applied to the IMF for funding.
The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates
secured at rates that could be adjusted only to correct a "fundamental disequilibrium" in the
balance of payments, and only with the IMF's agreement.
LEADERSHIP
Board of Governor:
The Board of Governors consists of one governor and one alternate governor for each member
country. Each member country appoints its two governors. The Board normally meets once a
year and is responsible for electing or appointing executive directors to the Executive Board.
The Board of Governors is advised by the International Monetary and Financial Committee and
the Development Committee. The International Monetary and Financial Committee has 24
members and monitors developments in global liquidity and the transfer of resources to
developing countries. The Development Committee has 25 members and advises on critical
development issues and on financial resources required to promote economic development in
developing countries. They also advise on trade and global environmental issues.
Executive Board:
24 Executive Directors make up Executive Board. The Executive Directors represent all 188
member-countries. Countries with large economies have their own Executive Director, but most
countries are grouped in constituencies representing four or more countries.
Following the 2008 Amendment on Voice and Participation, eight countries each appoint an
Executive Director: the United States, Japan, Germany, France, the United Kingdom, China, the
Russian Federation, and Saudi Arabia. The remaining 16 Directors represent constituencies
consisting of 4 to 22 countries. The Executive Director representing the largest constituency of
22 countries accounts for 1.55% of the vote.
Managing Director:
The IMF is led by a managing director, who is head of the staff and serves as Chairman of the
Executive Board. The managing director is assisted by a First Deputy managing director and
three other Deputy Managing Directors. Historically the IMF's managing director has been
European and the president of the World Bank has been from the United States. However, this
standard is increasingly being questioned and competition for these two posts may soon open up
to include other qualified candidates from any part of the world.
In 2011 the world's largest developing countries, the BRIC nations, issued a statement declaring
that the tradition of appointing a European as managing director undermined the legitimacy of
the IMF and called for the appointment to be merit-based. The head of the IMF's European
department is Antonio Borges of Portugal, former deputy governor of the Bank of Portugal. He
was elected in October 2010.
Voting Power:
Voting power in the IMF is based on a quota system. Each member has a number of "basic votes"
(each member's number of basic votes equals 5.502% of the total votes), plus one additional vote
for each Special Drawing Right (SDR) of 100,000 of a member country's quota. The Special
Drawing Right is the unit of account of the IMF and represents a claim to currency. It is based on
a basket of key international currencies. The basic votes generate a slight bias in favour of small
countries, but the additional votes determined by SDR outweigh this bias.
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OBJECTIVES
Give confidence to members through fund supplies shorten the disequilibria in balance of
payments.
The IMF holds a relatively large amount of gold among its assets, not only for
reasons of financial soundness, but also to meet unforeseen contingencies. The
IMF holds about 2,814 metric tons, of gold at designated depositories. The IMF's
holdings amount to about $160 billion.
FUNCTIONS
Offering wide range of technical assistance and training for government and central bank
officials.
Working with its member governments, international organizations, regulatory bodies and
private sector to strengthen financial system.
Make assessment of member countries to identify actual and potential weakness Improve
regulatory standards.
ORGANISATIONAL STRUCTURE
Central office:
In Washington Autonomous body affiliated to UNO Highest authority- Board governors of each
member countries- also policy making bodies Meets once a years.
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& world bank called development committee advises and reports to governors on developmental
issues concerning developing countries.
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FINANCIAL ORGANISATIONS
Resources:
Quota of member countries and supplement borrowings.
Quotas:
Subscription by member countries to capital fund -fixed for each country based on economic
size -forms the basis for deciding SDRs, voting power, and share in allocation of SDRs -25% of
countries quota should be paid in gold/US dollars -75% in own currency -reviewed at intervals of
5years. The more powerful the country the larger the quota -member country can draw to meet
BOP deficits.
The IMF works to foster global growth and economic stability. It provides policy advice and
financing to members in economic difficulties and also works with developing nations to help
them achieve macroeconomic stability and reduce poverty. The rationale for this is that private
international capital markets function imperfectly and many countries have limited access to
financial markets. Such market imperfections, together with balance of payments financing,
provide the justification for official financing, without which many countries could only correct
large external payment imbalances through measures with adverse effects on both national and
international economic prosperity. The IMF can provide other sources of financing to countries
in need that would not be available in the absence of an economic stabilization program
supported by the Fund.
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The IMF's role was fundamentally altered after the floating exchange rates post 1971. It shifted
to examining the economic policies of countries with IMF loan agreements to determine if a
shortage of capital was due to economic fluctuations or economic policy. The IMF also
researched what types of government policy would ensure economic recovery. The new
challenge is to promote and implement policy that reduces the frequency of crises among the
emerging market countries, especially the middle-income countries that are open to massive
capital outflows. Rather than maintaining a position of oversight of only exchange rates, their
function became one of surveillance of the overall macroeconomic performance of its member
countries. Their role became a lot more active because the IMF now manages economic policy
instead of just exchange rates.
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The Guidance Note reprinted in this pamphlet, adopted by the Board in July 1997, reflects the
strong consensus among Executive Directors on the significance of good governance for
economic efficiency and growth. The IMFs role in these issues has been evolving pragmatically
as more was learned about the contribution that greater attention to governance issues could
make to macroeconomic stability and sustainable growth. Executive Directors were strongly
supportive of the role the IMF has been playing in this area in recent years. They also
emphasized that the IMFs involvement in governance should be limited to its economic aspects.
Taking into account lessons from experience and the Executive Boards discussions, the
guidelines seek to promote greater attention by the IMF to governance issues, in particular
through:
A more proactive approach in advocating policies and the development of institutions and
administrative systems that eliminate the opportunity for bribery, corruption, and fraudulent
activity in the management of public resources;
Enhanced collaboration with other multilateral institutions, in particular the World Bank,
to make better use of complementary areas of expertise.
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1. Reflecting the increased significance that member countries attach to the promotion of good
governance, on January 15, 1997, the Executive Board held a preliminary discussion on the role
of the IMF in governance issues, followed by a discussion on May 14, 1997, on guidance to the
staff.1 The discussions revealed a strong consensus among Executive Directors on the importance
of good governance for economic efficiency and growth. It was observed that the IMFs role in
these issues had been evolving pragmatically as more was learned about the contribution that
greater attention to governance issues could make to macroeconomic stability and sustainable
growth in member countries. Directors were strongly supportive of the role the IMF has been
playing in this area in recent years through its policy advice and technical assistance.
2. The IMF contributes to promoting good governance in member countries through different
channels. First, in its policy advice, the IMF has assisted its member countries in creating
systems that limit the scope for ad hoc decision making, for rent seeking, and for undesirable
preferential treatment of individuals or organizations. To this end, the IMF has encouraged,
among other things, liberalization of the exchange, trade, and price systems, and the elimination
of direct credit allocation. Second, IMF technical assistance has helped member countries in
enhancing their capacity to design and implement economic policies, in building effective
policymaking institutions, and in improving public sector accountability.
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Third, the IMF has promoted transparency in financial transactions in the government budget,
central bank, and the public sector more generally, and has provided assistance to improve
accounting, auditing, and statistical systems. In all these ways, the IMF has helped countries to
improve governance, to limit the opportunity for corruption, and to increase the likelihood of
exposing instances of poor governance. In addition, the IMF has addressed specific issues of
poor governance, including corruption, when they have been judged to have a significant
macroeconomic impact.
3. Building on the IMFs past experience in dealing with governance issues and taking into
account the two Executive Board discussions, the following guidelines seek to provide greater
attention to IMF involvement in governance issues, in particular through:
a more comprehensive treatment in the context of both Article IV consultations and IMFsupported programs of those governance issues that are within the IMFs mandate and
expertise;
a more proactive approach in advocating policies and the development of institutions and
administrative systems that aim to eliminate the opportunity for rent seeking, corruption, and
fraudulent activity;
Enhanced collaboration with other multilateral institutions, in particular the World Bank,
to make better use of complementary areas of expertise.
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The IMFs Role in the Post Bretton Woods era: externalities and public goods?
The decades following the breakdown of the par value system in 1973 witnessed a sea
change in the international environment from that envisioned by the architects of the Bretton
Woods system. The par value system was gone and with it the IMFs main function as the umpire
of the rules of the game of that system. In the new environment, member countries could freely
choose their exchange rate arrangementspegged exchange rates to secure the benefits of a
nominal anchor and monetary and fiscal discipline, or floating rates for policy independence and
insulation from external shocks. The move by most advanced countries towards floating, which
in theory at least provided policy independence and a reduced need for international reserves,
meant that the only role seemingly left for the Fund was surveillance designed to achieve
responsible exchange rate policies under the amended Article IV. The IMF provided information
and policy advice, and acted as a medium for policy coordination.
A second development that had profound implications for the IMF was the increasing
integration of the world economy. This reflected a reduction in trade and transportation costs
and especially financial integration. The dramatic opening up of private international capital
markets, which had been suppressed through the Bretton Woods years by IMF sanctioned capital
controls, implied that private capital could substitute for official financing of payments
imbalances. This indeed became the case for the advanced countries.
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What are the general political and security implications of the existence of an
democracy and accountable institutions. It is in the interest of the United States to promote this
development.
The collapse of the communist economies, or (in the case of China) their transformation
into market economies was the last stage in the creation of the new consensus. The consequence
has been an increasing homogeneity of political outlook, as well as of the economic order.
Indeed, one key insight is that the two are linked: that economic efficiency depends on a
functioning civil society, on the rule of law, and on respect for private property. Thus in the
1990s, the IMF (and the World Bank) have become intensely concerned with problems of
governance.
Such issues raise questions of political costs and limitations that may not always coincide
with economic rationality, however. There is a strategic or geo-political element to some of the
work of the Fund. Attacking excessive military expenditure, corruption, and undemocratic
practices is easier for international institutions in the cases of small countries, such as Croatia,
Kenya or Romania, or even in isolated states such as Pakistan or Nigeria. But it is likely to be
hard and controversial in large states with substantial military and economic potential, for
instance, in say Russia or China. The public position is that expressed by the IMFs Managing
Director when he recalls telling President Yeltsin that the IMF would treat Russia in exactly the
same way it treated Burkina Faso. 3 But Russia, and its strategic stability, is clearly of direct
concern to the United States, and to other major countries, in a way that Burkina Faso is not.
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During the Cold War era, there was political pressure from the international community
(i.e. the West) to support financially particular states for foreign policy reasons, because they
were essential to the stability of a particular region (Egypt, or Zaire).
An organizational assessment is a systematic process for obtaining valid information about the
performance of an organization and the factors that affect performance. It differs from other
types of evaluations because the assessment focuses on the organization as the primary unit of
analysis.
Organizations are constantly trying to adapt, survive, perform and influence. However, they are
not always successful. To better understand what they can or should change to improve their
ability to perform, organizations can conduct organizational assessments. This diagnostic tool
can help organizations obtain useful data on their performance, identify important factors that aid
or impede their achievement of results, and situate themselves with respect to competitors.
Interestingly, the demand for such evaluations is gaining ground. Donors are increasingly trying
to deepen their understanding of the performance of organizations which they fund (e.g.,
government ministries, International Financial Institutions and other multilateral organizations,
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NGOs, as well as research institutions) not only to determine the contributions of these
organizations to development results, but also to better grasp the capacities these organizations
have in place to support the achievement of results.
The International Monetary Funds structure and rules are based on the quota system that
was constructed when the Fund was set up in 1946. Quotas affect contributions and resource
availability at the Fund, access to resources, the distribution of Special Drawing Rights, and
voting rights. Despite periodic reviews and modifications, the quota system has gradually been
eroded and undermined. The fundamental problem is that a single system is attempting to serve
four separate and incompatible functions. We illustrate how this erosion has taken place, and how
an unreformed quota system will compromise the future operations of the IMF and the
international monetary and financial system. Although the difficulties associated with reforming
quotas are myriad and complex, the legacy of an unreformed quota system may be profoundly
undesirable. We argue that a refined IMF structure must accommodate a clearer separation of a
members contributions to the IMF, its access to IMF resources, and its voting rights at the
institution.
Quotas are significant to the Funds operations because they affect voting rights, subscriptions,
the size of ordinary drawing rights and access to special facilities, as well as the distribution of
Special Drawing Rights (SDRs). However from the outset of the Funds operations in 1946 the
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formula used to calculate quotas was spurious, since agreement had already been reached about
the total amount of quotas and the relative sizes of the quotas for the most powerful countries. A
trial-and-error process was then used to devise a formula the Bretton Woods formula- that
generated the desired results.
currency warfare (Foreign Affairs) that helped usher in the Great Depression. The new regime
was intended to foster sustainable economic growth, promote higher standards of living, and
reduce poverty. The historic accord founded the twin institutions of the World Bank and the IMF,
and required signatory countries to peg their currencies to the U.S. dollar.
The IMF is akin to a credit union that permits its membership access to a common pool of
resources--funds that represent the financial commitment or quota contributed by each nation
(relative to its size). In theory, members with balance-of-payments trouble seek recourse with the
IMF to buy time to rectify their economic policies and restore economic growth. The Fund
pursues its mission in three fundamental ways:
1) Surveillance:
A formal system of review that monitors the financial and economic policies of member
countries to ensure they are living within their means--tracking developments on a
national, regional, and global level. In this process, IMF officials consult regularly with
member countries and offer macroeconomic and financial policy advice.
2) Technical Assistance:
Practical support and training directed mainly at low- and middle-income countries to
help manage their economies (e.g., providing advice on tax policy, expenditure
management, monetary and exchange rate policy, financial system regulation,
privatization, trade liberalization, etc.).
3) Lending:
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Giving short- to mid-term loans to member nations that are struggling to meet their
international obligations. Loans (or bailouts) are provided in return for implementing
specific IMF conditions designed to help restore the macroeconomic dynamics conducive
to sustainable growth.
ECONOMIC STATISTICS
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Additional cross-country tables of key indicators with more data transformation in harmonized
units of measurement to facilitate comparative analysis;
Longer runs of historical data via real-time access to the underlying PGI database;
On-line access to referential metadata which provide information on the data sources, economic
concepts, or national practices used in compiling the data; and
Visual display of key cross-country indicators.
The IMF also conducts two - to three-week on-site missions to its member countries to assess the
quality of data and assist in their further development. The ROSC data module provides an
assessment of data quality in five areas of macroeconomic statistics - national accounts (NA),
prices (consumer and producer price indices), government finance, monetary, and balance of
payments (BOP) - based on the July 2003 Data Quality Assessment Framework (DQAF), as well
as an assessment of whether the data dissemination practices are in accordance with those
specified in the Special Data Dissemination Standard (SDDS).
The assessments are disseminated as data modules of the Reports on Observance of Standards
and Codes. As of December 2010, 124 data module ROSCs had been completed, including
updates and reassessments. These include - using the IMF's World Economic Outlook country
group classification - 27 from advanced economies, 27 from Africa, 9 from developing Asia, 20
from Central and Eastern Europe, 16 from the Commonwealth of Independent States (CIS), 4
from the Middle East, and 21 from Western Hemisphere countries (including one regional central
bank).
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International Trade:
The IMF participates in the development and promulgation of standards and methodology for
trade statistics compilation such as the UN's International Merchandise Trade Statistics. The IMF
has actively participated to the Intersecretariat Task Force on Merchandise Trade Statistics,
chaired by the World Trade Organization (WTO). The Task Force's initiatives include developing
international handbooks on concepts and compilation methods for merchandise trade statistics
and to reconcile merchandise trade data collected by the IMF, the United Nations, and the WTO.
The IMF collects and maintains the monthly Direction of Trade Statistics database and
disseminates associated monthly electronic and quarterly/annual hardcopy publications Direction
of Trade Statistics, both quarterly and annual. Online version of the DOTS was released in
January 2007. The Direction of Trade Statistics Yearbook (DOTSY) database provides annual
bilateral trade data on the value of imports and exports of goods for 182 countries and major
regional groups. Exports and imports are based upon both country data and estimation
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procedures designed to reduce gaps in reported values. The DOTS quarterly database is widely
used within the IMF for trade policy analysis. This quarterly publication presents data for 158
countries and major regional areas. It is supplemented by a monthly CD-ROM and online
database.
Trade in Services:
The IMF participates in the Inter-Agency Task Force on Statistics of International Trade in
Services (ITFSITS). The ITFSITS has revised the Manual on Statistics of International Trade in
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Services (MSITS) in accordance with revisions to the 2008 SNA and the sixth edition of the
IMF's Balance of Payments and International Investment Position Manual (BPM6). The 2010
MSITS was approved by the United Nations Statistical Commission at its meeting in February
2010. The IMF promotes the development and improvement of data on international trade in
services as an integral part of its activities relating to the implementation of the BPM6. These
efforts include the organization of and participation in regional seminars on statistics of
international trade in services, in collaboration with other ITFSITS members.
Guide ready by 2013. On the whole, the EDS Guide remains largely consistent with the updated
standards. A limited number of changes in the methodological treatments in the EDS Guide are
discussed in the paper: Update of the External Debt Guide on Issues Emerging from BPM6
(March 2009). The TFFS is hosted by the IMF and was launched in December 2008.
hands-on short workshops for high level officials (e.g. India, September 2010), and for mission
chiefs and fiscal economists in the IMF.
The IMF is phasing in the GFSM 2001 presentation for staff reports. The World Economic
Outlook adopted the GFSM 2001 presentation in December 2009, and staff assists fiscal
economists to adjust the fiscal sector files. Staff also participates in area department missions
focusing on fiscal data reporting to the IMF.
Work on updating the Government Finance Statistics Manual has begun. A Government
Finance Statistics Advisory Committee has been established and will be discussing the main
methodological areas for review, including the changes introduced in the 2008 System of
National Accounts. The first meeting is planned for February 2011. A GFSM discussion forum
for selected methodological issues is now available online.
With support from the U.K. DFID, staff is developing a Compilation Guide for Developing
Countries expected to be available for electronic distribution in 2011.
Cooperation with international organizations continues. The IMF, World Bank, OECD, ECB,
and Eurostat are developing a coordinated strategy for fiscal data presentation and collection.
Cooperation with the International Public Sector Accounting Board (IPSASB) continues.
The IMF collects and maintains the monthly Direction of Trade Statistics database and
disseminates associated monthly electronic and quarterly/annual hardcopy publications Direction
of Trade Statistics, both quarterly and annual. Online version of the DOTS was released in
January. The Direction of Trade Statistics Yearbook (DOTSY) database provides annual bilateral
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trade data on the value of imports and exports of goods for 182 countries and major regional
groups. Exports and imports are based upon both country data and estimation procedures
designed to reduce gaps in reported values. The DOTS quarterly database is widely used within
the IMF for trade policy analysis. This quarterly publication presents data for 158 countries and
major regional areas. It is supplemented by a monthly CD-ROM and online database.
Regional and global output see increased correlations during financial crises
Size of output spillovers depends on type of shock and strength of linkages with
originating economy
The global panic set in motion by the 2008-09 financial crises generated an unprecedented output
collapse around the world that temporarily had countries moving in close lockstep, according to
a new study by the IMF.
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The output performance of the worlds economies moved together during the peak of the global
financial crisis as never before in the recent history, according to a study published in the IMFs
October 2013 World Economic Outlook report. Correlations of various countries GDP growth
rates had been modest before the crisis but rose dramatically during 200709.
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The increased correlation or co movement was not confined to the advanced economies
which suffered most from the crisisbut was observed across all geographic regions. As in past
episodes when output correlations spiked, the increase was temporary. In fact since 2010 output
co movements have returned close to precrisis levels despite continued economic turmoil in
Europe.
Lively debate persists on what caused the globally synchronized collapse and recovery and more
generally what makes countries economies move together.
Trade and financial linkages are the most likely explanation because they can transmit countryspecific shocks to other countries.
A second possibility is that greater co movements in output were induced by large, common
shocks simultaneously affecting many countries at approximately the same timesuch as a
sudden increase in financial uncertainty or a wake-up call that triggered a change in investors
perceptions of the world.
Finally, it could be that the nature of shocks changed. Shocks to countries financial sectors, such
as banking crises and liquidity freezes, were more prevalent during the global financial crisis.
These financial shocks might be transmitted to other countries in a more virulent manner during
crises than are the supply and demand shocksthat are more prevalent during normal times.
Global spikes :
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Even though financial linkages may have played some role in pushing up co movements, the
study finds that big spikes in regional and global output correlations tend to occur during
financial crises, such as those in Latin America in the 1980s and in Asia in the 1990s. Moreover,
when the crisis occurs in an economy like the United Stateswhich is both large and a global
financial hubthe effects on global output synchronization are disproportionately large. U.S.
financial shocks generated spillover effects during the crisis years of 200709 that were about
quadruple that during other periods. In other words, the global financial crisis had a much
stronger impact on output than would have been predicted by the size of the underlying U.S.
financial shock.
Cross-country linkages:
The fact that co movements are now lower does not mean policymakers can ignore the effects of
external shocks, such as growth slowdowns or monetary and fiscal tightening in major
economies. But they need not worry equally about all potential shocks.
First, size matters. The United States still matters most from a global perspective, although the
euro area, China, and Japan are important sources of spillovers within their respective regions.
Second, the extent of the spillovers depends on the nature of the shock and the strength of
linkages with the economy where the shock originates.
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The conventional wisdom that financial globalization necessarily induces greater output co
movement across countries is not true until a crisis hits. Financial linkages do transmit financial
stresses across borders, but in normal times when real supply and demand shocks are dominant,
financial linkages facilitate the efficient international allocation of capital. They shift capital
where it is most productive. The key is to preserve the benefits of increased financial integration
while minimizing the attendant risks through better oversight, including strengthened policy
coordination and collaboration.
The IMF supervised a modified gold standard system of pegged, or stable, currency exchange
rates. Each member declared a value for its currency relative to the U.S. dollar, and in turn the
U.S. Treasury tied the dollar to gold by agreeing to buy and sell gold to other governments at $35
per ounce. A countrys exchange rate could vary only 1 percent above or below its declared
value. Seeking to eliminate competitive devaluations, the IMF permitted exchange rate
movements greater than 1 percent only for countries in fundamental balance-of-payments
disequilibrium and only after consultation with and approval by, the fund. In August 1971 U.S.
President Richard Nixon ended this system of pegged exchange rates by refusing to sell gold to
other governments at the stipulated price. Since then each member has been permitted to choose
the method it uses to determine its exchange rate: a free float, in which the exchange rate for a
countrys currency is determined by the supply and demand of that currency on the international
currency markets.
The international community recognized that the IMFs financial resources were as important as
ever and were likely to be stretched thin before the crisis was over. With broad support from
creditor countries, the IMFs lending capacity tripled to around $750 billion. To use those funds
effectively, the IMF overhauled its lending policies. It created a flexible credit line for countries
with strong economic fundamentals and a track record of successful policy implementation.
Other reforms targeted low-income countries. These factors enabled the IMF to disburse very
large sums quickly; the disbursements were based on the needs of borrowing countries and were
not as tightly constrained by quotas as in the past.Globalization and the Crisis (2005Present),
International Monetary Fund, accessed July 26, 2010.
The founders of the Bretton Woods system had taken for granted that private capital flows would
never again resume the prominent role they had in the nineteenth and early twentieth centuries,
and the IMF had traditionally lent to members facing current account difficulties. The 2008
global crisis uncovered fragility in the advanced financial markets that soon led to the worst
global downturn since the Great Depression. Suddenly, the IMF was inundated with requests for
standby arrangements and other forms of financial and policy support.
The IMFs requirements are not always popular but are usually effective, which has led to its
expanding influence. The IMF has sought to correct some of the criticisms; according to a
Foreign Policy in Focus essay designed to stimulate dialogue on the IMF, the funds strengths
and opportunities include the following-
Flexibility and speed- In March 2009, the IMF created the Flexible Credit Line (FCL),
which is a fast-disbursing loan facility with low conditionality aimed at reassuring
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CONCLUSION
47
The IMF also has an International Monetary and Financial Committee of 24 representatives of
the member-countries that meets twice yearly to provide advice on the international monetary
and financial system to the IMFs staff.
In simpler terms, the goals are to:
1. Facilitate the cooperation of countries on monetary policy, including providing the
necessary resources for both consultation and the establishment of monetary policy in
order to minimize the effects of international financial crises.
2. Assist the liberalization of international trade by helping countries increase their real
incomes while lowering unemployment.
3. Help to stabilize exchange rates between countries. Especially after the global depression
of the 1930s, it was considered vital to establish currencies that could hold their value,
serve as mediums of international exchange, and resist any speculative attacks.
4. Maintain a multilateral system of payments that eliminates foreign exchange restrictions.
Countries are thus free to trade with each other without worrying about the effects of
interest rates and currency depreciation on their payments.
5. Provide a safeguard to members of the IMF against balance of payments crises, i.e., when
governments cannot balance the money they have with the money they owe to other
countries. IMF members can have the confidence to adjust the imbalances in their
national accounts without resorting to painful measures that would hamper their
prosperity, such as devaluing their currency in relation to other countries.
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BIBLIOGRAPHY
BOOKS REFERRED:
Models of IMF, by Peter Fuses.
IMF- Research Reports.
Views of IMF, by David Stowell.
WEBSITES REFERRED:
www.google.com
www.yahoo.com
www.Retailbanking.com
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