Om Guruji Shiv Gorkash Nathay Namaha,

8/7/2019 Om Guruji Shiv Gorkash Nathay Namaha,

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EXECUTIVE SUMMARY

International monetary fund is an international organisation which was set up

with an aim to stabilize exchange rates and assist the reconstruction of theworlds international payment system. It plays a very important and crucial role

in world financial system. The expansions of the IMFs membership, together

with the changes in the world economy, have required the IMF to adapt in a

variety of ways to continue serving its purposes effectively.

The primary mission of the IMF is to provide financial assistance to

countries that experience serious financial and economic difficulties using funds

deposited with the IMF from the institution's 187 member countries. Member

states with balance of payments problems, which often arise from these

difficulties, may request loans to help fill gaps between what countries earn

and/or are able to borrow from other official lenders and what countries must

spend to operate, including covering the cost of importing basic goods and

services.

To simply say INTERNATIONAL MONETARY FUND & BANK OFINTERNATIONAL SETTELMENT are the two most crucial role players in

international financial market as well system. The International Monetary Fund

keeps account of international balance of payments accounts of member states.

The IMF acts as a lender of last resort for members in financial distress,

e.g., currency crisis, problems meeting balance of payment when in deficit

and debt default.

To simply conclude International Monetary Fund, IMF can be defined as

an intergovernmental organization that oversees the global financial system by

following the macroeconomic policies of its member countries. IMF was

important when it was first created because it helped the worl d stabilize the

economic system and today it is even more important because it is a leading


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significantly over-valued or under-valued currencies run the risk of facing

balance of payment crises. Thus, the structural adjustment programs are at least

ostensibly intended to ensure that the IMF is actually helping to prevent

financial crises rather than merely funding financial recklessness.

The World bank & IMF together pulled out the solution for the crisis in

2007-2009 and there emerged an developing countries union G -20.The G-20

Summit was created as a response both to the financial crisis of 20072010 and

to a growing recognition that key emerging countries were not adequately

included in the core of global economic discussion and governance. The G -20

Summits of heads of state or government were held in addition to the G-20

Meetings of Finance Ministers and Central Bank Governors who continued to

meet to prepare the leaders' summit and implement their decisions.


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HISTORY OF INTERNATIONAL MONETARY FUND

The International Monetary Fund was conceived in July 1944 during the United

Nations Monetary and Financial Conference. The representatives of 45

governments met in the Mount Washington Hotel in the area of Bretton Woods,

New Hampshire, United States, with the delegates to the conference agreeing on

a framework for international economic cooperation. The IMF was formally

organized on December 27, 1945, when the first 29 countries signed its Articles

of Agreement. The statutory purposes of the IMF today are the same as when

they were formulated in 1943.

Since last few centuries gold has been used as a form of money. Most

European countries which even used silver coins as money for trade transaction.

The countries which followed gold and silver as any one metal were said to

follow monometalism and those which used both gold as well as silver coins

were said to follow bimetallism. Use of gold as money is called as Gold

Standard System its the oldest system and was in operation till First World

War. This system is based on value of gold and relates to the a mount of gold

held by the monetary authority of a specific country. There are three known

kind of Gold Standard System that have been adopted since early 1700s The

gold specie, the gold bullion, and the gold exchange standard system.

With the outbreak of First World War, the United Kingdom ended using

the gold specie system and so did the British Empire, instead another system

where authorities agree upon amount an amount to sell gol d; however the gold

coins are not actually in circulation.

The country kept treasury notes instead of actually circulating the gold

coins. Officially the gold specie system had not been repealed (abolished) until

1925 when the Bank of England had been requested by someone to trade in

their paper money for gold.


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Then the bullion standard was put into effect; however this standard only

lasted until 1931, when the United Kingdom ended the bullion standard because

of large amounts of gold going overseas. Australia, New Zealand and Canada

also ended the gold standard because of money problems that were associated

with the Great Depression.

By First World War most countries were on the gold standard, but most

suspended it so they could print enough money to pay for their investment in the

war. The Gold Standard System came to an end for the United States in 1933

when President Roosevelt prohibited owning gold privately, except for

jewellery.

In this way after the Second World War the IMF was emerged and till date

plays a very crucial and a significant role in the global financial economies,

market as well as the global financial system. It can be said that the IMF is the

roots for the smooth working of the financial system worldwide.


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BRETTON WOODS SYSTEM.

Due to many events, including the breakdown of Gold standard System, world

monetary system was not really a system at all. It was an utter chaos. After the

Second World War, policy makers from United Kingdom and United states

along with other allies initiated the process of reviving world monetary system.

In 1944, representatives from around 40 countries met at Bretton Woods a town

in New Hampshire States of the United States. The system evolved was named

as Bretton Woods System. Also as results of this meet, two super- national

institution of world were formed, viz., International Monetary Fund (IMF) and

the International Bank for Reconstruction and Development, now known as the

World Bank.

The former was designed to monitor exchange rates and lend reserve

currencies to nations with trade deficits, the latter to provide underdeveloped

nations with needed capital although each institution's role has changed over

time. Each of the 44 nations who joined the discussions contributed a

membership fee, of sorts, to fund these institutions; the amount of each

contribution designated a country's economic ability and dictated its number ofvotes.

In an effort to free international trade and fund post war reconstruction,

the member states agreed to fix their exchange rates by tying their currencies to

the U.S. dollar.

On August 15, 1971, the United States unilaterally terminated

convertibility of the dollar to gold. This action, referred to as the Nixon shock,

created the situation in which the United States dollar became the sole backing

of currencies and a reserve currency for the member states. An American dollar

played an very important role in this system . The Bretton Woods System was a

modified version of Gold Exchange Standard and the main features were as

follows:


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1. The United States of America undertook to convert the US dollar ($)freely into gold at fixed parity of $ 35 per ounce. (1 ounce = 28.35 gram s)

2. Other countries (member countries) agreed to maintain their currencies atspecific parities (ratio) with US Dollar. 1% variation in this parity (+ or -)

was allowed. If the exchange rate of these member countries tended to

exceed this 1% limit, then their monetary authorities (the monetary

authorities can be Central Bank or Organisation of the country under the

law of that specific country) shall take the necessary measures to restore

it. This was supposed to be done by buying and selling dollars in the

international financial markets. Its simple to understand that if the

market of some specific country is buying dollars heavily then themonetary authorities of that specific country should sell dollars in

financial markets worldwide to maintain the parity fixed with the US

Dollars.

3. If there is any kind of problem in maintaining or in order to maintainparity obligations, if required, the members countries may borrow US

Dollars from International Monetary Fund (IMF).

4. If there is a genuine problem in maintaining parity to the particularmember country, then it can change it s parity itself by 10% (+ or-),

without consulting IMF. If desired to exceed this 10% limit, then the

member country or countries has to inform IM F and seek its consent.

Because of this feature, the Bretton Woods system was often referred as

Adjustable Peg System.

The Bretton Woods system of monetary management established the rules

for commercial and financial relations among the world's major industrial

states in the mid 20th century. The Bretton Woods system was the first

example of a fully negotiated monetary order intended to govern monetary

relations among independent nation-states.


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MECHANISM OF BRETTON WOODS SYSTEM

Dollar was universally accepted exchange currency.US did not have freedom to

change gold parity of its own currency. All other countries were willing to

accumulate by selling goods and services to US. However, US can buy these

goods from other countries by simply printing dollars, so long as they are

confident to convert those many dollars to gold, on demand. Being the power as

well as excepting to give Gold on demand to other countries in exchange of the

U.S Dollars ($) the American government started printing more and more

currency, on other side the member countries of IMF started acquiring more and

more ($) by providing America with goods and services.

The countries other than US had to accumulate more and more dollars so

as to carry out international trade. So US had to supply unlimited dollars. It had

to run balance of payment (BoP) deficits. Initial years while this deficit was at

moderate levels, it was fine. When it started to be higher and higher levels,

other member countries started doubting the capability of the US to convert

dollars into gold. Mainly France started demands of such actual conversion after

1960s. Soon it was evident that US did not have enough gold to honour its

commitment of conversion of dollars into gold.

COLLAPSE OF BRETTON WOODS SYSTEM

In 1960 Robert Triffin noticed that holding dollars was more valuable than gold

because constant U.S. balance of payments deficits helped to keep the systemliquid and fuel economic growth. What would later come to be known

as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to

keep running deficits the system would lose its liquidity, not be able to keep up

with the world's economic growth, and, thus, bring the system to a halt. But


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incurring such payment deficits also meant that, over time, the deficits would

erode confidence in the dollar as the reserve currency created instability.

The first effort was the creation of the London Gold Pool on November 1

of 1961 between eight nations. The theory behind the pool was that spikes in thefree market price of gold, set by the morning gold fix in London, could be

controlled by having a pool of gold to sell on the open market that would then

be recovered when the price of gold dropped. Gold's price spiked in response to

events such as the Cuban Missile Crisis, and other smaller events, to as high as

$40 per ounce. The Kennedy administration drafted a radical change of the tax

system to spur more production capacity and thus encourage exports. This

culminated with the 1963 tax cut program, designed to maintain the $35 peg.

In 1967, there was an attack on the pound and a run on gold in the sterling

area, and on November 18, 1967, the British government was forced to devalue

the pound. U.S. President Lyndon Baines Johnson was faced with a brutal

choice, either institute protectionist measures, including travel taxes, export

subsidies and slashing the budgetor accept the risk of a "run on gold" and the

dollar. From Johnson's perspective: "The world supply of gold is insufficient to

make the present system workableparticularly as the use of the dollar as a

reserve currency is essential to create the required international liquidity to

sustain world trade and growth." He believed that the priorities of the United

States were correct, and, although there were internal tensions in the Western

alliance, that turning away from open trade would be more costly, economically

and politically, than it was worth: "Our role of world leadership in a political

and military sense is the only reason for our current embarrassment in an

economic sense on the one hand and on the other the correction of the economic

embarrassment under present monetary systems will result in an untenable

position economically for our allies."


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While West Germany agreed not to purchase gold from the U.S., and

agreed to hold dollars instead, the pressure on both the dollar and the pound

sterling continued. This was unsuccessful, however, as in mid-March 1968 a run

on gold ensued, the London Gold Pool was dissolved, and a series of meetings

attempted to rescue or reform the existing system. But, as long as the U.S.

commitments to foreign deployment continued, particularly to Western Europe,

there was little that could be done to maintain the gold peg.

All attempts to maintain the peg collapsed in November 1968, and a new

policy program attempted to convert the Bretton Woods system into an

enforcement mechanism of floating the gold peg, which would be set by

either fait policy or by a restriction to honour foreign accounts.

In this way the system of Bretton Woods collapsed on 15TH August,

1971.And after that in 1971, at Smithsonian Institute, Finance Ministers

attempted to retain and defend the Bretton Woods System. The US agreed to

raise the official price of gold from ($) 35 to ($) 38 i.e. 7.9% devaluation of US

dollar ($).This agreement was also an incomplete solution to the problem

explained by Triffin, hence it was unsustainable for long time.

After several attempts to revive the system by parity changes, dollar

devaluation, etc. The system was practically abandoned in 1973 and officially in

1978. US lost its role as an anchor of the world monetary system.

But even though the Bretton Woods System collapsed but, the

International Monetary Fund and the International Bank for Reconstruction and

Development, now known as the World Bank are yet working in the benefit of

International financial system.


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INTERNATIONAL MONETARY FUND

The International Monetary Fund (IMF) is the intergovernmental organization

that oversees the global financial system by following the macroeconomic

policies of its member countries, in particular those with an impact on exchange

rate and the balance of payments. It is an organization formed with a stated

objective of stabilizing international excha nge rates and facilitating

development through the enforcement of liberalising economic policies on other

countries as a condition for loans, restructuring or aid. It also offers

highly leveraged loans, mainly to poorer countries. Its headquarters are

in Washington, D.C., United States. The IMF's relatively high influence in

world affairs and development has drawn heavy criticism from some sources.

ORGANIZATION AND PURPOSE

The International Monetary Fund was conceived in July 1944 originally with 45

members and came into existence in December 1945 when 29 countries signed

the agreement, with a goal to stabilize exchange rates and assist the

reconstruction of the world's international payment system. Countries

contributed to a pool which could be borrowed from, on a temporary basis, by

countries with payment imbalances (Condon, 2007). The IMF was importa nt

when it was first created because it helped the world stabilize the economic

system. The IMF works to improve the economies of its member countries. The

IMF describes itself as "an organization of 187 countries (as of July 2010),

working to foster global monetary cooperation, secure financial stability,

facilitate international trade, promote high employment and sustainable

economic growth, and reduce poverty".


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MEMBERSHIP

Members of the IMF are 186 of the UN members and Kosovo.

Former members are: Cuba (left in 1964), and Taiwan (expelled in 1980 due to

political reasons),

The other non-members are: North Korea, Andorra, Monaco, Liechtenstein,

Nauru, Cook Islands, Niue, Vatican City and the rest of the states with limited

recognition.

All member states participate directly in the IMF. Member states are

represented on a 24-member Executive Board (five Executive Directors are

appointed by the five members with the largest quotas, nineteen Executive

Directors are elected by the remaining members), and all members appoint a

Governor to the IMF's Board of Governors.

All members of the IMF are also IBRD members, and vice versa.

DATA DISSEMINATION SYSTEM

In 1995, the International Monetary Fund began work on data dissemination

standards with the view of guiding IMF member countries to disseminate their

economic and financial data to the pub lic. The International Monetary and

Financial Committee (IMFC) endorsed the guidelines for the dissemination

standards and they were split into two tiers: The General Data Dissemination

System (GDDS) and the Special Data Dissemination Standard (SDDS).

The International Monetary Fund executive board approved the SDDS

and GDDS in 1996 and 1997 respectively and subsequent amendments were

published in a revised "Guide to the General Data Dissemination System". The

system is aimed primarily at statisticians and aims to improve many aspects of


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statistical systems in a country. I t is also part of the World Bank Millennium

Development Goals and Poverty Reduction Strategic Papers.

The IMF established a system and standard to guide members in the

dissemination to the public of their economic and financial data. Currently thereare two such systems: General Data Dissemination System (GDDS) and its

superset Special Data Dissemination System (SDDS), for those member

countries having or seeking access to international capital markets.

The primary objective of the GDDS is to encourage IMF member

countries to build a framework to improve data quality and increase statistical

capacity building. This will involve the preparation of meta data describing

current statistical collection practices and setting improvement plans. Upon

building a framework, a country can evaluate statistical needs, set priorities in

improving the timeliness, transparency, reliability and accessibility of financial

and economic data. Some countries initially used the GDDS, but lately

upgraded to SDDS.


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GLOBAL FINANCIAL SYSTEM

The global financial system (GFS) is the financial system consisting

of institutions and regulators that act on the international level, as opposed to

those that act on a national or regional level. The main players are the global

institutions, such as International Monetary Fund and Bank for International

Settlements, national agencies and government departments, e.g., central

banks and finance ministries, private institutions acting on the global scale,

e.g., banks and hedge funds, and regional institutions, e.g., the Euro zone.

Deficiencies and reform of the Global Financial System have been hotly

discussed in recent years specifically from 1990s.

The history of financial institutions must be differentiated from economic

history and history of money. In Europe, it may have started with the first

commodity exchange, the Bruges Bourse in 1309 and the first financiers and

banks in the 15th17th centuries in central and western Europe. The first global

financiers the Fuggers (1487) in Germany; the first stock company in England

(Russia Company 1553); the first foreign exchange market (The Royal

Exchange 1566, England); the first stock exchange (the Amsterdam Stock

Exchange 1602).

Milestones in the history of financial institutions are the Gold

Standard (18711932), the founding of International Monetary Fund (IMF),

World Bank at Bretton Woods, and the abolishment of fixed exchange rates in

1973.


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PRESPECTIVE

There are three primary approaches to viewing and understand ing the global

financial system, which are as follows:

(1)The liberal view holds that the exchange of currencies should bedetermined not by state institutions but instead individual players at a

market level. This view has been labelled as the Washington Consensus.

(2)The Washington Consensus view is challenged by a socialdemocratic front which advocates the tempering of market mechanisms,

and instituting economic safeguards in an attempt to ensure financ ial

stability and redistribution. Examples include slowing down the rate of

financial transactions, or enforcing regulations on the behaviour of

private firms.

(3)Outside of this contention of authority and the individual, neoMarxists are highly critical of the modern financial system in that it

promotes inequality between state players, particularl y holding the view

that the political north abuse the financial system to exercise control of

developing countries' economies.

THE MAJOR PLAYERS IN THE GLOBAL FINANCIAL SYSTEM

International institutions

The most prominent international institutions are the International Monetary

System (IMF), the World Bank and the WTO:

(a)The International Monetary Fund keeps account of international balanceof payments accounts of member states.

(b)The World Bank aims to provide funding, take up credit risk or offerfavourable terms to development projects mostly in developing countries


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that couldn't be obtained by the private sector. The other multilateral

development banks and other international financial institutions also play

specific regional or functional roles.

(c)The World Trade Organization settles trade disputes and negotiatesinternational trade agreements in its rounds of talks (currently the Doha

Round).

Also important is the Bank for International Settlements, the intergovernmental

organisation for central banks worldwide. It has two subsidiary bodies that are

important actors in the global financial system in their own right - the Basel

Committee on Banking Supervision, and the Financial Stability Board.

In the private sector, an important organisation is the Institute of

International Finance, which includes most of the world's largest commercial

banks and investment banks.

Government institutions

Governments act in various ways as actors in the Global Financial System,primarily through their finance ministries: they pass the laws and regulations

for financial markets, and set the tax burden for private players, e.g., banks,

funds and exchanges. They also participate actively through discretionary

spending. They are closely tied (though in most countries independent of) to

central banks that issue government debt, set interest rates and deposit

requirements, and intervene in the foreign exchange market.


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Private participants

Players active in the stock-, bond-, foreign exchange-, derivatives-

and commodities-markets, this includes the participant like hedgers, speculators

and arbitrageurs.

Investment banking, including: Commercial banks, Hedge funds and Private

Equity, Pension funds, Insurance companies, Mutual funds, and Sovereign

wealth funds.

Regional institutions

It includes Commonwealth of Independent States (CIS), Euro zone, Mercosur,

North American Free Trade Agreement (NAFTA), South Asian Association For

Regional cooperation (SAARC) etc.


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ROLE OF INTERNATIONAL MONETARY FUND (IMF) IN

GLOBAL FINANCIAL SYSTEM.

The global economy and financial system are in the midst of a massive

deleveraging process. The increased globalization of the world economy and,

more important, of the world financial system in recent decades means that

countries can run, but not hide, from this crisis or future crises. Every country

has been affected, and those with the weakest policies and the most precarious

financial circumstances have been affected first. The incidence and virulence of

future crises may be reduced by decisions taken in the wake of this crisis, but

crises will not be prevented. What is important now is to cushion the impacts of

the global recession and to restore stability to financial markets.

The world has turned to the International Monetary Fund (IMF) . Under

managing director Dominique Strauss-Kahn, the IMF has moved aggressively.

In the fourth quarter of 2008, the IMF committed about $45 billion to six of its

member countries to support their adjustment programs. A program for Belarus

was approved on January 12, and programs for several more countries are in the

pipeline.On another front, on October 27, the IMF executive board approved a

new short term lending facility (SLF). Countries with sound economic and

financial policies and underlying fundamentals plus sustainable external and

internal debt positions (on the basis of their most recent Article IV

consultations) can borrow immediately as much as five times their IMF quotas

for three months with two possible rollovers. (Normally a member can only

draw the amount of its IMF quota over the course of one year.) The executive

board notionally set aside an initial $100 billion for this facility. This is out of

its estimated total forward lending capacity of about $200 billion as of the end

of September$250 billion including financing available under established


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IMF borrowing arrangements. Government of Japan offered to lend the IMF an

additional $100 billion.

Also on October 27 last year, the Federal Open Market Committee

(FOMC) of the Federal Reserve System approved reciprocal swap, or short-

term lending, arrangements with each of four emerging -market countries

Brazil, Korea, Mexico, and Singaporeof $30 billion each. It remains to be

seen whether any country draws on the SLF and how that facility interacts with

the Federal Reserve swap arrangements with these four and the other ten central

banks.

As of the end of 2008, the Federal Reserve had extended more than $600

billion in dollar credit to the fourteen. (In early January, a small portion of thatamount has been repaid.) Thus, the Federal Reserve lent to other countries

almost twice the amount that the IMF can lend out of its normal resources. Its a

most prominent international institution; the International Monetary Fund keeps

account of international balance of payments accounts of member states. The

IMF acts as a lender of last resort for members in financial distress,

e.g., currency crisis, problems meeting balance of payment when in deficit

and debt default. Membership is based on quotas, or the amount of money a

country provides to the fund relative to the size of its role in the international

trading system.

ROLE AND REFORMS OF IMF

The primary mission of the IMF is to provide financial assistance to countriesthat experience serious financial and economic difficulties using funds

deposited with the IMF from the institution's 187 member countries. Member

states with balance of payments problems, which often arise from these

difficulties, may request loans to help fill gaps between what countries earn


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and/or are able to borrow from other official lenders and what countries must

spend to operate, including covering the cost of importing basic goods and

services. In return, countries are usually required to launch certain reforms,

which have often been dubbed the " Washington Consensus". These reforms are

thought to be beneficial to countries with fixed exchange rate policies that may

engage in fiscal, monetary, and political practices which may l ead to the crisis

itself. For example, nations with severe budget deficits, rampant inflation, strict

price controls, or significantly over-valued or under-valued currencies run the

risk of facing balance of payment crises. Thus, the structural adjustment

programs are at least ostensibly intended to ensure that the IMF is actually

helping to prevent financial crises rather than merely funding financ e to themember countries.

EBBING OF INTERNATIONALISM

Since the early days of the Fund (leaving out the abnormal post -war lows),

world trade has grown, from 10% of world GDP in 1960 to almost triple that in

2005. World GDP itself has grown at an average rate of 3.5% over this period,

faster than at any other period in human history. In short, judging by the Fund's

goals at its founding, it has been a great success.

The Fund was a partnership of the heedful, and given that a country could

be a creditor one day and a debtor the next, it was also a community of common

interests. Over time, however, industrial countries recovered from their post -war

weakness. They rebuilt their capability to undertake policy analysis. And the

system of capital controls and fixed but adjustable exchange rates broke down

for reasons well described elsewhere. Most industrial countries moved to

floating exchange rates. This move, coupled with their political stability and

strong institutions, ensured that private capital markets would be a reliable


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source of finance. As a result, industrial countries stopped borrowing from the

Fund as late as 1975, nearly half of Fund lending was to industrial countries,

but by the late 1980s, it was zero.

This had two important consequences:

(1)It was that with little to gain from the vetting of their policies by thelarger Fund membership, important industrial countries started forming

groups outside the Fund, with serious policy discussion and economic co -

operation taking place within these group s. The most prominent avatar of

this First Circle is now the G-7. While not denying the global benefits of

frank policy dialogue and coordination within the group, an unfortunate

consequence has been to diminish the relevance of the multilateral

discussion that takes place within the Fund.

(2)It was that the Fund itself was divided between industrial countrycreditors who would never borrow and held the weight of the

shareholding, and potential debtors who had to subject their policies to

multilateral advice either within the context of a Fund-supported policy

program or for fear they might otherwise lose access to Fund resources in

their time of need. The tensions between these groups centred around

program conditionality the conditions the Fund imposed in lending

programs to ensure repayment, and to ensure that the resources were used

to promote, rather than postpone, adjustment and reform.

In the early days of the Fund, conditions were primarily imposed on a

country's exchange rate and macroeconomic policies. But as the Fund began

lending to more developing, emerging market, and formerly planned economies,

it began to place conditions relating to structural reforms such as

privatization, fiscal reforms, financial sector reforms, trade refo rms, central

bank independence, etc. These were more intrusive than prior Fund

conditionality the canonical example of what generally came to be viewed as


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excess being the 140 or so conditions imposed on Indonesia in 1998 including

measures dealing with reforestation programs, disbanding the clove monopoly,

and introducing a micro-credit scheme.Whether all these conditions were really

needed, or whether the Fund was freer with conditionality because its largest

shareholders did not ever anticipate borrowing is something that can again be

debated for a long time. What is true is that even though the Fund has taken

important steps to streamline conditionality as exemplified by the recent

program with Brazil the fear of excessive conditionality persists.

Most recently, some emerging markets have built up their foreign reserves

to such an extent that they are unlikely to need Fund resources at least in the

short term. Given the precedent set by the industrial countries, these "advanced"emerging markets are not keen to be seen heeding Fund advice, though many of

them value it privately. Unfortunately, paying attention to the global community

is seen as weakness today rather than responsible global citizenship.

This development of IMF is particularly pernicious for a number of

reasons. Unlike industrial countries, these advanced emerging markets still have

structural vulnerabilities which are currently papered over by the excellent

global economic condition. After all, with the United States r unning a huge

current account deficit, it becomes easier for many emerging markets to run

current account surpluses, and reduce their external borrowing. Similarly, fiscal

surpluses are easier to run when buoyant export revenues provide easy -to-

collect taxes. The times will change, though not necessarily soon, and while

emerging markets are trying to use current conditions to reduce their

vulnerabilities, it can expected that many will continue to benefit tremendously

from Fund surveillance. They may well n eed Fund resources in the future.

Many of the member countries are now significant players in the world

economy, who affect each other, as well as the rest of the world. They could

play a valuable role in the multilateral dialogue their collective will could be


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a powerful force in reforming multilateral form, but it is not being asserted,

partly because they have diverse interests. Equally problematic, industrial

countries are only slowly, too slowly in my view, figuring out that their groups

need to be reformed the smallest countries are a particular drag here because

any reform that includes new members is likely to leave them out. Moreover,

industrial countries have gotten used to domestic policy independence. The

member countries need to realize that if they want the advanced emerging

markets to alter their policies to further the common interest, they themselves

have to accept some multilateral constraints on their policies.

The ebbing spirit of internationalism is not felt only by the IMF. More

generally, it seems to that the rapidity with which the private sector hasembraced globalization worries citizens. Some governments see their role

increasingly as slowing this process, extracting political mileage by pandering

to vociferous interest groups obstructing change, rather than educating citizens

to accept it. Economic patriotism is protectionist old wine in a mislabelled new

bottle, but it is all the more dangerous in a world where multilateral dialogue is

becoming so critical. The beggar-thy-neighbour policies being contemplated by

some countries on the capital account -shielding large swathes of their own

economy from corporate takeovers while encouraging their own companies to

take advantage of the continued openness of o thers deserves to be roundly

condemned. If not stopped immediately, these policies will only spread, with

action breeding reaction.

It is amidst this background of diminishing multilateral dialogue that

calls are being made to reform the Fund. Part of the Fund's response to its

largest shareholders has to be, "Physician, heal thy self". But the larger part of

the Fund's response has to be to find ways to re -engage all of its member

countries.


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FUND SURVELLIENCE OF FLOATING EXCHANGE RATES

IMF surveillance that is its periodic monitoring of a country's economic

policies focuses on two related issues: the sustainability of a country's

policies and their external effects. While the exchange rate is at the heart of the

IMF's mandate for surveillance, the level of the exchange rate (and its departure

from some notion of equilibrium), is just one of the gauges of the

appropriateness of policy.

In the past, one hurdle used to be that countries simply did not have

the high quality personnel or the wealth of data and country experience the

Fund staff had. Increasingly, though, our member countries recruit officials with

qualifications comparable to those of Fund staff, and have access to the same

databases that the Fund uses. While they do not usually have the wealth of

cross-country experience we have, countries do talk to one another.

But as important as the quality of analysis is impartiality. This is where the

Fund still has an important advantage.

Example: Politicians need to be re-elected. This shortens their policy horizonsand increases their incentive to take on long -dated risks with short-dated

returns. Growth before elections is much valued, growth after elections is highly

discounted. Inflicting pain on current generations, especially those who are

vocal and vote, in order to ease the way for future generations, is especially

difficult. Unfortunately, future generations do not have a voice, and not all the

electorate see the consequences of myopic policies. Populism is ind eed popular!

Lack of sustainability as politicians follow will fully myopic policies is why so

many countries have had to borrow from the Fund in the past, and why so many

emerging markets have got into trouble in the past decade. Foreign investors are

willing to finance unsustainable spending for a while they give you a long

rope to hang yourself, but when the drop finally comes, it is quick and


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extremely painful.

Sustainability could be a domestic matter. It is because unsustainable

policies will eventually require outside (Fund) financing, or force costly

adjustment on other countries, that the Fund, representing the global

community, has a legitimate interest. And in matters of unsustainability,

emerging markets are not the only offende rs.

Consider the United States, which is running a current account deficit

of 6.5 percent of GDP meaning it spends far more than it saves in the

process absorbing nearly 70 percent of world external savings. Any industrial

country running such a large deficit becomes reliant on the mood of foreign

investors not so much because foreign investors will inflict a "sudden stop" butbecause they are likely, at some point, to start demanding a much higher

premium for continuing to finance. Thus far they have not, not even pricing in

the eventually needed real dollar depreciation, perhaps another example of the

long rope markets provide.

When they cut back on spending, the effect on U.S. output may well

be limited under some scenarios, especially if the spending slowdown is

accompanied by interest rate cuts and excha nge rate depreciation. This is why

the Fund has been so vocal about the problem of global current account

imbalances, and the need for the United States to increase sav ings in a measured

way.

Moreover, the counterpart of the U.S. deficit, the current account

surpluses and reserve build-up that have so fortified emerging markets, are also

unsustainable. When the deficit shrinks the surpluses will shrink this is

simply a matter of adding up. The question every country has to ask itself is

"Am I prepared for the day the U.S. consumer finally decides to hang up the

shopping bag and save?"

It is concerns about sustainability and external effec ts that motivate

the Fund's advice to China. China is becoming overly reliant on external


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demand. Its exchange rate policy distorts the pattern of investment even while

weighing on consumption, and prevents the central bank from using interest

rates as an effective tool of policy. While corporate and financial sector reform

is probably key to medium-term sustainability in China, allowing exchange rate

appreciation must be an integral part of the strategy.

Ultimately, adjustment of the global imbalances will be a good thing,

for it does seem against the natural order for countries with massive

development needs to finance the asset price booms and the under -saving of

rich countries (leaving aside the distortionary exchange intervention and

demand compression that underlies some of the reserve build -up). Nevertheless,

there are those who question the need for any concern about imbalances, giventhat they have been financed so long. After all, the US was running a large

current account deficit in the late 1980s, and that imbalance r esolved itself

smoothly.

There is need for concern. For one, the benign global financing

conditions appear to be turning so the recent past need not say much about the

future. More important, the U.S. current account deficit is twice the size of what

it was in the 1980s even with increasing economic integration, there is a

limit to how much a country can depend on the outside world. Since adjustment

is inevitable, would it not be better for each country to commit to a medium.

IMF's mandate to monitor these imbalances and to work together to

narrow them. In particular, the Managing Director has called for a new modality

called "multilateral consultations", which will recognize the multilateral nature

of these imbalances and bring together key countries for a dialogue whenever

deemed necessary.


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IMF INSURANCE

To provide a better forum for multilateral dialogue is an essential step to re -

engage the major players. Equally important if the Fund can convince advanced

emerging markets that they still have much to gain by listening to the Fund,

these countries are drawn back to the Fund. In turn, this makes the Fund a more

interesting place for industrial economies to engage in multilateral dialogue.

It is believed that insurance is a key to re-engagement. Many argued

earlier that the advanced emerging markets s till have vulnerabilities such as

underdeveloped financial sectors that are being papered over by massive

reserve holdings.

It has been suggested by IMF that, the underlying imbalances driving

the reserve build-up may reverse in the future. As the reserves of advanced

emerging markets fall, they may well want to re -engage with the Fund, but on

their own terms. They are being open to some kind of insurance from the Fund,

but are to be wary of the creditor-biased conditionality that they believe

accompanies it. Some industrial countries do not want to offer automatic access

for fear of encouraging lax policies or moral hazard.

A PROPORSAL FOR FUTURE FUND "INSURANCE" TO

EMERGING MARKETS.

Let me speculate on what a potential solution could be. The more automatic

access a country wants to financing in case of crisis, the more pre -screening is

necessary. One way to offer this is to condition a country's automatic access to

Fund financing on the quality of its policies, as determined by regula r Fund

surveillance. If a country's policies are judged to be sensible, its access to

automatic financing in case it is hit by an unexpected shock improves. Access to

automatic financing then becomes a precise, meaningful, and continuous signal


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of a country's policies. Precise because it is a number, meaningful because it

implies automatic access, and continuous because it is constantly updated based

on a country's policies. Such a system of "ex ante" conditionality would give

countries added incentive to stay on the straight and narrow, even outside

normal Fund programs.

Industrial countries may be reluctant to provide financing for such a

scheme. But there may be ways of minimizing the call on their purse. The range

of innovative possibilities that would give advanced emerging markets more of

a say over Fund policies, a greater role in financing, and more attractive

insurance facilities from the Fund, is large and is well worth further

examination. For instance, one extreme would be simply being a more global

version of the Chiang Mai initiative, where countries offer to l end reserves to

each other, mediated by the Fund. Some initial drawing level would be

automatic, but more would require an IMF program.

At the other extreme would be a more formal pooling of country

reserves within the Fund, as part of a new insurance facility that would offer far

more automatic access in times of trouble in return for more ex ante

conditionality. The Managing Director has indeed called for an examination of

the possibilities in his strategic review. With advanced emerging markets more

engaged, perhaps industrial countries will also see more value in the Fund as a

forum for dialogue and the spirit of internationalism will be rekindled once

more.

SUPPORT OF MILITARY DICTATORSHIP

The role of the Bretton Woods institutions has been controversial since the

late Cold War period, due to claims that the IMF policy makers

supported military dictatorships friendly to American and


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International Monetary Fund (IMF) get involved in many problems

of members countries and try to sort out the problem related, it played a crucial

role in Kenya. IMF got involved in the country; the Kenyan central bank

oversaw all currency movements in and out of the country. The IMF mandated

that the Kenyan central bank had to allow easier currency movement. The

adjustment resulted in very huge foreign investment in the country which before

was working in huge deficit problem was then; due to intervention of IMF got

somewhat out of problem.

In 2006, an IMF reform agenda called the Medium Term Strategy

was widely endorsed by the institution's member countries. The agenda includes

changes in IMF governance to enhance the role of developing countries in the

institution's decision-making process and steps to deepen the effectiveness of its

core mandate, which is known as economic surveillance or helping member

countries adopt macroeconomic policies that will sustain global growth and

reduce poverty.

On June 15, 2007, the Executive Board of the IMF adopted the 2007

Decision on Bilateral Surveillance, a landmark measure that replaced a 30 -year-

old decision of the Fund's member countries on how the IMF should analyse

economic outcomes at the country level. From IMF view the global scenario is

changing and it is trying to change the situation and has started analysing

countries from single country level.

It is this: Even as the world has become more interconnected

through trade and finance, even as the Fund's members have become more

successful, the spirit of cooperation that prevailed amongst the members at the

time of the founding of the Fund seems to have waned.


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SUBSCRIPTION AND QUOTAS

What emerged largely reflected U.S. preferences: a system of subscriptions

and quotas embedded in the IMF, which itself was to be no more than a fixe d

pool of national currencies and gold subscribed by each country as opposed to a

world central bank capable of creating money. The Fund was charged with

managing various nations' trade deficits so that they would not produce

currency devaluations that would trigger a decline in imports.

The IMF is having as much as fund, composed of contributions of

member countries in gold and their own currencies. The original quotas were to

total $8.8 billion. When joining the IMF, members are assigned " quotas"reflecting their relative economic power, and, it is as a sort of credit deposit,

were obliged are to pay a "subscription" of an amount commensurate to the

quota. The subscription is to be paid 25% in gold or currency convertible into

gold (effectively the dollar, which was the only currency then still directly gold

convertible for central banks) and 75% in the membe r's own currency.

Quota subscriptions are to form the largest source of money at the

IMF's disposal. The IMF set out to use this money to grant loans to member

countries with financial difficulties. Each member is then entitled to withdra w

25% of its quota immediately in case of payment problems. If this sum should

be insufficient, each nation in the system is also able to request loans for foreign

currency.

TRADE DEFICITS

In the event of a deficit in the current account, Fund members, when short of

reserves, are be able to borrow foreign currency in amounts determined by the


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size of its quota. In other words, the higher the count ry's contribution was, the

higher the sum of money it could borrow from the IMF.

Members are required to pay back debts within a period of 18

months to five years. In turn, the IMF embarked on setting up rules andprocedures to keep a country from going too deeply into debt year after year.

The Fund exercises "surveillance" over other economies for the U.S.

Treasury in return for its loans to prop up national currencies.

IMF loans are not comparable to loans issued by a conventional

credit institution. Instead, they are effectively a chance to purchase a foreign

currency with gold or the member's national currency.

The IMF is designed in such a way to advance credits to countries

with balance of payments deficits. Short -run balance of payment difficulties

would be overcome by IMF loans, which would facilitate stable currency

exchange rates. This flexibility meant a member stat e would not have to induce

a depression to cut its national income down to such a low level that its imports

would finally fall within its means. Thus, countries are to be spared the need to

resort to the classical medicine of deflating themselves into drasticunemployment when faced with chronic balance of payment s deficits.

The IMF sought to provide for occasional discontinuous exchange -

rate adjustments (changing a member's par value) by international agreement.

Member nations were permitted to adjust their currency exchange rate by 10%.

This tended to restore equilibrium in their trade by expanding their exports and

contracting imports. This would be allowed only if there was a fundamental

disequilibrium. A decrease in the value of a country's money was called

devaluation, while an increase in the value of the country's money was called

a revaluation.


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GROWTH OF INTERNATIONAL CURRENCY MARKETS

Another aspect of the internationalization of banking has been the emergence of

international banking consortia. Since 1964 various banks had formed

international syndicates, and by 1971 over three quarters of the world's largest

banks had become shareholders in such syndicates. Multinational banks can and

do make huge international transfers of capital not only for investment purposes

but also for hedging and speculating against exchange rate fluctuations. These

new forms of monetary interdependence made possible huge capital flows.

TECHNICAL ASSISTANCE

The IMF shares its expertise with member countries by providing technical

assistance and training in a wide range of areas, such as central banking,

monetary and exchange rate policy, tax policy and administration, and

official statistics. The objective is to help improve the design and

implementation of members' economic policies, including by strengthening

skills in institutions such as finance ministries, central banks, and statistical

agencies.

The IMF has also given advice to countries that have had to re

establish government institutions following severe civil unrest or war.

In 2008, the IMF embarked on an ambitious reform effort to enhance the

impact of its technical assistance. The reforms emphasize better prioritization,

enhanced performance measurement, more transparent costing and st ronger

partnerships with donors.


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Beneficiaries of technical assistance

Technical assistance is one of the IMF's core activities. It is concentrated in

critical areas of macroeconomic policy where the Fund has the greatest

comparative advantage. Thanks to its near-universal membership, the IMF's

technical assistance program is informed by experience and knowledge

gained across diverse regions and countries at different levels of

development.

About 80 percent of the IMF's technical assistance goe s to low- and

lower-middle-income countries, in particular in sub-Saharan Africa and Asia.

Post-conflict countries are major beneficiaries. The IMF is also providing

technical assistance aimed at strengthening the architecture of the

international financial system, building capacity to design and implement

poverty-reducing and growth programs, and helping heavily indebted poor

countries (HIPC) in debt reduction and management.

Types of technical assistance

The IMF's technical assistance takes different for ms, according to needs,

ranging from long-term hands-on capacity building to short -notice policy

support in a financial crisis. Technical assistance is delivered in a variety of

ways. IMF staff may visit member countries to advise government and

central bank officials on specific issues, or the IMF may provide resident

specialists on a short- or a long-term basis. Technical assistance is integrated

with country reform agendas as well as the IMF's surveillance and lending

operations.

The IMF is providing an increasing part of its technical assistance

through regional centres located in Gabon, Mali, and Tanzania for Africa; in

Barbados for the Caribbean; in Lebanon for the Midd le East; and in Fiji for

the Pacific Islands. As part of its reform program, the IMF is planning to


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open four more regional technical assistance centres in Africa, Latin America,

and central Asia. The IMF also offers training courses for government and

central bank officials of member countries at its headquarters in Washington,

D.C., and at regional training centres in Austria, Brazil, China, India,

Singapore, Tunisia, and the United Arab Emirates.

Partnership with donors

Contributions from bilateral and multilateral donors are playing an

increasingly important role in enabling the IMF to meet country needs in this

area, now financing about two thirds of the IMF's field delivery of technical

assistance. Strong partnerships between recipient countries and d onors enable

IMF technical assistance to be developed on the basis of a more inclusive

dialogue and within the context of a coherent development framework. The

benefits of donor contributions thus go beyond the financial aspect.

The IMF is currently seeking to leverage the comparative

advantages of its technical assistance to expand donor financing to meet the

needs of recipient countries. As part of this effort, the Fund is strengtheningits partnerships with donors by engaging them on a b roader, longer-term and

more strategic basis.

The idea is to pool donor resources in multi-donor trust funds that

would supplement the IMF's own resources for technical assistance while

leveraging the Fund's expertise and experience. Expan sion of the multi-donor

trust fund model is envisaged on a regional and topical basis, offering donors

different entry points according to their priorities. The IMF is planning to

establish a menu of seven topical trust funds over the next two years,

covering anti-money laundering/combating the financing of terrorism; fragile

states; public financial management; management of natural resource wealth,


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public debt sustainability and management, statistics and data provision; and

financial sector stability and development.

Technical assistance benefits to low-income countries

Technical assistance is one of the benefits of IMF membership. About 85

percent of IMF technical assistance goes to low and lower -middle income

countries. Post-conflict countries are also major beneficiaries. Apart from the

immediate benefit to recipient countries, by helping individual countries

reduce weaknesses and vulnerabilities, technical assistance also contributes to

a more robust and stable global economy.

Further, technical assistance provided to emerging and

industrialized economies in select cutting -edge areas helps provide traction to

IMF policy advice, and keeps the institution up -to-date on innovations and

risks to the international economy.

Integration of technical assistance with IMF surveillance and

lending

Technical assistance contributes to the effectiveness of the IMFs surveillance

and lending programs, and is an important complement to these other core

IMF functions. Specialized technical assistance from the IMF helps build

capacity in countries for effective policymaking, including in support of

surveillance or lending operations.

Conversely, surveillance and lending work results in policy and

other experiences that further inform and s trengthen the IMFs technical

assistance program according to international best practices. In view of these

linkages, achieving greater integration between technical assistance,

surveillance, and lending operations is a key priority for the IMF.


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Technical assistance covers core areas of IMF expertise

The IMF provides technical assistance in its areas of core expertise:

macroeconomic policy, tax policy and revenue administration, expenditure

management, monetary policy, the exchange rate system, financial sector

sustainability, and macroeconomic and financial statistics. In particular, efforts

in recent years to strengthen the international financial system have triggered

additional demands for IMF technical assistance.

For example, countries have asked for help to address financial sector

weaknesses identified within the framework of the joint IMF-World

Bank Financial Sector Assessment Program; adopt and adhere to

international standards and codes for financial, fiscal, and statistical

management; implement recommendations from off-shore financial centres

assessments; and strengthen measures to combat money laundering and the

financing of terrorism.

At the same time, there is a continuing demand for technical

assistance to help low-income countries build capacity to design and implement

poverty-reducing and growth programs, and to help heavily indebted poor

countries undertake debt sustainability analyses and manage debt -reduction

programs. The IMF also contributes actively to the Integrated Framework for

trade-related technical assistance, which aims to assist lo w-income countries

expand their participation in the global economy. The recipient country is fully

involved in the entire process of technical assistance, from identification of

need, to implementation, monitoring, and evaluation .


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Technical assistance delivery takes a regional approach

The IMF delivers technical assistance in various ways. Depending on the nature

of the assignment, support is often provided through staff missions of limited

duration sent from headquarters, or the placement of experts an d/or resident

advisors for periods ranging from a few weeks to a few years. Assistance might

also be provided in the form of technical and diagnostic studies, training

courses, seminars, workshops, and on-line advice and support.

The IMF has increasingly adopted a regional approach to the

delivery of technical assistance and training. It operates seven regional technical

assistance centresin the Pacific; the Caribbean; East, West and Central

Africa; the Middle East; and in Central America. The latter was opened in May

2009, and the IMF is planning to open three additional regional centres in

Central Asia, and two further centers in Africa. In addition to training offered at

the IMF Institute in Washington D.C., the IMF also offers courses, workshops,

and seminars for country officials through a network of seven regional training

institutes and programs, and in the context of the regional technical assistance

centers.

The regional centers will be complemented by technical assistance

financed through topical trust funds. The f irst such fund started operations in

May 2009, concentrating on building capacity in connection with anti -money

laundering and combating the financing of terrorism. Further trust funds are

planned, including on tax administration and policy, managing natur al resource

wealth, fiscal management, sustainable debt strategies, financial stabilitystatistics, and training in Africa.


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Donors play a large role in financing technical assistance

Technical assistance accounts for about one-fifth of the IMFs operating budget.

It is financed by both internal and external resources, the latter comprising

funds from bilateral and multilateral donors. Such cooperation and resource

sharing with external donors has a few benefits: it leverages the internal

resources available for technical assistance; helps avoid duplication of advice by

different donors, and strengthens collaboration with donors and other technical

assistance providers.

Bilateral donors to the IMFs technical assistance and training

program include Australia, Austria, Belgium, Brazil, Canada, China, Denmark,

Finland, France, Germany, India, Italy, Japan, the Republic of Korea, Kuwait,

Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Oman, Qatar,

Russia, Saudi Arabia, Singapore, Spain, Switzerland, the United Kingdom, and

some beneficiary countries.

Multilateral donors include the African Development Bank, the Arab

Monetary Fund, the Asian Development Bank, the Caribbean Development

Bank, and the Central American Bank for Economic Integration, the European

Commission, the European Investment Bank, the Inter-American Development

Bank, the Islamic Development Bank, and the United Nations Development

Program (UNDP). In FY 2009, external financing accounted for more than two-

thirds of IMF technical assistance field delivery.


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STEPS TAKEN BY INTERNATIONAL MONETARY FUND

The IMF is the principal institution of global economic governance positioned

to help deal with the current economic and financial crisis. Fortunately, the

Funds legitimacy and relevance has been changing in recent years specifically

from 1990s. Moreover, even in the best of circumstances, the Fund is as

successful as its principal members want it to be.

(A)In the near term, the Fund :

(a) Lend help to countries that have been adversely affected by the crisis,

(b) Help to establish an agreed approach to global economic and

financial recovery, and

(c) Monitor the implementation of national economic and financial

policies, in particular exchange-rate policies, to minimize the negative,

spill over effects of one countrys policies on other countries.

(B)In the longer term, the Fund should step up its surveillance of nationalfinancial systems and the global system and help to develop a better

framework for macro prudential supervision. The macro prudential

supervision can be defined as a concern for the influence of financial

system developments on the global economy and system.

THE DRAWBACK OF INTERNATIONAL MONETARY FUND

The IMF was emerged also to play a major role in helping the so-called

transition countries of Eastern Europe and the former Soviet Union to adopt

market oriented economic systems.

Despite substantial continued, overall success over the past

three decades, three problems emerged:


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(1)A countrys adoption of economic adjustment programs in connectionwith IMF financial assistance is politically controvers ial.

(2)The private sector came to play the dominant role as the source ofinternational capital flows, and global surveillance and supervisory

systems failed to keep pace with many of the resulting implications for

the countries attracting the inflows.

(3)The governance of the IMF continued to be dominated by the majorindustrial countries, in particular the United States and the European

countries, which undermined the legitimacy o f the institution in a

changing world.

The IMF has evolved with the globalization of our economies, but not as fast assome would prefer. A fresh reform effort was begun four years ago, but there

was little sense of urgency given the benign global economic and financial

conditions that generally persisted until the middle of last year.

Major financial institution around the world and government after the

global financial crisis in 2007-2009 argued that the IMF no longer had a major

role to play as a lender or in helping to guide the global economy a nd financial

system. The major IMF credit outstanding peaked (on an end-of-year basis) at

almost $100 billion at the end of 2005, but had declined to about $10 billion by

the end of September 2008.

One consequence is that the package of IMF reforms that was agreed

in the spring of 2008, after years of contentious discussions, was modest at best.

Due to this drawback of IMF there was a major problem created to the world,

the IMF gifted us The Global financial Crisis of 2007-2009. This till date some

were has an effect on the international financial system and has dropped the

majority countries around the world.


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Impact on access to food

A number of civil society organizations have criticized the IMF's policies for

their impact on peoples' access to food, particularly in developing countries. In

October 2008, former US President Bill Clinton joined this chorus in a speech

to the United Nations World Food Day, which criticized the World Bank and

IMF for their policies on food and agriculture:

We need the World Bank, the IMF, all the big foundations, and all the

governments to admit that, for 30 years, we all blew it, including me w hen I was

President. We were wrong to believe that food was like some other product in

international trade, and we all have to go back to a more responsible andsustainable form of agriculture.

Former US President Bill Clinton, Speech atUnited Nations World Food

Day, October 16, 2008

Impact on public health

In 2008, a study by analysts from Cambridge and Yale universitys published

on the open-access Public Library of Science concluded that strict conditions on

the international loans by the IMF resulted in thousands of deaths in Eastern

Europe by tuberculosis as public health care had to be weakened. In the 21

countries to which the IMF had given loans, tuberculosis deaths rose by 16.6%.

In 2009, a book by Rick Rowden titled, The Deadly Ideas of

Neoliberals: How the IMF has Undermined Public Health and the Fight Against

Aids, claimed that the IMF's monetarist approach towards prioritizing price

stability (low inflation) and fiscal restraint (low budget deficits) was

unnecessarily restrictive and has prevented developing countries from being


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able to scale up long-term public investment as a percent of GDP in the

underlying public health infrastructure. The book claimed the consequences

have been chronically underfunded public health systems, leading to dilapidated

health infrastructure, inadequate numbers of health personnel, and demoralizing

working conditions that have fuelled the "push factors" driving the brain drain

of nurses migrating from poor countries to rich ones, all of which has

undermined public health systems and the fight against HIV/AIDS in

developing countries.

Impact on environment

IMF policies have been repeatedly criticized for making it difficult for indebted

countries to avoid ecosystem-damaging projects that generate cash flow, in

particular oil, coal and forest-destroying lumber and agriculture

projects. Ecuador for example had to defy IMF advice repeatedly in order to

pursue the protection of its rain forests, though paradoxically this need was

cited in IMF argument to support that country. The IMF acknowledged this

paradox in a March 2010 staff position report which proposed the IMF Green

Fund, a mechanism to issue Special Drawing Rights directly to pay for climate

harm prevention and potentially other ecological protection as pursued

generally by other environmental finance.

While the response to these moves was generally positive possibly

because ecological protection and energy and infrastructure transformation are

more politically neutral than pressures to change social policy. Some expertsvoiced concern that the IMF was not representative, and that the IMF proposals

to generate only 200 billion dollars/year by 2020 wit h the SDRs as seed funds,

did not go far enough to undo the general incentive to pursue destructive


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projects inherent in the world commodity trading and banking systems -

criticisms often levelled at the WTO and large global banking institutions.

In the context of the May 2010 European banking crisis, some

observers also noted that Spain and California, two troubled economieswithin Europe and the US respectively, and also Germany, the primary and

politically most fragile supporter of a Euro currency bailout would benefit from

IMF recognition of their leadership in green technology, and directly

from Green-Fund generated demand for their exports, which might also

improve their credit standing with international bankers.

Criticism from free-market advocates

Typically the IMF and its supporters advocate a monetarist approach. As such,

adherents of supply-side economics generally find themselves in open

disagreement with the IMF. The IMF frequently advocates

currency devaluation, criticized by proponents of supply-side economics

as inflationary. Secondly they link higher taxes under " austerity programmes"

with economic contraction.

Complaints have also been directed toward the International Monetary

Fund gold reserve being undervalued. At its inception in 1945, the IMF pegged

gold at US$35 per Troy ounce of gold. In 1973, the Nixon administration lifted

the fixed asset value of gold in favour of a world market price. This need to lift

the fixed asset value of gold had largely come about because Petrodollars

outside the United States were worth more than could be backed by the gold

at Fort Knox under the fixed exchange rate system. Following this, the fixed

exchange rates of currencies tied to gold were switched to a floating rate, also

based on market price and exchange.


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FINANCIAL CRISIS OF 2007-2009

The financial crisis of 2007 to the present was triggered by a liquidity shortfall

in the United States banking system. It has resulted in the collapse of large

financial institutions, the bail out of banks by national governments, and

downturns in stock markets around the world. In many areas, the housing

market has also suffered, resulting in numerous evictions, foreclosures and

prolonged vacancies. It is considered by many economists to be the

worst financial crisis since the Great Depression of the 1930s.

It contributed to the failure of key businesses, declines in consumer

wealth estimated in the hundreds of billions of U.S. dollars, substantial financial

commitments incurred by governments, and a significant decline in economic

activity. Many causes have been suggested, with varying weight assigned by

experts. Both market-based and regulatory solutions have been implemented or

are under consideration, while significant risks remain for the world

economy over the 20102011 periods.

THE MAIN CAUSE OF FINANCIAL CRISIS

The collapse of the housing bubble, which peaked in the U.S. in 2006, caused

the values of securities tied to real estate pricing to plummet thereafter,

damaging financial institutions globally. Questions regarding bank solvency,

declines in credit availability, and damaged investor confidence had an impact

on global stock markets, where securities suffered large losses during late 2008and early 2009. Economies worldwide slowed during this period as credit

tightened and international trade decline d.

Major financial markets heads argued that credit rating agencies and

investors failed to accurately price the risk involved with mortgage-related


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financial products, and that governments did not adjust their regulatory

practices to address 21st century financial markets. Governments and central

banks responded with unprecedented fiscal stimulus, monetary policy

expansion, and institutional bailouts.

BACKGROUND OF THE CRISIS

The immediate cause or trigger of the crisis was the bursting of the United

States housing bubble which peaked in approximately 20052006. Already-

rising default rates on "subprime" and adjustable rate mortgages (ARM) began

to increase quickly thereafter. As banks began to increasingly give out m ore

loans to potential home owners, the housing price also began to rise. In the

optimistic terms the banks would encourage the home owners to take on

considerably high loans in the belief they would be able to pay it back more

quickly overlooking the interest rates. Once the interest rates began to rise in

mid 2007 the housing price started to drop significantly in 2006 leading into

2007. In many states like California the refinancing became more difficult. As a

result the increase amount of fore closured homes began to rise as well.

Lower interest rates encourage borrowing. From 2000 to 2003,

the Federal Reserve lowered the federal funds rate target from 6.5% to

1.0%. This was done to soften the effects of the collapse of the dot-com

bubble and of the September 2001 terrorist attacks, and to combat the perceived

risk of deflation.

Additional downward pressure on interest rates was created by the

USA's high and rising current account (trade) deficit, which peaked along with

the housing bubble in 2006. Ben Bernanke explained how trade deficits required

the U.S. to borrow money from abroad, which bid up bond prices and lowered

interest rates.


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Bernanke explained that between 1996 and 2004, the USA current

account deficit increased by $650 billion, from 1.5% to 5.8% of GDP.

Financing these deficits required the USA to borrow large sums from abroad,

much of it from countries running trade surpluses, mainly the emerging

economies in Asia and oil-exporting nations. The balance of payments

identity requires that a country (such as the USA) running a current account

deficit also have a capital account (investment) surplus of the same amount.

Hence large and growing amounts of foreign funds (capital) flowed into the

USA to finance its imports.

This created demand for various types of financial assets, raising the

prices of those assets while lowering interest rates. Foreign investors had these

funds to lend, either because they had very high personal savings rates (as high

as 40% in China), or because of high oil prices. Bernanke referred to this as a

"saving glut."

A "flood" of funds (capital or liquidity) reached the USA

financial markets. Foreign governments supplied funds by purchasing

USA Treasury bonds and thus avoided much of the direct impact of the crisis.

USA households, on the other hand, used funds borrowed from foreigners to

finance consumption or to bid up the prices of housing and financial assets.

Financial institutions invested foreign funds in mortgage-backed securities.

The Fed then raised the Fed funds rate significantly between

July 2004 and July 2006. This contributed to an increase in 1-year and 5-

year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets

more expensive for homeowners. This may have also contributed to the

deflating of the housing bubble, as asset prices generally move inversely to

interest rates and it became riskier to speculate in housing. USA housing and

financial assets dramatically declined in value after the housing bubble burst.


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The International Monetary Fund estimated that large U.S. and

European banks lost more than $1 trillion on toxic assets and from bad loans

from January 2007 to September 2009. These losses are expected to top

$2.8 trillion from 2007-10. U.S. banks losses were forecast to hit $1 trillion and

European bank losses will reach $1.6 trillion. The IMF estimated that U.S.

banks were about 60% through their losses, but British and euro zone banks

only 40%.

One of the first victims was Northern Rock, a medium-sized

British bank. The highly leveraged nature of its business led the bank to request

security from the Bank of England. This in turn led to investor panic and a bank

run in mid-September 2007.Over 100 mortgage lenders went bankrupt during

2007 and 2008. Concerns that investment bank Bear Stearns would collapse in

March 2008 resulted in its fire-sale to JP Morgan Chase. The financial

institution crisis hit its peak in September and October 2008. Several major

institutions failed, were acquired under duress, or were subject to government

takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie

Mac, Washington Mutual, Wachovia, and AIG.

WEALTH EFFECTS OF GLOBAL CRISIS

There is a direct relationship between declines in wealth, and declines in

consumption and business investment, which alo ng with government spending

represent the economic engine. Between June 2007 and November 2008,

Americans lost an estimated average of more than a quarter of their collective

net worth. By early November 2008, a broad U.S. stock index the S&P 500 was

down 45% from its 2007 high. Housing prices had dropped 20% from their

2006 peak, with futures markets signalling a 30-35% potential drop. Total home

equity in the United States, which was valued at $13 trillion at its peak in 2006,


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had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total

retirement assets, Americans' second-largest household asset, dropped by 22%,

from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period,

savings and investment assets (apart from retirement savings) lost $1.2 trillion

and pension assets lost $1.3 trillion. Taken together, these losses total a

staggering $8.3 trillion. Since peaking in the second quarter of 2007, household

wealth is down $14 trillion.

Further, U.S. homeowners had extracted significant equity in their

homes in the years leading up to the crisis, which they could no longer do once

housing prices collapsed. Free cash used by consumers from home equity

extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the

housing bubble built, a total of nearly $5 trillion over the period. U.S. home

mortgage debt relative to GDP increased from an average of 46% during the

1990s to 73% during 2008, reaching $10.5 trillion.

To offset this decline in consumption and lending capacity, the U.S. government

and U.S. Federal Reserve have committed $13.9 trillion, of which $6.8 trillion

has been invested or spent, as of June 2009. In effect, the Fed has gone from

being the "lender of last resort" to the "lender of only resort" for a significant

portion of the economy. In some cases the Fed can now be considered the

"buyer of last resort."

GLOBAL EFFECTS OF FINANCIAL CRISIS

A number of commentators have suggested that if the liquidity crisis continues,

there could be an extended recession or worse. The continuing development of

the crisis has prompted in some quarters fears of a global collapse although

there are now many cautiously optimistic forecasters in addition to some

prominent sources who remain negative. The financial crisis is likely to yield


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the biggest banking shakeout since the savings -and-loan meltdown. Investment

bank UBS stated on October 6 that 2008 would see a clear global recession,

with recovery unlikely for at least two years. Three days later UBS economists

announced that the "beginning of the end" of the crisis had begun, with the

world starting to make the necessary actions to fix the crisis: capital injection by

governments; injection made systemically; interest rate cuts to help borrowers.

The United Kingdom had started systemic injection, and the world's

central banks were now cutting interest rates. UBS emphasized the United

States needed to implement systemic injection. UBS further emphasized that

this fixes only the financial crisis, but that in economic terms "the wo

Om Guruji Shiv Gorkash Nathay Namaha,

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