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Policy Analysis Paper

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Policy Analysis Paper

Description of the Policy Problem

There has been widespread outcry worldwide about the International Monetary Fund’s refusal of its global mandate to ensure economic stability and progress of its client nations. The IMF’s predicament is partly triggered by its uncoordinated internal managerial affairs and partly on the global economic trends. The current crisis IMF faces is a result of its unpreparedness and lack of proactive strategies to handle unforeseen financial crises. The recommendations highlighted in this analysis are aimed at reinforcing IMF’s operations to restore its previous reputation and sustain the confidence of its clients which has greatly been undermined in order to avoid a risk of dissolution and replacement by another financial entity created for that purpose. Thus, IMF’s current challenges, especially its failure to provide sufficient aid for developing economies, are among the vexed issues that should be on the list of priorities of the World Financial Authority and a Global Economic Coordination Council.

IMF’s Current Insufficiencies

Although IMF had steady progress with regard to its resources since the inception in 1944, apparently, its original rationale is outdated and requires review. The reason is that as time passes, the state of the world economy changes dramatically. Apparently, the IMF has lacked appropriate mechanisms to keep pace with the dynamic frequency and severity of economic crises. In fact, the major shortcoming of IMF has been its static role of providing short-term loans based on microeconomic policy change other than advancing long-term aid which is grounded on structural economic reforms. Moreover, it has failed to provide pecuniary aid, thereby failing to tackle the issue as the global economic crisis manager. Consequently, the IMF became an object of ridicule due to the inability to enforce loan conditions and its institutional incentives to lend.

 

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Moreover, the IMF has continued with the provision of aid on a massive scale to countries that are worst hit by the financial crisis which is equivalent to the creation of a moral hazard. However, the institution has outright demonstrated the inability to enforce loan conditions as well as its institutional lending incentive. For instance, in the event that IMF has lent to governments that are indifferent to reforms, the fund’s credit is reluctant to promote a policy or structural changes. Therefore, this has often compelled the IMF to suspend credit until it receives promises of policy change in the right direction.

Furthermore, the IMF’s utility both in preventing defaults and handling their global effects is questionable. For instance, the endeavor to tackle Asian economic crises and Russian communism, in particular, has considerably tarnished the IMF’s role as a surveillance agency. Apparently, the fund did not provide any warning about the impending collapse of currencies and domestic banking systems. On the contrary, the fund commended the East Asian economies in public documents shortly before the outbreak of the crises. Thus, the failure by the fund to prevent the alarming world market and reduce moral hazards led to the collapse of Russian rubble. Consequently, this crisis contributed to the Brazilian devaluation which had colossal consequences.

The challenges IMF faced have partly been triggered by non-transparent client governments which it handles. The reason is that in the event that the fund has advanced loans to these governments, the disbursements are not accelerated, necessitating large amounts to be rescheduled. The best example was in Thailand where the agency provided an earlier warning to IMF officials, but they kept it confidential. As a result, this situation has caused massive loses, thereby making western banks insolvent. Hereby, such occurrences have triggered an intrinsic argument pertaining to the role of IMF as both an agency for countries’ credit rating and an agency that attempts to prevent the emergence of financial disorder.

Current Course of Action to the Existing Problems in IMF

Following the above insufficiencies, the agency has made efforts that are deemed necessary for the IMF to recuperate and restore its lost reputation. First, the agency has undergone the process of abolition of fixed exchange rates and elimination of increased reliance on direct negotiations between lenders and borrowers in international finance as well as minimized reliance on IMF lending and mediation.

Moreover, the fund has devised initiatives to bail in the private sector as a way of making investors bear more burdens of irregular investment decisions. What is more, a line of credit has to be created to provide aid to countries ahead of emerging crises as a proactive mechanism. As a consequence, this will prevent lines of credit and increase the moral hazard to avoid precipitation of the same crises that they intended to prevent. Furthermore, the IMF should be more transparent and improve surveillance functions in order to maintain sound relations with client countries in a bid to prevent the outbreak of financial turmoil.

In line with that, the institution has undertaken to offer advisory and financial aid to countries with a wider range of social and economic problems and appalling circumstances. It is worth noting that it is vital to broadening the scope of policy concerns beyond sound money to stabilize exchange rates and expand markets to encompass numerous elements that contribute to economic growth and financial stability.

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Other solutions that have been included in the IMF operations entail deregulation of domestic economies as well as the creation of a level ground that will permit active participation of the private sector and creation of stronger financial systems through the development of effective regulation and supervision structures. Moreover, the institution has disapproved of indiscreet government expenditures, especially exorbitant military build-ups, and instead encouraged spending on basic human needs such as health and education, social protection for the vulnerable groups and the unemployed, and vital environmental issues.

Furthermore, IMF has been emphatic about greater transparency and accountability in government systems and corporate affairs as well as the establishment of effective dialogue on economic policy with labor and the rest of the civil society. Thus, this will help members to tackle a number of issues that could not be foreseen during the inception of the institution such as the recurrent energy crisis. Apparently, IMF should champion means of reversing the economic tide in sub-Saharan Africa by transforming a perennial situation of deepening poverty and despair into one that is characterized by vibrant growth toward affluence, increased income per capita, more employment and investment opportunities and rising hopes.

IMF member countries have also implemented some policies as solutions to the current stalemate. In fact, all member countries have the obligation to make annual consultation with the fund so that a subsequent in-depth analysis will be prepared to assess the economy and policy advice for the member authorities. Afterward, such analysis shall be reviewed by the executive board to make further conclusions and recommendations for the appropriate measure to be taken.

IMF’s Future Prospects

Considering the current efforts made by IMF leadership to restore the credibility of the fund, it is possible to envision a bright future if the fund implements the following strategies to the full extent of their expectations. First, they should reinforce surveillance of the economic policies of all countries particularly those that have evaded being accountable for their economic states in their countries. Occasionally, the fund should be facilitated by full disclosure of relevant economic and financial data after thorough scrutiny. Consequently, this will enable the fund to reinforce programs and render necessary policy advice to all member countries. Moreover, the fund should champion means of establishing regional surveillance aiming to improve economic performance at the regional level. Hereby, this will entail the collaboration of neighboring countries in order to encourage one another to pursue sound economic policies. Apparently, the fund should enforce more of such initiatives in Asia and other Third-World countries which still have serious economic issues to tackle.

Furthermore, the IMF should employ financial sector reforms which entail prudent control and supervision to enhance and disseminate best practices in the banking sector. Thus, the fund in cooperation with the World Bank and other financial institutions will facilitate a program by which countries can adopt standards and practices that have worked well in other countries. Similarly, the fund will initiate more effective structures for orderly debt workouts. Apparently, this will include better and convenient laws on bankruptcy at the national level that will help to resolve problems of sovereign debt. Moreover, the fund will enhance the liberation of an orderly capital account to ensure no return to outmoded capital controls or a mad dash to complete economic liberation no matter the involved risks. Thus, careful sequential liberation will be upheld so that large numbers of countries can benefit from access to international capital markets.

Furthermore, the fund will take necessary measures to ensure corruption does not exist in the economic sector because it has been the reason for the massive loss of finances. In fact, this is hoped to be enforced with the support of Transparency International together with the Financial Action Task Force. What is more, tough punitive measures will be procured to any member state which is found culpable for the corruption claims as a way of discouraging the propagation of the vice and improving the economic sector.

Finally, to ensure effective implementation of the above-mentioned policies, it is crucial to allocate adequate resources that will be channeled to assorted departments in member countries to expedite the facilitation of these proposed reforms so that the initial reputation of IMF may be reclaimed. Currently, an increase of $88 billion to IMF quotas has already been proposed by the international community, $14.5 billion of which will be the US share. It is estimated that the new quotas would yield up to $58 billion of usable resources that are expected to suffice for a number of years in the next century. Therefore, if this allocation is well-managed, it will be sufficient to fully address the world’s economic needs and rapidly transform the lives of many vulnerable people socially and economically.

Recommendations

With regard to the analysis given, I strongly want to make the following recommendations to you as the president of the UNGA in the hope that you will disseminate the same to appropriate authorities within the UN agencies. The analysis revealed a worrying situation that IMF has found itself in, pertaining to its mandate to run the economic affairs of the entire world. However, the fund has been influenced by the crisis that has engulfed it and that is why it put necessary measures in place to address the current stalemate as well as curb the eventualities. Apparently, rather than establishing an alternative organization to assume the responsibilities of IMF, I wish to recommend that the UN gives the fund a benefit of the doubt and allow it the grace period of between five and ten years to validate its remedies for the existing problems.

In addition to that, I suggest that instead of crafting a new organization as you had suggested, the UN should create a task force to work closely with IMF reform implementation team to provide moral support, checks, and balances and to appraise the practicability of the proposed reform agenda before discarding it. Moreover, the UN should weigh between the cost of establishing a new financial body and the time it would take to be fully oriented and acclimate to the global economic responsibilities, as compared to restructuring the existing one. In my opinion, the latter option is cost-effective; therefore, the IMF should be given a second chance.

However, the plans that the UN had put in place of initiating another organization should not be discarded but should be used as a blueprint against which IMF should benchmark. In that plan, the UN already has the expectations of the financial organization that it wished to establish. These expectations should be shared with the IMF during its reconstruction period so that they are adopted as the guiding principles for reformation.

Conclusion

The challenges that the IMF has undergone have been complex and confounding to handle due to their various causes. These challenges have been a result of the spontaneous rise in the magnitude of the IMF’s responsibilities based on the proportionate increase in the world’s population. The reason may be that planning for unforeseen future happenings is often a great challenge since it is based on speculative facts. That is why it has been difficult for the IMF to proactively address the challenge of the global economic crisis. However, these challenges cannot be blamed entirely on IMF given that it requires the support of member countries to fully execute its mandate. IMF numbers 178 member states worldwide, which is a high number to handle and among these countries, there are those which as earlier stated do not cooperate fully with regard to the provisions of IMF. Thus, there were instances when member states have frustrated the efforts of the organization, making it difficult for it to effectively render its services in an optimal manner. I am convinced that given another opportunity and necessary support, the IMF has enormous potential to restore itself and rise to the occasion as the global economic facilitator. Thus, all of us have a duty to make a positive contribution to this vision instead of sitting and waiting for things to go wrong so that we point accusing fingers.

 

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