Introduction
The economic well-being of nations around the world is important to the advancement of all people. When the 2008 global economic recession hit, people were out of jobs and stock markets crashed, with the worst economic situation the world has seen since the Great Depression in the 1930’s. Organizations such as the International Monetary Fund were meant to have been an important factor in stabilizing markets after the major collapse of 2008. However, with the way the IMF and other organizations have been setup, global financial governance has not been as effective as it should be.
The purpose of this paper is to analyse the effectiveness and fairness of the International Monetary Fund (IMF) from a critical perspective of global financial governance. This paper argues that from a critical perspective that the IMF has not been an effective or fair organization. This paper will be divided into three segments. The first will talk about what global financial governance is. The second segment will talk about the critical perspective in general and the views associated. The final segment will focus on the IMF has been ineffective and its role during and after primarily the 2008 recession and the 1997 Asian Financial Crisis.
Global Financial Governance
According to Betz (2014), global financial governance is “a cluster of interrelated policies designed to ensure the proper functioning and integrity of the financial system, policies that include public regulation and supervision of (adequate) bank capital, leverage (i.e. proportion of equity capital and/or secure assets to liabilities) liquidity and risk management, control of moral hazard and customer protection” (p.293). Global financial governance is the cooperative effort of state economies working together to ensure strong economic growth is seen throughout the world. Global financial governance is seen as a mechanism to help wealthy nations work with poorer and developing countries to help with strengthening domestic economic conditions (Woo et al., 2016).
It Is about the creation of intergovernmental organizations that work to provide assistance to developing countries and serves as a forum for discussion on what actions can be taken to strengthen economies around the world (Suzuki, 2011). Global financial governance also focuses on ensuring that state policies on trade are fair, and ensuring that states do not take advantage of another state. There are three categories of groups involved in global financial governance and includes intergovernmental organizations, states and the financial institutions (Betz, 2014).
The particular area I am focusing on within global financial governance is the International Monetary Fund and the role it plays in helping to advance the economic strength of the world as a whole. The International Monetary Fund is one of the major intergovernmental financial institutions that exists in the world today. With its founding in 1944, the International Monetary Fund now has the support of 189 states and the support of the world powers (International Monetary Fund, 2017).
Its role is to focus on ensuring that international financial system is strong, reliable and foreseeable (International Monetary Fund, 2017). The IMF also serves to help with “macro-economic and financial sector policy-making” (Betz, 2014). The International Monetary Fund provides loans to help with economic downturn and with taking the loan, the IMF will impose rules that must be followed by the state receiving the funds (Peou, 2017).
Critical Perspective Views
Critical perspective thinkers of global governance are not fans of the idea. These thinkers believe that under this system it is about those with power controlling those who do not have power and imposing their views on them. They believe that the system is set up to help the powerful groups to advance and achieve their own goals (Peou, 2017). Critical perspective thinkers also believe that one of the main reasons global governance exists is to reform economic markets and create free markets worldwide (Peou, 2017).
Critical perspective thinkers of global financial governance believe that the International Monetary Fund serves as an organization that advances the interests of the fully developed states onto developing countries (Peou, 2017). Critical perspective thinkers also believe that global financial governance seems to pursue the interests of the United States, while even the United States does not follow the rules outlined by organizations such as the International Monetary Fund (Helleiner, 2009).
Critical perspective thinkers believe that global financial governance institutions lead to people becoming worse off, as most of the conditions given by lenders, generally are cuts to programs and services within a state. Critical perspective thinkers also believe that only when power changes and influence changes are made, that reform can be achieved at these institutions (Peou, 2017). These thinkers believe that personal political goals and economic goals are part of the way decisions are made (Woo et al., 2016).
Critical perspective thinkers overall conclude that global financial governance exists to impose views of the top ruling class onto the rest of the states. Critical perspective thinkers examine that the end of this system may be on the horizon with the elimination of the neo-liberal system (Peou, 2017).
International Monetary Fund and ineffectiveness
The International Monetary Fund was a concept that was created in order to have an intergovernmental organization supporting economies around the world. However, throughout history, the IMF continues to be seen as advancing the interests of Western powers and giving a lack of power to developing nations elsewhere (Betz, 2014). With the advancement of international trade and more free trade agreements being reached, developed nations do not need the assistance of the International Monetary Fund and thus, operate on their own interest. On the other hand, the developing nations who need the help of the IMF through economic assistance are the ones who listen to the International Monetary Fund (Betz, 2014). This suggests that the IMF is an institution that is dysfunctional as it no longer serves as a forum for all nations, but rather to only those who need its assistance.
At previous points in time, the IMF has proved to be an organization that does not work to the abilities of states. During the Asian Financial Crisis of 1997, the International Monetary Fund tried to extend loans out to states that needed economic assistance. However, the assistance provided, had conditions attached that were “unsuited to domestic financial and economic conditions” (Woo et al., 2016). Woo et al. (2016) also talk about how the IMF attached conditions that aligned with the views of the Western world, including free market economies.
A reason why the 2008 financial crisis existed was the lack of power intergovernmental organizations have over financial institutions. The sale of subprime mortgages in the United States by financial institutions were a key reason to the recession of 2008 (Lucchetta, 2016). Despite the role its serves, the International Monetary Fund was not able to do much and continues to not be able to put in measures to prevent future situations. The International Monetary Fund to many states around the world find it as the last place, they would go for help (Lucchetta, 2016). In the article, Lucchetta (2016) mentions that due to politicians making decisions based on private interests, it led to policy making that made organizations such as the International Monetary Fund ineffective.
The International Monetary Fund has a different style to its voting structure when making decisions. The weight of a country in terms of its effect in a vote, is dependent upon the state’s “weight in the global economy and in the international financial system” (Wilczyński, 2011). This further leads to explain how when looking at whether the IMF represents the interests of all states, that it truly does not. When this system is used during voting, it gives superpowers a huge advantage over states that are developing.
However, Wilczyński (2011) also mentions in the findings that the IMF has many developing states such as Saudi Arabia and Pakistan overrepresented and many developed states like Spain and Ireland are underrepresented. This suggests that the International Monetary Fund operates under a system that truly does not make any sense and leads to its overall ineffectiveness.
The focus of talking about the key issue of how the International Monetary Fund continues to favour certain states over others when looking at decision-making is important. Grabel (2013) suggests that there needs to be formal and informal changes made, so that the IMF will become an effective organization and fulfill the role it was intended to serve. The two key findings are that there needs to be a change in voting procedures and the effect that certain member states have over other states and the organization as a whole (Grabel, 2013). With five countries, which includes the United Kingdom, United States, Japan, France and Germany, representing 37% of the voting share amongst all states and China and Russia having 3% each, it leads to the International Monetary Fund to be an institution that is not reflective or fair to all states (Suzuki, 2011).
Conclusion
It is quite clear after going through the arguments that the International Monetary Fund has been ineffective and has not believed in fairness since its creation. Despite the critical perspective and its view on global financial governance, it is clear that states still believe there is an importance of continuing to have the International Monetary Fund to exist. The organization continues to receive funding to support and ensure stability in the economic markets around the world.
It is important, however, that if the International Monetary Fund is to continue operating, that it needs to go through significant reforms. The reforms need to be consulted by the superpowers, but also with the developing countries. With the conversation about global trade and economic interdependence beginning again due to President Donald Trump, now would be the best time to take a serious look into reforms. With the strengthening of the IMF and reforms being made, our economies can become stronger than ever before.