International Finance Analysis: International Monetary Policies

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International Finance Analysis: International Monetary Policies

Abstract

Most of the international monetary policies are formulated by the Bretton Woods institutions namely the World Bank and International Monetary Fund (IMF). While the core objectives of these polices are to create a level playing ground and sustainable economic growth across the globe, the anticipated economic returns have not been beneficial to most developing and emerging economies. The two institutions have been in existence for slightly over 70 years with little to show in terms of economic progress in developing economies.

Do the International Monetary Systems policies support or impede the progress of developing economies?

It can be recalled that in 2014, few developing nations were not fascinated by the 70^th birthday celebrations organized by IMF and World Bank. It is only well-developed states in Europe, the US and BRIC member nations that pooled their resources together to organize the festivities. As it stands now, the economic challenges posed by the balance of payment in developing economies is a real threat to economic progress.

A number of governments in developing nations have even proposed the establishment of New Development Bank, an institution that can offer affordable development and infrastructural loans to poor nations. When some jurisdictions contemplate of shifting global economic governance and policies, it is a vivid indication that the policies adopted by IMF and World Bank only serve the interests of a few wealthy nations (Lindenthal & Koch, 2013).

After critical analysis of the available empirical financial data and international monetary policies, it is evident that low-income economies are in the receiving end of IMF and World Bank programs. The most affected region is sub-Saharan Africa (Kotsios & Kotsios, 2014). One of the policy areas of Bretton Woods institutions is healthcare spending. Even though the cost of healthcare in developing nations has been increased with the aim of improving the quality of care delivered to patients, it is crucial to mention that such a policy only impoverishes the poor nations owing to lack of priority (Lindenthal & Koch, 2013). Why should surplus funds be allocated in healthcare sector while households can hardly afford a meal? As much as there are pressing healthcare needs in most developing economies, respective governments should be in a position to identify local needs and prioritize them accordingly instead of relying on global policies. In any case, almost all the international monetary systems policies are usually drafted and enacted with the preferences of key players in mind.

The global poverty index shows that the national debt margin in developing nations is quite overwhelming. The Structural Adjustment Program (SAP) is just one of the global monetary policies that has aggravated the state of poverty in developing economies (Lindenthal & Koch, 2013). For the decades that World Bank and IMF have been in operation, poverty reduction has remained a dream pipe. The third world countries are being compelled to rely on richer nations for survival. The latter has bred another economic ailment known as dependency syndrome among weak economic states.

It is obvious that SAPs were initiated with the aim of making sure that poor nations gain a position to repay their debts. In order to implement the ideas and ideology of SAP, both the Washington Consensus and concept of neoliberalism came into play (Kotsios & Kotsios, 2014). This monetary policy is more of an affirmative action to push for debt repayment among defaulters at the expense of allocating funds to key national priorities such as development projects, education, security, health and food. Apart from SAP, there are other numerous debt recovery policies that the western nations have imposed to developing states. As a consequence, the living standards of citizens in developing economies have considerably declined over the years.

Do these policies encourage or discourage investment in these developing economies?

Proponents of World Bank and IMF argue that the two institutions have significantly facilitated sustainable economic growth in both poor and rich nations. Nevertheless, the financial assistance provided especially to poor nations are accompanied by tough conditions that are enshrined as international monetary policies (Hartzell, Hoddie & Bauer, 2010). Nations that seek their assistance and are ready to comply with the autocratic conditions are the only beneficiaries of the services. For instance, before any loan or financial assistance is advanced to a poor nation, structural adjustment is proposed as a precondition. In this case, the target nation is conditioned to open its markets for exports, governments are required to allow extraction of natural resources by the so-called able investors from overseas and liberalization of the economy. In other words, governments lose total control of their nations. These are just some of the prescribed cutbacks that eventually impoverish the already struggling economies. When a developing nation opens up its markets freely to foreign investment and international trade, it is highly likely that domestic firms will suffer due to stiff and unfair competition from giant companies (Lindenthal & Koch, 2013).

Preconditions also minimize the role played by the state. In addition, such policies encourage privatization and hamper investment in the developing nations. Companies that are privatized have less room for external players to inject capital and claim shares from proceeds. Worse still, domestic industries lose the much-needed protection (Hartzell et al., 2010). Additional monetary policies that impede local investments include increased rates of interest and devaluation of the domestic currency. Therefore, the impoverished local population loses the purchasing power which directly affects domestic investment opportunities.

References

Hartzell, C. A., Hoddie, M., & Bauer, M. (2010). Economic liberalization via IMF structural adjustment: Sowing the seeds of civil war? International Organization, 64(2), 339-356.

Kotsios, P., & Kotsios, V. (2014). IMF and social indicators: A story of love or hate? International Journal of Economics and Finance, 6(11), 203-220.

Lindenthal, A., & Koch, M. (2013). The Bretton woods institutions and the environment: Organizational learning within the World Bank and the international monetary Fund (IMF). Administrative Sciences, 3(4), 166-201.

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