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International Monetary Fund

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International Monetary Fund | A paper for the course Contemporary Global System | Rexis Jun M. Maamo |

Introduction

The international monetary system (IMS) had undergone several evolutions ever since international trade relations between states rose to prominence. Realizing the importance of trade relations and interdependence, the international community had established a number of international monetary systems throughout the history, in order to provide formal (rules and decision-making processes) and informal (principles and norms) institutions that acts as venues and sites to offer convenient transactions between states, and to address and prevent the reoccurrence of global financial issues and crises that are concurrently relative to the existing international monetary system. So far, there are about four international monetary systems that have been established and adopted consecutively: the Classical Gold Standard, the Gold Exchange Standard, the Bretton Woods System, and the Floating Exchange Rate System. The current monetary system espoused by the international community is the Floating Exchange Rate system which is accompanied by its formal institution, the IMF or the International Monetary Fund.

The International Monetary Fund aims to promote global monetary and exchange stability, facilitate the expansion and balanced growth of international trade, and assist in the establishment of a multilateral system of payments for current transactions (Investopedia, n.d.). This international organization operates with its aims to prevent the recurrence of other global financial crises which could lead to recession, unemployment, poverty, famine, and even death to millions of lives.

Having explained the intricacies of the organization, the next concern for this paper would be to discuss the structure and functions of the IMF, and to elaborate how the institution, aiming economic development, addresses issues ushered in by the growing international economic interdependence.

Structure and Functions of the IMF

Technically and historically, the current monetary system is not the one responsible for the establishment of this organization; rather, it was in the stint of the previous system (Bretton Woods System) that the IMF was institutionalized. The IMF was created to oversee the stability of the international monetary system by preventing unnecessary devaluations of member-state currencies all over the world. The IMF held the power to adjust the value of a one’s currency and to provide special drawing rights, which provides liquidity, in order to address balance of payments disequilibria (International Monetary Fund, 2013). The system then broke down after the successive withdrawal of member states and the renouncement of the US President Richard Nixon of the direct convertibility of dollar to gold; however, both of the organization survived the collapse, and are currently operating in the present monetary system, as a legacy of the former system, to ensure and maintain international economic stability (Lowenstein, R. 2011).

Despite having to evolve from one system to the other, this institution is able to retain its fundamental organizational structure and most of its functions and role in the international community. The operation and leadership in the IMF is conducted by the three major departments in the organization: the Board of Governors, the Executive Board, and the Managing Director and Staff.

Board of Governors All powers in the IMF are officially vested in the Board of Governors, on which all member states: comprising 188 states are represented. Each member state appoints one governor and one governor and one alternate governor, who may vote when the principal governor is absent. The Board normally meets once a year, and is responsible for electing or appointing executive directors to the Executive Board. While the IMF Board of Governors is officially responsible for approving quota increases, special drawing rights allocations, the admittance of new members, compulsory withdrawal of members, and amendments to the Articles of Agreement and By-Laws, in practice it has delegated most of its powers to the IMF Executive Board (International Monetary Fund, n.d.).

The Executive Board Twenty four Executive Directors (and twenty four alternates) make up the Executive Board in the IMF. The Executive Board is responsible for the Fund’s general operations, and for this purpose they exercise all the powers delegated to them by the Board of Governors. They “function in continuous session” at the Fund’s headquarters and meet as often as business may require, usually several times a week. Of the twenty four executive directors, five are appointed by the countries having the largest quotas (United States, Japan, Germany, France, and the United Kingdom), and the other nineteen are elected by regional groups of the remaining members (Encyclopaedia of the Nations, n.d.).

The Managing Director The managing director in the IMF, who is chosen by the executive directors, is responsible for the conduct of the ordinary business of the Fund. He/she is appointed for a five-year term and may not serve concurrently as a governor or executive director of the IMF. The managing director chairs meetings of the executive directors but may vote only in a case of a tie.

Special Drawing Rights

Each IMF member country is allotted a quota, or contribution, that reflects the country’s relative size in the global economy. This quota makes up the Special Drawing Rights, which are supplementary foreign exchange reserve assets that represents a claim to currency held by IMF member countries for which they may be exchanged into Euros, Japanese Yen, Pounds Sterling, or US Dollars (International Monetary Fund, 2013). Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations (International Monetary Fund, 2013).

Originally, the SDR can only be exchanged into US dollars with ratio of 1:1. It was then redefined, after the collapse of the Bretton Woods System in 1973, as a basket of currencies, today consisting of the four major currencies which determine the value of SDR. In addition, the SDR plays a part in determining the number of votes of a member country holds. Each state, represented by a Governor in the Board, carries a 250 vote, which is 5% of the total votes, and an additional one vote for every 100, 000 XDR in a country’s IMF quota. Hence, the voting power is explicitly tied to the size of member countries’ financial contributions, known as “quotas.” By virtue of their large quotas, rich countries have the preponderance of voting power while developing countries are left to complain about a “democratic deficit” that leaves them with little influence over the IMF’s policies and programs (International Monetary Fund, 2013).

Bibliography

Encyclopedia of Nations. The International Monetary Fund (IMF) – Structure. [Online]. Available from: http://www.nationsencyclopedia.com/ United-Nations-Related-Agencies/The-International-Monetary-Fund-IMF-Structure.html. [Accessed: 27 July 2013]

Investopedia. International Monetary Fund – IMF. [Online]. Available from: http://www.investopedia.com/terms/i/imf.asp#axzz2M462GJYQ. [Accessed: 27 July 2013]

International Monetary Fund. Factsheet: IMF Lending. [Online]. 2 April 2013. Available from: http://www.imf.org/external/np/exr/facts/howlend.htm. [Accessed: 27 July,2013]

International Monetary Fund. Governance Structure. [Online]. Available from: http://www.imf.org/external/about/govstruct.htm. [Accessed: 27 July 2013]

International Monetary Fund. FACTSHEET: Special Drawing Rights (SDRs). [Online]. 29 March 2013. Available from: http://www.imf.org/external/np/exr/facts/sdr.HTM. [Accessed: 27 July, 2013]

Lowenstein, R. (2011). Features: The Nixon Shock. [Online]. 4 August 2011. Available from: http://www.businessweek.com/magazine/the-nixon-shock-08042011.html. [Accessed: 26 July 2013]

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