International Monetary System\'s Policies Support

¶ … International Monetary System's policies support or impede the progress of developing economies? 2. Do these policies encourage or discourage investment in these developing economies?

The International Monetary System's Policies

The International Monetary system is a set of internationally agreed rules, conventions and policies that facilitate international trade, cross border investment, and the general reallocation of capital between one nation and another. These conventions implement and apply the rules for monetary dealings between one nation and another with different currencies and delineate acceptable forms of negotiation for instance in the situation of deferred payment. The whole is subject to the foreign exchange market and, therefore, to the decision-making of currency traders regarding the value of foreign currency (InfoPlease, http://www.infoplease.com).

Exchange rate procedures -- from time to time modified - are the rules and policies that drive this system. The International Monetary Fund (IMF) manages the entire procedure.

Exchange rate policies work in the following manner: a nation buys or sells its currency on the foreign exchange market. If the nation's central bank is the only organ that buys its currency, the currency of that country declines whilst the currency of other nations rise in comparison. The nation's currency becomes 'devalued'. However, if the reverse occurs, namely one or other of the nations bought that nation's currency, the supply of that currency on the market increases, and the value of the currency of other nations decreases in comparison.

Since the effective operation of international monetary system policies work on trust and on the implicit belief that the negotiating nation has sufficient liquidity that can facilitate the contract as well as the means by which global imbalances can be corrected, it seems plausible, therefore, that developing countries lacking this confidence and that, therefore, their means may be hindered more than helped by the Monetary Systems policies, particularly since citizens of developed countries may be reluctant to invest in these developing countries. In a vicious circle, currency has to be bought by other countries for it to increase its value. If a developing nation's currency is, however, suspect from the start, the potential for it to ever increase is highly unlikely. In this manner, therefore, exchange rate policies only serve to hinder the progress of developing countries.

On the other hand, in a glimpse of optimism, the IMF decided in 1944 that it would issue credits to countries with payment deficits, introduce greater flexibility in its programmes, and on a secondary note also advise developing countries on policies affecting their monetary system. The bungling and greater complexity introduced in the system in later years due to inflation and difficulties with the dollar made this far from being the case.

In fact, Joseph Stieglitz in his book 'Globalization and its discontents' (http://hdr.undp.org/external/HDR_papers/oc3b.htm) points out that it has generally been the wealthier countries who have profited from the IMF and its policies, whilst those at the bottom of society have only been pauperized by its conventions. Developing countries, themselves, have been offended and aggravated by the conventions, and have time and again fought for polices to reform them.

In an issue aside from currency devaluation, borrowing also hinders the developing economy by raising its interest rates to formidable levels. According to Chancellor Helmut Schmidt the interest rates of the developed countries in the post1990 era were higher than they had ever been "at any time since Jesus Christ" (http://hdr.undp.org/external/HDR_papers/oc3b.htm). In 1983, in Latin America, whose devaluations were enormous, it was recorded that in one year "the effect on the individual private sector, which in [some] cases had been encouraged by the policies of the authorities to borrow, has been devastating...the amount needed in local currency to service external debt has increased three or four times" (Kuczynski,1983, p. 22). The situation in these countries is such: with the decrease of their currency value, more goods must be sold to pay back their debt plus interest, and since their export prices have been steadily declining in the post war years, their accumulated interest swells to a rate that is higher than the nominal dues stipulated in the original contract (http://hdr.undp.org/external/HDR_papers/oc3b.htm). In fact, their interest rates are sometimes more than three times higher than the comparative interest rates paid in the same era by developed countries (ibid). The fluctuating rise and fall of the international markets can, consequently, lead debtor countries into stagnation and inflation that last for much longer than they generally do in developed countries. That such was the case can be exemplified by the 1980s.