The International Monetary Fund Introduction to the unit 2




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The International Monetary Fund

Introduction to the unit 2

1. The Role of International Monetary Fund 2

1.1 The Role of International Monetary Fund 2

1.2 Multiple choice questions 4

2. A critical view of the IMF 5

2.1 A critical view of the IMF 5

2.2 Multiple choice questions 7

3. Realism in world economic affairs 8

3.1 Realism in world economic affairs 8

3.2 Multiple choice questions 9

4. International Monetary Law 10

4.1 International Monetary Law 10

4.2 Multiple choice questions 10

5. Role of exchange rates, balance of payments and multilateral payments 11

5.1 Role of exchange rates, balance of payments and multilateral payments 11

5.2 Multiple choice questions 12

Do this 13

Try this 13

Acknowledgements 13

Introduction to the unit


This unit will explain the role of the International Monetary Fund with particular emphasis on the concepts of exchange rates, balance of payments and multilateral payments. In this context the efficiency of the IMF will likewise be evaluated.

By the end of this unit you should have gained knowledge on:

 The role of the International Monetary Fund.

 International monetary law.

 The role of exchange rates, balance of payments and multitlateral payments under the Fund’s legal framework.

1. The Role of International Monetary Fund

1.1 The Role of International Monetary Fund


Description

The IMF sign on their building

End of description

The role of International Monetary Fund in the sphere of global economics is a challenging one. The International Monetary Fund (IMF) is an international organisation which keeps the global financial nexus under inspection.

It does so by observing the world exchange rates and the balance of payments and multilateral payments. The IMF offers also technical assistance to various countries around the world.

The IMF was conceived in 1944 and formally created in 1945.

Activity 1


This activity should take approximately 5 minutes to complete.

Hover your cursor over the map to see which countries are members of the IMF.

An animation that shows the member countries of the IMF.

Flash content unavailable

The key objective of the IMF is to promote the growth of trade as a whole. The IMF uses three paths to achieve this target.

Activity 2


This activity should take approximately 10 minutes to complete.

View the animation to see how the IMF uses three paths to achieve its target.

An animation that shows the three paths used by the IMF to achieve its target.

Flash content unavailable

Answer

The IMF uses three paths to achieve its primary objective, which is to promote the growth of trade as a whole. These are:



  1. It acts as a forum for world negotiation

  2. It provides the world financial system with liquidity by correcting anomalies in the balance of payments

  3. It regulates the world exchange rates to a certain degree by providing for a relevant code of conduct.

End of answer

1.2 Multiple choice questions


Now test your understanding of what this section has covered so far.

The following multiple choice questions should take approximately 10 minutes to complete.


Question 1


What is the role of the IMF?

(a) It controls the budgets of national governments

(b) It acts as a forum for international economics

(c) It observes world exchange rates, balance of payments and multilateral payments

(d) It seeks to promote free international trade

Answer


The role of the IMF is that:

(c) It observes world exchange rates, balance of payments and multilateral payments

End of answer

Question 2


What is the IMF’s primary objective?

(a) The overall promotion of world trade

(b) The fixation of the value of world currencies

(c) The promotion of free trade

(d) The promotion of its policies in certain countries around the world

Answer


The IMF’s primary objective is:

(a) The overall promotion of world trade

End of answer

Question 3


How does the IMF meet its primary objective?

(a) By promoting free international trade

(b) By overseeing the balance of payments, acting as a forum of world negotiation and regulating world exchange rates

(c) By acting as an arbitrator for the dispute settlement of world trade matters

(d) By aligning its primary objective with the monetary objectives of national governments

Answer


The IMF meet its primary objective by:

(b) By overseeing the balance of payments, acting as a forum of world negotiation and regulating world exchange rates

End of answer

2. A critical view of the IMF

2.1 A critical view of the IMF


Description

Protests against the IMF

End of description

In the past a number of criticisms have been directed towards the role of the IMF. A major criticism against the IMF has been the fact that it should not only seek exchange rate stability around the world, but it should also identify what should be regulated and what is necessary to be regulated.

Secondly, the role of the IMF has been maligned by lawyers and economists alike. Lawyers have been the victims of legal technicality and economists have been the main designers when it came to the structure of the Fund.

Another major concern has been the fact that the IMF has not always been effective in the implementation of its policies, in addition to the fact that the IMF has not managed to persuade States to achieve consensus in a number of certain legal matters of international economic significance.

2.2 Multiple choice questions


Now test your understanding of what this section has covered so far.

The following multiple choice questions should take approximately 10 minutes to complete.


Question 4


Why has the IMF been criticised in the past for being ineffective in the implementation of its policies and legal provision around the world?

(a) Because it did not manage to persuade States to achieve consensus in certain legal matters and because the implementation of its policies has been ab initio ineffective

(b) Because different States seek to promote their national interests to the detriment of the IMF’s efforts

(c) Because the IMF cannot promote its policies in the case of trade blocks

(d) Because the IMF is not an independent international organisation

Answer


The IMF has been criticised in the past for being ineffective in the implementation of its policies and legal provision around the world because:

(a) Because it did not manage to persuade States to achieve consensus in certain legal matters and because the implementation of its policies has been ab initio ineffective

End of answer

Question 5


Why have lawyers (and economists) been accused in the past for maligning the role of the IMF?

(a) Because they have not paid attention to the calls of national governments for global deregulation of the world exchange rate markets

(b) Because they have not paid attention to the calls from other international organisations for the further liberalisation of the world exchange rate markets

(c) Because they did little to escape legal technicality

(d) Because they did little for co-operating with economists

Answer


Lawyers (and economists) have been accused in the past for maligning the role of the IMF:

(c) Because they did little to escape legal technicality

End of answer

3. Realism in world economic affairs

3.1 Realism in world economic affairs


Description

Illustration of the world globe.

End of description

Despite the efforts of the IMF it must be stressed that it is not the IMF’s fault if the different economies around the world refuse to fully comply with the IMF’s policies.

This is the case, as states are predominantly influenced by self-interest. Additionally, regional economic regulation in exchange rate matters does not always follow international economic regulation in the same matters and vice-versa.

Most importantly, the purposive school of thought (mutatis mutandis interpretivism) has won over the literal school of thought (mutatis mutandis legalism) in the case of interpreting the Articles of Agreement, the leading statute of the IMF.

3.2 Multiple choice questions


Now test your understanding of what this section has covered so far.

The following multiple choice questions should take approximately 10 minutes to complete.


Question 6


In world economic matters States are not always to correspond to the calls of the IMF. Why is this?

(a) States have different agendas

(b) States do not have the political will to follow the IMF’s calls

(c) States oppose the IMF’s policies

(d) States may not always have the same interests as the IMF

Answer


In world economic matters States are not always to correspond to the calls of the IMF because:

(d) States may not always have the same interests as the IMF

End of answer

Question 7


There are two schools of thought in the interpretation of the IMF’s Articles of Agreement. Which one has prevailed?

(a) Realism

(b) Parochialism

(c) Legalism

(d) Interprevitism

Answer


The school of thought which prevailed in the interpretation of the IMF’s Articles of Agreement is:

(d) Interprevitism

End of answer

4. International Monetary Law

4.1 International Monetary Law


International monetary law tends to be abstract or rather minimal. For this reason international monetary law does not so much deal with ‘black letter law’.

Little is provided in international law when it comes to monetary matters (exception to this is the case of the Eurozone, even though this has a regional character as opposed to a more global character).

There are historical reasons for the absence of norms in international monetary law. The main reason is that the regulation of monetary matters is a sovereign area of national politics and economics.

The Articles of Agreement is the leading international monetary law instrument which is, however, interpreted liberally (school of interpretivism).


4.2 Multiple choice questions


Now test your understanding of what this section has covered so far.

The following multiple choice question should take approximately 5 minutes to complete.


Question 8


8. How would you describe international monetary law?

(a) Rather detailed and for this reason exact

(b) Rather minimal and for this reason abstract

(c) Rather detailed and for this reason convoluted

(d) Rather minimal and for this reason parochial

Answer


International monetary law is described as:

(b) Rather minimal and for this reason abstract

End of answer

5. Role of exchange rates, balance of payments and multilateral payments

5.1 Role of exchange rates, balance of payments and multilateral payments


Exchange rate can be defined as the value of a given currency vis-à-vis another currency. Exchange rates are influenced by national politics.

Such influence, however, may have an impact on other States’ currency value (domino effect). If for example the American dollar is devalued, orthodox economic theory dictates that foreigners would be more willing to buy American products by mere reason of the fact that they would have to pay less in their own currency to obtain American products. The opposite is also true. For this reason the national exchange rates are of concern for international economics.

Under the IMF’s Articles of Agreement a discretionary system of exchange rates is the case. This means that system members have the choice of the system according to which the values of their exchange rates are determined.

Yet, it has to be stressed that the current system is one of soft law. See the animation below for an illustration of har and soft law instruments.


Activity 3


This activity should take approximately 15 minutes to complete.

An animation that shows the difference between hard and soft law instruments.

Flash content unavailable

This is a rather vague approach, as Article I (iii) of the IMF Articles of Agreement provides:

‘To promote exchange rates stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation’.

Furthermore, Article IV of the IMF Articles is the key provision in relation to world exchange rates. The current system is a system of discretionary system of exchange arrangements has been designed.

As the system stands, the linking of exchange rates to gold is now prohibited and an IMF member, whilst not obliged to have the IMF’s approval for its national exchange rate policy, must still inform the IMF of its exchange rate policy decisions.

With regard to the multilateral system of payments, this is a system of payments across national borders. The animation below shows the difference between multilateral and bilateral economic regulation


Activity 4


This activity should take approximately 5 minutes to complete.

Click on the tabs in the animation to see the difference between bilateral economic regulation and multilateral economic regulation

An animation that shows the difference between bilateral economic regulation and multilateral economic regulation.

Flash content unavailable

In particular the system is characterised by currencies which are convertible. Convertibility of currencies refers to the freedom of residents of a State to acquire and dispose currency in exchange markets for current international transactions. A member’s currency is said to be convertible if it has undertaken the prohibitions and stipulations of the IMF, as set out in Article VIII of the IMF Articles of Agreement.

5.2 Multiple choice questions


Now test your understanding of what this section has covered so far.

The following multiple choice questions should take approximately 10 minutes to complete.


Question 9


9. Is the IMF’s policy on exchange rates of soft-law or hard law nature and why?

(a) Of soft-law nature, the reason being national sovereignty in currency matters

(b) Of soft-law nature, the reason being clarity

(c) Of hard-law nature, the reason being legal precision

(d) Of hard-law nature the reason being global uniform standards

Answer


The IMF’s policy on exchange rates is:

(a) Of soft-law nature, the reason being national sovereignty in currency matters

End of answer

Question 10


10. Under Article IV of the IMF’s Articles of Agreement, should a sovereign State which is a member inform the Fund of its monetary policy decisions?

(a) No, IMF member States do not have to inform the Fund

(b) No, IMF member States do not have to inform the Fund but should inform regional monetary organisations

(c) Yes, IMF member States have to inform the Fund in relation to their monetary policy decisions

(d) Yes, IMF member States have to inform the Fund in relation to their monetary policy decisions and in relation to all their national economic arrangements

Answer


The correct answer is:

(c) Yes, IMF member States have to inform the Fund in relation to their monetary policy decisions

End of answer

Now you have finished this unit:


Do this


Now you have completed this unit, you might like to:

  • Post a message to the unit forum.

  • Review or add to your Learning Journal.

  • Rate this unit.

Try this


You might also like to:

  • Find out more about related courses ran by the University of Derby: LL.M Commercial Law: Law of International Trade

  • Book a FlashMeeting to talk live with other learners

  • Create a Knowledge Map to summarise this topic.

Acknowledgements


Author: Antonios Platsas

All other written material contained within this unit originated at the University of Derby.

Image of US cent: www.freeimages.co.uk

Image of The IMF by Kyrion available from Flickr under CC-Attribution-Non-Commercial-No Derivative Works 2.0 Generic



Image of IMF Protest by Agent Rouge available from Flickr under CC-Attribution-Non-Commercial-No Derivative Works 2.0 Generic




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