Please complete Sections 1, 2, 5, 6 and 7
IMF- responsibility is to provide financial assistance to countries facing deep and persistent balance-of-payments difficulties. Balance of payments refers to the net flow of money into and out of a country in connection with activities such as trade, investment, and foreign aid.
Challenges is that countries with large deficits are unable to borrow the additional funds needed to finance their imports of foreign goods and services, and their currency will weaken, making imports more expensive and contributing to domestic inflation, thus not able to participate in the global economy.
IMF can offer loans to countries in extreme financial difficulty. The U.S. accounts for over 17 percent of IMF funding in 2008. The IMF voting power is equal to the quota that is contributed in the lending pool- thus U.S. voting power in 2008 was 16.7 percent.
Structural Adjustment Programs- programs designed to make changes in economic policy to eliminate the source of the country’s financial difficulties.- these reforms in the 1990s were known as the Washington Consensus.
Critiques of the IMF Policies:
1) the anticipated long-term gain preceded by considerable short-term pain.
2) a one size fits all advice provided by the IMF often ignores the specific political, economic, and cultural context of countries in economic crisis.
3) Neo-Marxists and other critics note that it functions largely to perpetuate the dependence of developing countries on the developed West.
4) The IMF weighted voting system gives developed countries effective control over the IMF.
Large critique was during the Asian Economic Crisis of 1997- in 1970s and 1980s much of Southeast Asia received capital from the West in billions of dollars from Western investors looking to earn higher rates of interest than they could at home. Allowed for a great acceleration of economies with investment in infrastructure projects, real estate, and construction activity.
Led to significant economic turmoil- some say it was because of an unregulated global market in capital others say it was corruption.
Regional Institutions:
The nature and degree of regional economic integration can vary considerable and can result in three basic types of arrangements.
1. Free Trade Agreements- eliminate barriers to trade among themselves
2. Customs Union- trade barriers are eliminated among member countries, and the member countries adopt common external tariffs toward nonmembers.
3. Economic Union: member countries eliminate internal barriers, implement a common external tariff, and harmonize economic, social, and environmental rules and policies. Members can freely move goods and services as well as labor and capital across national borders with other members countries, and ultimately they adopt a common currency and common monetary and fiscal policies.
The regional organization work parallel to WTO and GATT, argument that it is dual-track approach to the same free trade goal.
NAFTA- went into effect on January 1, 1994.
U.S., Canada and Mexico agreed to phase out tariffs and other trade barriers among themselves.
Why was the creation of NAFTA so controversial?
1) concerned that it would produce a “giant sucking sound” of jobs leaving the US for Mexico.
2) concerned that US industries would be unable to compete, given Mexico’s low wages and lax environmental protection enforcement, and that the sovereignty of the US would be compromised.
Benefits:
1) allow US companies to invest in Mexico and compete with Asian producers
2) Stimulate economic development in Mexico and the US
3) Reduce illegal Mexican immigration
NAFTA is still controversial- 133% growth in US exports in NAFTA areas compared to 77% for US exports globally