The International Monetary Fund is made up of 186 countries, which together strive for global monetary co-operation, financial stability, the facilitation of international trade, as well as promoting high employment and sustainable economic growth. At the same time, the IMF and the World Bank also aim to reduce poverty around the world. Some task! – especially with the current financial crisis putting strains on even the richest of countries. In its annual meeting on the 2nd October 2009, the ‘rescue’ of more than 12 governments has already been organised by the IMF.
But it is not just countries who are suffering. The World Bank has said that it could run out of money within the next year and the IMF’s Managing Director has also suggested that it will run out of money for its low-income-country loan facility, which loans money to low-income countries at zero interest rates. However, France and Britain have stepped up with a $4 billion allocation to the IMF to help poorer countries, which may lead to other countries doing the same.
Meanwhile, Alistair Darling continues to fight to keep Britain’s seat at the IMF, as some suggest that Europe has too many seats and should give them up to make room for growing economies. This comes at a time when Britain is also facing the prospect of being side-lined from a new group of economic superpowers that would include the US, Japan, China and the Eurozone countries. The following articles consider the role of the IMF and the WB, as the global economy continues to face financial turmoil.
Doubts remain over global power of IMF Financial Times, Alan Beattie (3/10/09)
Pledge for more IMF help for poor BBC News (4/10/09)
World Bank could run out of money ‘within 12 months’ Telegraph, Edmund Conway (2/10/09)
Will tough new G20 measures work? BBC News (26/9/09)
France, UK to loan IMF$4 billion for poor nations Bloomberg, Sandrine Rastello (3/10/09)
Darling rejects call for UK to lose permanent seat on IMF Guardian, Larry Elliot (4/10/09)
Alistair Darling battles to keep UK on the world’s economic top table Telegraph, Edmund Conway(3/10/09)
See also:
IMF Homepage
World Bank Homepage
Questions
- How do the roles of the IMF, the World Bank, the G7 and the G20 differ and overlap? Do we need all of them?
- What are the arguments for less European representation at the IMF? How may this affect decision-making?
- If the G4 does go ahead, with the Eurozone as one of its members, why will the UK be sidelined?
- It is often mentioned that all countries are interdependent, but what do we mean by international policy harmonisation and why is it desirable?
- The BBC News article and the Telegraph article talk about money shortages at the IMF and the WB. What does this mean for the poorer countries and also for the UK and France which have allocated $4 billion to the IMF?
The following link is to a video charting the growth of China and the UK over the past 200 years and projecting forward to 2014. The video is from Gapminder, a site that allows you to compare countries’ performance in terms of a large range of economic and social indicators.
The introduction to this video states, “200 years ago, United Kingdom was a leading nation of the world – both in regard to health and economy. In this video, Hans Rosling details UK’s 200-year journey, to present time, and also shows that China, in the coming five years, will narrow the gap to UK faster than ever.”
Crisis narrows China–UK gap Hans Rosling, Gapminder (2/6/09)
Questions
- Why has the gap in GDP per head narrowed between the China and the UK?
- Why is the gap likely to narrow further over the next five years?
- Identify the factors that will determine how much the gap is likely to narrow in this period.
The World Economic Forum has warned that 2009 may see a ‘hard landing’ for China. In the context of China, this does not necessarily mean a recession, but the WEF report does identify a significant possible slowdown in Chinese growth. Given that high growth in China has led to a high level of demand for imports from other countries, especailly for raw materials and semi-finished goods, any slowdown in Chinese economic growth may have significant repercussions in the rest of the world. Any hopes that China and the emerging economies may help the rest of the world through their recessions have been dashed by data showing that even exports from China have been falling in October and November 2008 by 2.2% and 2.8% respectively. This has meant that aggregate demand in China is falling and may cause further problems, not only for China, but for the whole world economy.
China slowdown ‘big global risk’ BBC News Online (13/1/09)
China’s exports in record decline BBC News Online (13/1/09)
China’s exports slump in sharpest decline in decade Times Online (13/1/09)
World Economic Forum highlights Chinese slump as biggest risk to global economy Telegraph (14/1/09)
Chinese exports fall by the biggest margin in a decade Telegraph (14/1/09)
Questions
- Explain the significance of the fall in Chinese exports for the Chinese economy.
- Analyse the principal causes of the fall in the level of Chinese exports.
- Assess how the changes in China’s trade position will affect the exchange rate of the Chinese currency, the yuan.
- Discuss policies that the Chinese government can implement to try to minimise the impact of the fall in exports on economic growth.
To try to help reduce inflation, the People’s Bank of China (the central bank of China) has ordered banks to hold a greater proportion of their assets as cash. These higher reserve requirements will limit the ability of the banks to create deposits and is a form of monetary policy intended to support the fight against inflation. However, how successful is this likely to be given the rapid economic growth being experienced by China?
China lifts reserve requirements for banks Times Online (12/5/08)
Questions
| 1. |
Explain how a higher reserve requirements helps reduce inflation. |
| 2. |
Evaluate two policies that the central bank could adopt, other than raising reserve requirements to help control inflation in China. |
| 3. |
“As underlying inflationary pressures remain undiminished, it is vital for the government to keep its tightening policy stance to anchor inflationary expectations.” Discuss the extent to which a tightening policy stance will influence inflationary and other expectations. |
Rapid economic growth in China has pushed inflation to an 11-year high of 8.7% in February 2008. This was driven significantly by higher food prices, with the price of pork rising by nearly 64%. This higher level of inflation has led to concerns that policy may need to be tightened.
Sweet and sour pork The Economist (13/3/08)
China inflation hits fresh high BBC News Online (11/3/08)
Chinese inflation alarms authorities Guardian (11/3/08)
Chinese warn on decade-high inflation Times Online (5/3/08)
Chinese inflation shoots to 11-year high Times Online (11/3/07)
China tries to apply brakes to economy Guardian (4/3/08)
Questions
| 1. |
What are the main causes of rising inflation in China? |
| 2. |
Assess the extent to which policy needs to be tightened to counter the rising level of inflation in China. What would be the possible downsides of such a policy? |
| 3. |
Discuss possible policy changes that could be implemented by the Chinese government to reduce the level of inflation. |