The World’s Political System Governed By International Organizations – Economics Essay

The World’s Political System Governed By International Organizations – Economics Essay
Globalization has lead to an ever-increasing interconnectedness between places and people, the extent of which is often not fully realized. The world political system is now governed based on interdependencies between international government organizations, such as the IMF,

and increasing flows of capital (Dicken, 2003). In Argentina, the implementations of international financial policies of the International Monetary Fund (IMF) were believed to ignite the growth and recovery of the economy. However, these policies have had an adverse effect on Argentina’s economy as well as negatives social implications. It is important to look at the history of the IMF and the natural of its loans and policies to understand the economic and social impacts of these policies in Argentina.
The IMF was one of the institutions borne out of the Bretton Woods conference in 1944. Originally it was intended to define a new international monetary system, designed to promote international cooperation and an organized exchange rate system while also providing short-term financial assistance to countries so that temporary balance of payment needs could be meet (Isard, 2005). The present day IMF has distanced its self from its original form; “founded on the belief that markets often worked badly, it now champions market supremacy with ideological fervour” (Stiglitz, 2001, p.12). It was founded on the belief that global collective action was needed to achieve economic stability. It is a public institution financed by taxpayers worldwide, even though “it does not report directly to either the citizens who finance it or those whose lives it affects…it reports to the ministries of finance and the central banks of the governments of the world” (Stiglitz, 2001, p.12). Control is exerted through a voting arrangement mostly based on the economic power of countries at the end of World War II, with most power in the hands of developed counties and with only the United States having veto power (Isard, 2005; Stiglitz, 2001). Initially, it was believed that international pressure was needed for countries to implement expansionary policies, such as increasing spending while reducing taxes, or stimulating the economy through lowered interest rates. It now provides funds to countries only if they engage in policies such as reducing deficits, raising taxes, privatizing public enterprises, devaluing their currency, and raising interest rates. The originally, the IMF was to focus on crises, but because of the continual need for help in the developed world, it was continually involved in the developing world, whether or not they were experiencing a crisis. Although it was supposed to focus on macroeconomic matters when dealing with countries, it saw almost everything falling within the boundaries of its domain, since it was argued that any structural issues had an impact on the economy (Isard, 2005; Stiglitz, 2001).
According to the IMF’s Article 1 of Articles of Agreement, its purpose is to:
To promote international monetary cooperation through a permanent institution, providing the machinery for consultation and collaboration on international monetary problems.
To facilitate the expansion and balanced growth of international trade, thereby contributing to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions that hamper the growth of world trade.

To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. (International Monetary Fund, 2004)

Member countries are expected to direct their policies towards achieving orderly economic growth with reasonable price stability; and seek the promotion of stability by encouraging orderly economic and financial conditions (Isard, 2005). The IMF fulfills its purposes are through activities such as:implementing surveillance over members’ economic and financial policies and developments, providing financial assistance (subject to conditions) and technical assistance and training in areas in which the IMF has expertise, performing research and policy analysis to advance economics understand of the national economies and international monetary system, and finally, Offering a forum for an ongoing dialogue of issues relating to the functioning of the world economy and international monetary system (International Monetary Fund, 2004; Isard, 2005).

Member countries must undergo a significant amount of surveillance from the IMF, the measure through which the IMF supervises the economic and financial policies and functioning of its members, to ensure the successful operation of the international monetary system (Isard, 2005). Member countries must provide adequate information for effective surveillance, in addition to agreeing with to “direct policies toward the goals of orderly economic growth with reasonable price stability, together with orderly underlying economic and financial conditions, and to avoid manipulating exchange rates for unfair competitive advantage” (International Monetary Fund, 2004). Surveillance provides the monitoring of economies as well as the provision of policy advice, which can help to identify potential problems and allows action to be taken to prevent these problems (International Monetary Fund, 2004; Isard, 2005). Surveillance occurs on three levels, country, regional, and global. Country surveillance involves consultation regarding the country’s economic policies, assesses the reliability of the financial system, and other issues which may effect is macroeconomic policies and performance. A summary of the findings is then submitted to the executive board that then makes recommendation to the government (International Monetary Fund, 2004; Isard 2005). At best, Isard (2005) believes that:

The quality of the IMF’s analysis and policy advice is limited by the accumulated knowledge and best judgements of the economics profession… it is handicapped by the fact that economists have not yet discovered “the magic formula that assures rapid and steady economic growth, low inflation, financial stability, and social progress”…in some cases the Fund’s advice is bound to be bad simply because economists’ collective knowledge and judgements are limited. (p. 76)

There are several concerns about the effectiveness of surveillance and the IMF’s analysis that have lead to an expansion of guidelines to include those for sustainable economic growth. These include the need to strengthen national financial systems and the ability to monitor financial and economic developments in a more efficient manner, a review of policy measure countries in crises are pushed to undertake as a condition of financial support. Moreover, and perhaps most importantly, that regardless of their policies, countries face the threat of being overwhelmed by the volume and mobility of international capital (Brenner, 2004; Isard, 2005; Peck & Tickell, 1994).

Another significant role of the IMF is to provide financial assistance to member countries to lessen the impacts of balance of payments on both national and international prosperity. A prerequisite to borrowing from the fund is the negotiation of a program of policies that provides assurance that the country will be able to repay the loan within a distinct period, done on the basis that the loan is temporary and must be subject to safe guards (Isard, 2005). The program typically includes policies set as prior conditions for assistance. The loan is then paid to the country in instalments, on the basis that the next instalment will be received so long as policies are complied with, determined by targets included in the program and sometimes in addition with structural benchmarks. Some of the policies required to be implemented include:

Support an appropriate economic environment, but achieving high rates of sustainable growth depends primarily on private sector activities.
Market-oriented economic systems with high levels of competition are generally more efficient in allocating resources to meet consumer needs and to support worthwhile investment and growth, Openness to international trade and investment and to transfers of information and technology is vital for economic progress, Exchange rates should broadly reflect international competitiveness, Policies resulting rapid inflation are generally injurious to economic performance, To maintain reasonable price stability and to counteract unwarranted fluctuations in output and employment, monetary policies typically need to respond to (and to anticipate) cyclical developments, The public sector has an essential role in fairly enforcing the rules of a competitive market system, in providing appropriate assistance to the vulnerable in society, in supporting investment in some key areas such as education and health and some components of infrastructure, and in countervailing identifiable and significant market failures,
Public expenditure needs to be adequately financed by equitable and enforceable taxes with broad bases and with the lowest feasible tax rates,
Fiscal deficits often have a desirable cyclical component reflecting the “automatic stabilizers”; buy public sector deficits and debt should be kept within reasonable limits lest they unduly mortgage futures generations or contribute to economic and financial instability. (Isard, 2005, p.77)

The principles behind IMF policies tend to reflect the preferences of multinational corporations by promoting investment and freeing the movement of capital into and out of countries. IMF pushed capital market liberalization, despite the fact there was no indication that the policies would be effective in stimulating growth, believing that the issues of competition and regulation that accompany rapid privatization can be dealt with later on (Stiglitz, 2001). This attitude is largely one of the contributing factors to the dismal state of the Argentinean economy.

IMF imposed policies contributed to Argentina’s increased sensitivity to changes in world economic conditions, increasing macroeconomic volatility. The restructuring of the economy that occurred because of these polices lead to the loss of locally owned firms, states enterprises, and jobs, leading to unstable development patterns (Brenner, 2004; Lee, 2003). It was believed that implementing these policies would lead to the efficient allocation of resources (Schvarzer, 1998), which it did not. Opening of the global economy lead to increasing flows of capital; it is believed that countries must create conditions to attract foreign investment (Peck & Tickell, 1994), conditions which were created by IMF implemented policies. Isard (2005) believes:
The acceleration of capital flows into developing countries… which raised their vulnerability to capital flow reversals was closely associated with rapid financial liberalization by emerging market countries;…the degree to which … countries became vulnerable, and the virulence of the crisis episodes when they occurred, has been largely attributed to the weaknesses of financial institutions and prudential frameworks in the crisis-stricken countries.” (p. 108)

Strengthening of financial institutions and prudential frameworks and addressing macroeconomic imbalances before liberalization financial markets is widely agreed upon to be vital, and is something the IMF ignored in the case of Argentina.
The urban landscape is shaped by the investment of private capital with the purpose of generating wealth, particularly with financial and real estate capital. This has resulted in an unevenly distributed urban space, creating different zones of heterogeneity and inequality of standards of living divided along social class lines (Lombardo, DiVirgilio, & Fernádez, 2005). The emergence of a ‘new’ liberalized and deregulated economy spurred a wave of new foreign investments, generated a reproduction of capital and social structures, which determined the nature of the labour market, consumer habits, government spending, living conditions, and the framework for economic growth. This new framework lead to the reorganization firms, the distribution of buildings and infrastructure, the relocation of people and sources of employment, and provided circuits allowing for increased profits and the subsequent socio-spatial segregation occurring in Argentina (Lombardo et al 2005). Neo-liberal ideology incites competition for capital development and revenue comes along with such investments (Brenner, 2004; Lombardo et al, 2005).

Deregulation and privatization brought many changes to Argentina. The maintenance and operation of a large portion of national highways and access routes to cities were privatized, including those through the Buenos Aires Metropolitan area (BAMA), which meant increased investment in the improvement and maintenance of its roads. Along with improved roads came increased private automobile use, increasing 58% between 1970 and 1992, as well as increased cell phone usage – indicators of a growing upper class and a sign of increasing social polarization that comes with neo-liberal ideology (Brenner, 2004). There was also an increase in the number of private, gated communities and neighbourhoods and country club style development on the outskirts of BAMA, indicating a significant increase in the upper class in the area. Improved highways have lead to a new boom of urban expansion, allowing new sub-developments of the upper class to be connected to the economic and political centre in Buenos Aires. However, the increase in the development of housing, those who are most in need of improved housing conditions, do not have access to it, a problem exacerbated by income concentration in upper level and high rates of poverty and employment in the informal sector (Inter-American Development Bank, 2005). Although home ownership is relatively high among low-income families, however the housing often does not meet minimum standards of quality, with many located in self-built neighbourhoods, lacking basic services (Inter-American Development Bank, 2005). The problem of access to new housing lies in the fact that unemployment in Buenos Aires, as of May 2001, was approximately 23% (Lombardo et al, 2005). In order to qualify for a loan a minimum monthly income of between $1000 and $1800 is required (with the mortgage payments taking between 35 and 40% of that) as well proven job security (Lombardo et al, 2005).

Liberalization of markets has so far not brought stability. Integration into the global economy is successful when foreign traders and investors have confidence in the local economy (Gilbert, 2004), when problems arise in another area, it causes questioning of investments in current areas, causing major problems as capital is pulled out due to these fears, which in actually make these fears realized, whether or not the were founded. Capital flight leads to unstable patterns of development (Brenner, 2004). Argentina saw unemployment increase – rapid privatization meant that the proper structures were not in place to protect the economy and labour force in the event of capital flight. Emphasis on the development on local and regional business was ignored, while foreign investment was encouraged. Privatization was encouraged by the IMF, with the assumption that the private sector would take over from the public sector. This did not happen fast enough, and when the private sector eventually did take over, it proved inefficient, and eventually firms were shut down (Stiglitz, 2001).

Markets do not always arise to meet needs; “government activities have arise because markets have failed to provide essential services”. Privatization of these services leads to negative social implications, such as unemployment and increased poverty, which may then lead to increased violence, crime, and social and political unrest. Families experienced great financial restraints; the remaining employed family members experience greater burdens, children may be forced to withdraw from school to help support their family, debt may amount, as families will have to decide between paying bills or providing food and shelter. Domestic firms may be more socially conscious and be reluctant to fire workers dependent on the economic situation, while foreign firms have an obligation to their shareholders, and will do what is necessary to reduce costs and maximize profits (Stiglitz, 2001). In the past, unemployed workers were often absorbed by the informal sector, but with the rapid capital flight in Argentina in the 1990’s, the sector was not able to absorb the surplus labour, leading to the increases in unemployment. Formal firms are also experience less job security as they are more prone to layoffs and with subcontracting to informal firms becoming increasingly common, have lead to further increases in unemployment, and increasing rates of poverty (Gilbert, 2004).

Growing inequality in Argentina can also attributed to the increasing wage gap. Between 1992 and 1998, real hourly wages did not significantly changed with those with a high school degree or less, while those with a post secondary degree saw their hourly wages significantly increase (Bebczuk & Gasparini, 2001). A number of IMF labour reforms may have also contributed to the widening income gap. An agreement with labour union in 1997, at the IMF’s suggestion, included reduced severance payments, the gradual elimination of collective bargaining agreements, as well as discouraging temporary labour contracts – policies that did not help reduce unemployment (Takagi, 2004). It is typical in Latin American countries that half the country’s income is concentrated in the wealthiest 10 percent of the population (Inter-American Development Bank, 2005). Poverty, after declining significantly between 1990 and 1991, has been steadily increasing since. As of 2004, 55% of the Argentinean population was below the national poverty line (World Bank, 2004).

Global forces and international governance play a direct role in daily life (Swyngedouw, 1992). The crisis in Argentina is a “direct example…of the damaging formative intersection of local, national, and global in the highly unsettling process of the continue making of histories and geographies in a world continually subjected to the marginalization of its reproductive conditions of existence” (Lee, 2003, p. 79). Deregulation continues to leads to the exacerbation of structural imbalances, social polarization, as well as exaggerated fluctuations in the economy and increased fragility of local growth. Private capital has become an important component in the process of social reproduction and the distribution of space (Brenner, 2004; Lombardo, 2005; Peck & Tickell, 1994).

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