International Monetary Fund AGENDA: Tackling the issue of fiscal deficit, current account deficit, volatility and sovereign

debt in the global financial system

Dear Delegates, Welcome to RISMUN 2012. Being the delegates of the International Monetary Fund, your responsibility will be to primarily find solutions to the economic aspects of the agenda at hand. If you are well versed with the rules of procedure it would help you to understand the proceedings of the committee and hence be in your benefit. Being the representatives of your countries, you are expected to discuss debate and negotiate in the interest of your country and the people of the world. Since the UN charter is the principle document facilitating discussions at UN, all delegates are expected to well verse with all articles of the charter. The background guide has been divided into various categories which will give you a background of the problem as well as acquaint you with the mandate of your committee. All the sections are extremely important and hence, you are requested to go through them carefully. The content given in the Background Guide is just to give an introduction of the agenda; in the committee other perspectives of the agenda have to come out as well. At the end, we wish you all the very best for the conference and your research. Please feel free to contact the executive board whenever you have any query. Regards Prashant Khurana Managing Director(M.D) Sanchit Gupta First Deputy M.D Amlan Panda Deputy M.D.

sanchitgupta95@gmail.com bh.amln@hotmail.com

Mandate, History and Powers of the IMF Mandate of the International Monetary Fund and its Members Obligation Like any other international organization, the IMFs mandate is founded in the Articles of Agreement, which sets forth the specific powers granted to the IMF and the purposes for which the IMFs powers have been granted. The extension of the IMFs mandate is directly proportional to the extension of its members obligations. The IMFs mandate covers all the international monetary problems, but has regulatory authority only over the system of exchange rates and the international system of payments. (Article I). IMF members obligations also relate to the same elements of the international monetary system, with the distinction that their responsibilities concerning domestic policies are soft, while those concerning external policies are hard . The IMFs obligation of surveillance spreads over the entire international monetary system (multilateral surveillance), as well as over each members policies individually, with a particularly hard obligation to carry firm surveillance over the exchange rate policies of its members (bilateral surveillance). Article I Purposes of the Articles of Agreement of the IMF The purposes are laid down in Article I and have remained unchanged since the IMF was established in 1945. They are exhaustive and do not, in and of themselves, confer powers on the Fund, but they are intended to provide guidance as to how the powers set forth elsewhere in the Articles should be exercised. Table 2: Article I Purposes Article I: Purposes The purposes of the International Monetary Fund are: (i) To promote international monetary cooperation through a permanent institution this provides the machinery for consultation and collaboration on international monetary problems. (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby 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. (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

(iv) 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 which hamper the growth of world trade. (v) 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. (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article. All the powers granted to the IMF relate to problems in the balance of payments of its members. While the IMFs purpose is to provide the platform for collaboration on monetary problems between its members, the granted power intended to achieve that purpose is the one enunciated in Article IV Section 3. That provision enables the IMF to oversee the management and adaptation of the international monetary system (multilateral surveillance) and to supervise the members obligation of collaboration to promote a stable system of exchange rates (bilateral surveillance). Article I(iii) and Article IV 3 focus on the stability of the system of exchange rates. As such, for the IMF to exercise its powers all problems must relate to the balance of payments and every economic policy pursued by a member is considered in the view of its impact on the exchange rate. Obligations of the Member States: Article IV, Section 1 of the IMFs Articles of Agreement The essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services and capital among countries, and that sustains sound economic growth.Additionally, a principal objective of the system is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability. The purpose of the international monetary system is not the purpose of the IMF. The IMF has regulatory authority over some components of the system. Making the purpose of the IMF similar to that of the system would have meant a significant increase of jurisdiction, and the drafters wished to avoid such augmentation, even at the time of the Second Amendment.The assumption underlying the preamble is that, to the extent that members observe their general

obligations set forth in Article IV, Section 1, they will enhance the effective functioning of the international monetary system and, thereby, contribute to the realization of the broader economic benefits identified in this text. The General Obligation to Collaborate [E]ach member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. This represents members general obligation of collaboration. The nature of the actions that members must take to satisfy the obligation of collaboration can only be determined in light of the objectives of this collaboration: to promote orderly exchange arrangements and a stable system of exchange rates. Similar to the purposes and the obligation of bilateral surveillance of the IMF, members obligation of collaboration is directly related to the stability of the system of exchange rates (systemic stability). The Specific Obligations Article IV Section 1 lays down four specific obligations of particular importance directly related to the general obligation of collaboration of members. The first two provisions have as their object the domestic policies of member states. The wording of these provisions makes them particularly soft obligations, as a member state is required only to endeavor to direct its economic and financial policies toward [growth and stability]and to seek to promote stability by fostering orderly underlying economic . . . conditions. The weakness of the obligations is not surprising considering that the mentioned domestic policies to be pursued (economic and financial policies) are a matter of national sovereignty. Consequently, a member could not be required through Article IV consultations to change its domestic policies if presumed stable. The last two provisions, (iii) and (iv), refer to a members external policies, and therefore are formulated in hard language requiring actual results rather than mere efforts. The logic behind the wording of the article is that systemic stability is presumed achieved if domestic and external stability are achieved, and, even more, the stability of the system of exchange rates would be enhanced if appropriate economic policies are pursued. Obligations of the Fund (Article IV Section 3) Surveillance

At the very basic, Article IV 3(a) represents the provision conferring to the IMF the power to conduct multilateral and bilateral surveillance. The second paragraph raises the level of surveillance to firm as it is directly related to the hard obligations for members exchange rate policies. This provision is perceived to undermine evenhandedness, given the fact that firm surveillance is only to be exercised over members exchange rate policies, implying that there is closer scrutiny of members with fixed or managed exchange rates, unlike those that let their currencies float. Obligations of Members Article IV, Section 1, Preamble: . . . to promote a stable system of exchange rates. Article IV, Section 1, paragraph (i): endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances. Article IV, Section 1, paragraph (ii): seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions. Article IV, Section 3, paragraph (b): . . . the Fund shall exercise firm surveillance over the exchange rate policies of members . . .

History
The International Monetary Fund was originally created as part of the Brentton Woods system exchange agreement in 1944. During the Great Depression, countries sharply raised barriers to foreign trade in an attempt to improve their failing economies. This led to the devaluation of currencies and a decline in world trade. This breakdown in international monetary cooperation created a need for oversight. The representatives of 45 governments met in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire, United States, with the delegates to the conference agreeing on a framework for international economic cooperation to be established post World War II. The participating countries were concerned with the rebuilding of Europe and the global economic system after a devastating war . There were two views on the role the IMF should assume as a global economic institution. John Maynard Keynes, from Britain, imagined that the IMF should be a cooperative fund which member states could draw upon to maintain economic activity and employment through periodic crises. This view suggested

an IMF helping governments to act as the US government had during the New Deal in response to the great recession of the 1930s. Harry Dexter White, the US delegate, foresaw an IMF more like a bank, making sure that borrowing states could repay their debts on time. Most of Whites plan was incorporated into the final acts adopted at Bretton Woods. The IMF was formally organized on December 27, 1945, when the first 29 countries signed its Articles of Agreement. The International Monetary Fund was of the key organizations of the international economic system; its design allowed for the balance of the rebuilding of international capitalism and the maximization of national economic sovereignty and human welfare, also known as embedded liberalism. In 1947, France was the first country to borrow from the IMF. The IMFs influence in the global economy steadily increased as it accumulated more members. The number of IMF member countries has more than quadrupled from the 44 states involved in its establishment, reflecting in particular the attainment of political independence by many developing countries in Africa and more recently the dissolution in 1991 of the Soviet Union. Most countries in the Soviet Sphere of influence did not join. The Bretton Woods system prevailed until 1971, when the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold. As of August 2010, Romania ($13.9 billion), Ukraine ($12.66 billion), Hungary ($11.7 billion), and Greece ($30 billion) are the largest borrowers of the fund Powers With its near-global membership of 187 countries, the IMF is uniquely placed to help member governments take advantage of the opportunitiesand manage the challengesposed by globalization and economic development more generally. The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties. The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries' policy choices in many areas, including labor, trade, and tax policies. Helping a country benefit from

globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how interconnected countries have become in todays world economy. Key IMF activities The IMF supports its membership by providing

policy advice to governments and central banks based on analysis of economic trends and cross-country experiences; research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets; loans to help countries overcome economic difficulties; concessional loans to help fight poverty in developing countries; and Technical assistance and training to help countries improve the management of their economies.

Original aims The IMF was founded more than 60 years ago toward the end of World War II (see History). The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed. Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF's main purposeto provide the global public good of financial stabilityis the same today as it was when the organization was established. More specifically, the IMF continues to

provide a forum for cooperation on international monetary problems facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction; promote exchange rate stability and an open system of international payments; and lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems.

An adapting IMF The IMF has evolved along with the global economy throughout its 65-year history, allowing the organization to retain its central role within the international financial architecture As the world economy struggles to restore growth and jobs after the worst crisis since the Great Depression, the IMF has emerged as a very different institution. During the crisis, it mobilized on many fronts to support its member countries. It increased its lending, used its cross-country experience to advise on policy solutions, supported global policy coordination, and reformed the way it makes decisions. The result is an institution that is more in tune with the needs of its 187 member countries.

Stepping up crisis lending. The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessional lending (thats to say, subsidized lending at rates below those being charged by the market) to the worlds poorest nations. Greater lending flexibility. The IMF has overhauled its lending framework to make it better suited to countries individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises. Providing analysis and advice. The IMFs monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been used by the G20. Drawing lessons from the crisis. The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture. Historic reform of governance.The IMFs member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members.

History of The Problem During the nineteenth and early twentieth century, fiscal deficits and surpluses were small in the major industrial countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), and a chart of fiscal balances would show a fairly stable trend line. World War I (1914-18) altered the picture radically, as its participants emptied national treasuries and borrowed against the future in a desperate struggle to survive. The interwar period saw a return to "normalcy" that brought the huge deficits contracted during the war down to manageable size in nearly all countries. World War II (1939-45) and the immediate postwar years repeated the fiscal experience of World War I and the interwar period--immense deficits in all countries followed by surprisingly satisfactory progress toward fiscal balance. Nevertheless, a disturbing trend began in the 1960s and gained seemingly irresistible momentum by the 1970s. The normal peacetime condition of near fiscal balance gave way in almost every industrial country to large and obdurate fiscal deficits. Macroeconomic Shifts The 1950s and 1960s were unusually sanguine decades in the industrial world. Unemployment and inflation were low; economic growth was robust. Incomes were rising faster than inflation so that a consumer could buy more. At the same time, optimism about the government's ability to solve social problems was buoyant. Social welfare programs, many of which were broadened at this time, assumed rather too hopefully that the robust tax revenue and low inflation of the era would continue indefinitely. As a result, government budgets were set on trajectories that were unsustainable and vulnerable to economic downturns. In the late 1960s and early 1970s, economic growth began a secular decline because of fundamental macroeconomic shifts: slower growth in productivity, volatile inflation, rising health care costs, and increasing structural unemployment. Together these factors have driven government revenues well below targets projected during the boom years. Inflation and Debt The oil embargo of 1973 wreaked havoc on an unprepared and oil-dependent industrial world. Huge price jumps and the attendant economic instability remain powerful memories for those who lived through the oil crisis. What is less well remembered, however, is that those price hikes occurred during a period of steadily rising prices, which contrasted with the long-term price stability traditional in the industrial world.

While inflation is painful for consumers, those in debt usually welcome it because inflation makes existing debt (if it has a fixed interest rate) cheaper to service and repay. This sounds like unambiguous good news for governments, who are always deeply in debt, since a surge in inflation could float their problems away. Nevertheless, only unanticipated inflation reduces debt, since creditors negotiate the terms of each loan with a keen eye for anticipated inflation to ensure a reasonable real rate of return on their money. When inflation is volatile, creditors lose money and become wary about future lending, either demanding higher interest rates to cover the added risk of inflation surprises or choosing not to lend at all. Because continued liquidity in the credit markets is vital to economic growth, governments cannot raise interest rates for any length of time without disrupting financial markets. The real growth rate also affects the accumulation of government debt. If an economy grows more slowly than the real interest rate, the national debt grows faster than the government's ability to pay it back. Disturbingly, such a dynamic has taken hold in the industrial world, where real interest rates have generally exceeded real growth rates since the early 1980s, an indicator of how urgent the deficit problem has become. Inflation also raises payments for indexed benefits, since their levels are by definition tied to inflation. If inflation rises unexpectedly, the government will pay out larger sums for welfare, unemployment, social security, and food and housing assistance. Such unexpected expenditures will increase deficit spending. Finally, inflation in an industry such as health care can put severe strain on the government budget. It is argued that the successive regimes for restructuring sovereign debts, since the early 20th century have been shaped by the articulation of three institutional functions: information gathering and economic expertise, then third-party mediation, lastly policy enforcement, also called conditionality. Whereas these functions where integrated within the Fund during the 1980s debt crisis, mediation has now been outsourced, under the pressure of the demand by the private sector for a thorough judicialisation of the restructuring process. Two responses to this demand have been formulated: the creation of a supra-national bankruptcy court, as envisaged in the SDRM proposal put forward by the IMF in 2001; and the reliance upon national courts, specifically those in which jurisdiction the initial debt contracts had been signed. This latter option corresponds to the contractbased approach to sovereign defaults based on Collective Action Clauses, which was eventually adopted in spring 2003. It is defended that outsourcing third-party mediation makes the IMF considerably much

weaker, as it remains with only two functions and no consistent rules of interaction with its traditional partners private investors and the government of debtor countries.

Questions to consider
How to stabilize the current economic situation in the European economy? How to restore pre 2008 growth trajectory of the global economy? How to develop a plan of action in order to combat rising fiscal deficit and inflationary pressures especially in emerging economies? What steps should be taken in order to increase investor confidence in the developed economies? Looking into the past experiences of developed economies what steps should be taken by the emerging markets to increase their pace of development?