Criticisms of IMF Policies

This article discusses the criticisms of recent IMF policies and their impact on member countries. It explores the controversy surrounding IMF loans and their effects on economic growth. The article also highlights the uniform nature of IMF policy prescriptions and the lack of involvement of affected countries in the policy-making process.

Running Text: Econ 401
Econ 401

Econ 401
Ques1. Recent policies of the IMF have drawn a lot of criticism. Discuss these criticisms
Ans.1 IMF stands for International Monetary Fund which has been formed with the motive of
bringing stability in the International Monetary system (The IMF). The topic of IMF loans is
very controversial. The opponents of IMF loans say that it forces the member countries to adopt
economic policies which are actually reckless and when required they could be even bailed out.
The opponents are also of the view that IMF supports and safeguards the International bankers
with bad credit history which indirectly supports riskier international investments. There are
people who are not satisfied with the IMF Policy Prescriptions because of its uniform nature
and not being tailored as per the circumstances which differs from country to country. This
actually results in strict loan conditions making the loan amount unavailable for the borrowing
countries’ poor people. It also affects the economic growth of the country in an adverse
manner. The IMF is also criticised because it does not involves the affected countries at the
time of forming policies which makes the process opaque for others.
Ques2.
Ques2 (a) How did Caterpillar use strategy as a “real hedge” to reduce its exposure to foreign
exchange risk? What is the downside of this approach?
Ans.2 (a) Caterpillar used the strategy of real hedge for reducing its exposure to the risk
associated with the foreign exchange rate. A good number of foreign manufacturing facilities
were established by the Caterpillar. This decision of constructing the manufacturing facilities at
different countries had actually reduced the adverse impact of changing exchange rates. It acted
in a way like when there was a rise in the value of dollar, revenues from these facilities surely
dropped however it also reduced the cost associated with manufacturing and operations.
However, in spite of dealing with the foreign exchange risk in such an appreciable manner, at
present the company is faced with the most complicated and complex business structure.
Ques2 (b) Explain the difference between Feldstein's concepts of "hot money" and "patient
money".
Ans.2 (b) Short term capital flows are referred as “hot money” and longer term investments are
considered as “patient money” as per Feldstein’s concept. Longer term investments like
Foreign Direct Investment (FDI) are nothing but the real assets which have been constructed or
brought by the firms in the foreign country for the purpose of production of goods. Here we

Econ 401
could see that FDI is not even related with currency, debt crisis or banking. Whereas, hot
money refers to the international investments made by the investor in the financial instruments
which is capable of getting liquidated and could be even taken out of the country in a shorter
period of time. According to Feldstein, the business owners and managers still prefers to keep
the patient money at the home country the reason for which it is still rare. Since the investors do
not have enough knowledge about the foreign market the patient money is still available in a
minimal number. However, the availability of patient money could actually make the working
of global capital market more efficient. Feldstein even is of the view that excessive flow of hot
money in and out of the country and little patient money actually lead to the economic
problems in Mexico during mid-1990s (Hill, 2019).
Ques3.
Ques3 (a) Identify and explain four strategies that a firm can use to minimize its foreign
exchange exposure.
Ans.3 (a) A firm can reduce its risk associated with foreign exchange in the following manner-
1. Identify Countries with Strong Currencies: the firms should always try to identify and
choose those countries which have strong as well as rising currencies. Usually the
countries with high debt to GDP ratio have to witness a fall in the value of the currency
as compared to those with low debt to GDP ratios.
2. Foreign bonds react vulnerable to currency fluctuation: When the investments are done
in the foreign bonds index, the fluctuations related to currency can be either plus ten or
minus ten. These changes are actually double of return to be received on bond.
3. Choose Currency Hedged funds for Investment: It is always preferable to invest in
either mutual funds or exchange-traded funds which are hedged. It helps in protecting
the foreign returns on investment. It also helps in reducing the loss because these funds
incorporate the use of investments like futures and options in order to hedge the bonds’
or equities’ currency risk.
4. Diversify Globally: If a firm is investing in loads of foreign securities then it is
advisable not to put all the money into single basket rather they should invest the
money in multiple regions. This would result in the risk diversification (Gustke).

Econ 401
Ques3 (b) Explain how a borrower can hedge against unpredictable movements in
exchange rates.
Ans. 3 (b) At the time loan becomes due, the borrower have the option of entering into
forward contract for purchasing the required currency which was borrowed at an already
decided exchange rate. In this way a borrower can hedge against the unpredictable
movements in exchange rates. No doubt, this will result in higher cost of capital for the
borrower but the insurance would actually benefit him by restricting the risk involved in the
transaction. Before borrowing funds from the global capital market, the firms should
always prefer to make a comparison between the advantages of lower rate of interest and
the risk arising because of an increase in the cost of capital which may be a result of bad
movements of exchange rates. The risk cannot be eliminated completely by the forward
exchange market it could only help in reducing the risk and also it does not provide any sort
of coverage for long-term borrowings.
Ques4. Describe the growth of the global capital market since 2000. What are the two
major factors that account for this growth? Do you think this growth will continue through
the next decade? Why or why not?
Ans. 4 Until 2007, the worth of global financial assets had gone up and reached to $194
trillion which was equal tob343% of GDP. From 1980 to 2007 the capital market was doing
really well which accelerated the growth of financial asset. However, this growth was
interrupted when the global financial crisis occurred in the year 2008 and the financial
assets worth fell down to $178 trillion (McKinsey, 2009).
Again a growth in capital market was witnessed in 2010 after the great financial crisis of
2008-2009. In 2010 the value of global financial stock went up by $11 trillion to the final
value of $212 trillion which was above the peak level of 2007. A rise in the cross-border
capital was also seen in 2010. Markets of North America, Western Europe and Japan had
contributed majorly to the witnessed growth in the global financial stock with $6.6 trillion
market capitalization. Where the growth in the mature markets gone up by 3.9% only, the
emerging market grew up by 13.5%. In 2010, the financial stock went up by $4.4 trillion
because of the increased equity valuations and lending. Also, there was a rise in Global
Debt outstanding ($5 trillion approx.) and government bonds ($4 trillion). The bonds issued
by the financial institutions fell down in 2010 as a result of noticeable low confidence
among the investors however the corporate bonds issuance went up. The investors in the

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world started to diversify their portfolios geographically which resulted in increased global
foreign investments ($96 trillion) in 2010. The global foreign investment grew because of
rise in cross border lending, issuance of debt and foreign reserves.
In 2010, the major factor responsible for the growth in the capital market was the rise in
global financial stock which went up because of two reasons:
i. Recovery of global equity markets happened in 2009 and 2010
ii. Growth happened in government debt securities (Capgemini, 2011).
It seems that the emerging countries would continue to witness growth in capital market
because of their solid long-term fundamentals. However, all the markets could be
affected as a result of global uncertainty and volatility.

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References
Capgemini. Trends in the Global Capital Markets Industry: Financial Intermediary Firms,
2011. Web. 11 June, 2019.
<https://www.capgemini.com/wp-content/uploads/2017/07/Trends_in_the_Global_Cap
ital_Markets_Industry__Financial_Intermediary_Firms.pdf>.
Gustke, C. 4 ways to minimize foreign currency risk, 2014. Web. 11 June 2019.
<https://www.bankrate.com/investing/4-ways-to-minimize-foreign-currency-risk/>.
Hill, C. W. L. (2019). International business: Competing in the global marketplace (12th ed.).
New York: McGraw-Hill Education.
McKinsey.Global capital markets: entering a new era, 2009. Web. 11 June, 2019.
<https://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and
%20Principal%20Investors/Our%20Insights/Global%20capital%20markets
%20entering%20a%20new%20era/
MGI_Global_capital_markets_Entering_a_new_era_gcm_sixth_annual_full_report.ash
x>.
The IMF at a Glance. International Monetary Fund, n.d. Web. 11 June 2019,
<https://www.imf.org/en/About>.