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Unit 10: International Financial Institutions-II

7. Helpful in Times of Difficulties: The Fund has come to the rescue of all member countries notes
faced with economic crisis. On account of hike in petrol prices, many countries of the world
experienced acute shortage of foreign exchange. In order to ease this situation, it set up
Petrol Facility Fund.

Task Describe trade disequilibrium.

10.3.6 failures of international monetary fund

Despite the achievements made, the Fund has also failed to achieve some of its objectives. Its
chief failures are as under:
1. Lack of Exchange Stability: The Fund has failed to achieve its main objective of exchange
stability. It succeeded till 1971 in maintaining Fixed Rate of Exchange. Thereafter, it became
variable once again. Lack of stability in exchange rate is the major failure of the Fund.
2. Lack of Stability in the Price of Gold: Strenuous efforts were made by the Fund to bring
stability in the price of gold but it failed miserably. Up to 1971, the price of gold was kept
stable at $35 per oz; but thereafter it could not remain stable and rose to $1500 per oz.
3. Inability to Remove Exchange Control: The Fund has failed to remove restrictions on
foreign trade and control on foreign exchange. Many countries of the world have resorted
to policy of protection with greater vigour.
4. Rich Countries’ Club: Critics say that International Monetary Fund is a club of rich
countries. It works at the behest of rich countries like America, Britain, etc., and helps their
supporters. It pursues a policy of discrimination.
5. Charitable Institution: Other critics point out that it is a charitable institution whose main
function is to provide the resources of some rich countries to their supporter countries to
enable them to correct disequilibrium in their balance of payments. Such a help instead of
promoting their economic development renders them more careless and increases their
foreign indebtedness.
6. No Solution for International Liquidity: IMF does not have a proper solution for
international liquidity. Although Fund has considerably increased its permanent resources
and helped in the creation of a new currency in the form of Special Drawing Right (SDRs),
yet the problem of liquidity persists. Consequently, it will be difficult for the Fund to lend
resources to developing countries and help them tide over their balance of payments
deficit.

7. No Elimination of Multiple Exchange Rates: Another aim of the Fund was to eliminate
multiple exchange rates but it has not succeeded therein. Multiple exchange system refers
to a system wherein a country adopts different exchange rates for different transactions. For
instance in 1971, France had adopted two exchange rates, fixed exchange rate for genuine
trade transactions and flexible rate of exchange for speculative transactions.

8. Inability to Tackle the Monetary Crisis of August 1971: In the year 1971, a global monetary
crisis triggered off when America not only devalued dollar but also stopped its convertibility
into gold. The Fund failed to resolve this crisis. Rather, due to this crisis, the Fund had to
bid good-bye to its objectives like gold standard and fixed exchange rate. It was the biggest
failure of the Fund.
9. Discriminatory Policies: The major cause of criticism of the Fund is its discriminatory
policies in favour of developed countries and against the developing countries. US and

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