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SF18Delta
11-28-2009, 12:13 PM
Why do we need the IMF?


Smoothing the bumps in the flow of foreign exchange
Before people from different countries can buy or sell anything to each other, they have to solve a basic problem. Buyers have to be able to change their money from their country's currency to the seller's national currency. This is called "foreign exchange." Each currency, whether it's the US dollar or the Haitian gourde, has a value in terms of other currencies. This is the "exchange rate." Without a reliable supply of foreign exchange in each country, and without relatively stable exchange rates, world trade would drop drastically. You wouldn't be wearing tennis shoes made in Asia, or eating an apple grown in New Zealand.

The International Monetary Fund was founded over 50 years ago to allow currency to be exchanged freely and easily between member countries. Today, the IMF works to help member countries ensure that they always have enough foreign exchange to continue to do business with the rest of the world.

The following imaginary scenario attempts to picture what would happen if the IMF did not exist. It tells the story of a businessperson in a fictional developing country that is suffering from a shortage of foreign exchange. In the scenario, there is no IMF to turn to in order to resolve the currency crisis. You will soon come to realize the difficulties of carrying on international trade in that imaginary world without the IMF.


The Phone Dealer's Dilemma



You are a wireless phone dealer in the mythical land of Yak. Your country is large, but has a small population. Just about everyone has a cellular phone because there are no regular phone lines across the vast distances of your country. Naturally, people take a lot of interest in their phones. Your customers are looking for the latest new styles and features. Your business has great potential.

But you have a problem. You are a dealer. You sell phones, but you do not manufacture them. The best phones come from the neighboring countries of New Bells, Vox, and Sans Fil. To give your customers the selection they want, you realize you could import cell phones from these countries.



Pay Foreign Phone Exporters in Yak Doubloons



You contact cell phone exporters in New Bells, Vox, and Sans Fil. They are all eager to sell you their unique, high-quality phones. But none will take payment in doubloons, Yak's own money. They can't spend doubloons in their own countries. Your currency is worthless outside of Yak. Doubloons are therefore known as a "soft currency."

The exporters all tell you that you could pay them in shillings instead. The shilling is the currency of Zedland, another, more distant, country. Zedland's economy is so strong that its currency is trusted all over the world. Shillings are known as "hard currency" because they have value outside the country they come from.

SF18Delta
11-28-2009, 12:17 PM
Exchange Soft Currency for Hard Currency


You go to the First National Bank of Yak to exchange your doubloons, the currency of Yak, for Zedland shillings. At the bank, the teller says that you can't buy any shillings. She tells you that shillings are scarce in Yak right now. They aren't sure when the bank will get more.

What will you do?


Go Back to Your Shop


You still have some basic models of wireless phones to sell, but you cannot get more of them. People are always asking about the Horizon-Hopper XT from the country of New Bells and the Clear Sound 9000 from another country, Vox. All you can do is show them the catalogs and tell them you're trying to get some soon. But soon, customers stop coming into your shop, and your business declines.



Get on the Hard Currency Waiting List


You get on the waiting list for shillings at Yak First National Bank. The teller says, "I should tell you why we have a shortage of shillings. We only get shillings as payment when we export goods to other countries. Right now Yak imports more than we export. So we have spent all of the shillings we have. We don't have any left for you to buy."

She leans closer and whispers, "You didn't hear this from me. But our exports are down because the government has made it too complicated and expensive for anyone to sell their products outside the country. We also don't have any hard currency because government regulations discourage foreign investors from putting money into our economy. It's a real scandal!"

What will you do?


Wait for Things to Get Better


The current government does nothing effective to improve export trade and investment. Inflation and unemployment rates spiral up. You are forced to close your phone shop. To make a living, you go door to door offering to repair people's phones for spare change and meals. After a while the economy is so bad no one can afford to give you anything.


Lead a Protest, Enter Politics


You are outraged at the government. So you help organize a huge rally against the bad economic conditions. You make a passionate speech demanding change. The President hears your speech and appoints you to be his Economics Minister. You sell your telephone dealership to avoid any conflicts of interest and devote yourself fully to solving Yak's economic problems.

As Minister, you want to get Yak's economy back on track. It's your job to work with the central bank to develop a good policy for managing inflation and interest rates. You also must work with your ministry of finance to keep government spending in line with tax revenues. If your reforms are to succeed, you need more hard currency to allow merchants to import the goods your citizens want.

How will you obtain more hard currency?

TXCPA
11-28-2009, 12:17 PM
Now that makes sense. Medic you should be an economics professor.

SF18Delta
11-28-2009, 12:21 PM
Work to Increase Exports


You need to sell more goods made in Yak to other countries. But foreign buyers don't want your goods right now. Some of the things Yak makes are not of sufficient quality. Products made in Yak cost more to produce than the price they sell for on the international market. So exporters can't afford to sell them in other countries.

How can you make your exports more competitive?


Invest in Existing Industries


Some of your existing industries were once competitive, but have grown inefficient over the years. For instance, at Yak's can-opener plant, manufacturing equipment is outdated and often broken, and managers have not been trained well. The workers are paid well, but they can't produce can openers efficiently. So the can openers cost more to produce than they would fetch on the export market.

To upgrade your industries, you must finance the purchase of equipment and training from outside the country with hard currency. But the head of your central bank reminds you that your whole problem is that there isn't enough hard currency.

How will you get the hard currency to upgrade your industries?


Seek a Foreign Loan

The Bank of Old Money in New Bells is willing to loan you the hard currency you need. You negotiate for the loan to run over a long period. You don't have to pay it back quickly, but you will pay a lot of interest over time. You are counting on big improvements in Yak's economy to meet the payments. It's a big risk. The nearby country of Vox is still struggling to pay back its debts. The President is getting impatient and, remembering your experience as private businessman in the telephone business, you know you must do something.



Buy Factory Equipment and Technical Expertise


You spend your loan to renovate the old can-opener factory. A celebrity TV chef in Zedland endorses the can-openers made at the updated plant. People all over the world want one.

Your exports of this product grow and you have more hard currency. A grateful President promotes you to Prime Minister.

During your term as Prime Minister, exports finally exceed imports. The head of Yak's central bank tells you, "Congratulations! We achieved a trade surplus. That will let us meet the payments on our loan from the Old Money Bank of New Bells!" Your brilliantly successful economic policy earns you international praise.

SF18Delta
11-28-2009, 12:23 PM
How the IMF Could Have Helped


This has been the story of how a lack of foreign exchange can prevent international trade. What began as a simple problem -- the desire to import cellular phones -- turned into a major political and economic crisis.

As the Economics Minister of the mythical country of Yak, you learned how to increase exports in order to bring more foreign exchange into the country. In the end, more international trade between Yak and its neighboring countries contributed to a healthy economy for all the trading partners.

In the real world, there exists an organization that helps member countries that are in need of foreign exchange. It is the IMF. The IMF works to help countries get back on track when they have problems with the supply of foreign exchange. The IMF works to make currency exchange easy and predictable by lending countries needed foreign exchange and helping those countries reform their economics.

If Yak and its trading partners had an organization like the IMF, this story would have been quite short. You, as the cell phone dealer, would have gone to the bank, exchanged some of your money for foreign currency, which would be available through the assistance of the IMF, and purchased the imported cell phones that your customers wanted. Not very dramatic, but that's how the IMF would like it to be.

THE END

frankielovesdinar
11-28-2009, 12:27 PM
Thanks Medic. Pretty simple when put like that. appreciate it!

kelpie
11-28-2009, 12:34 PM
I saw a special on HDNet the other night on the IMF, Kuhn and how they are getting involved in the economies of many countries around the world. Hosted by Dan Rather. Very, very informative and we should all understand the IMF role a little more....

cebp
11-28-2009, 12:40 PM
Way to go medic, you are the best, thanks for your always vivid explanations of iraqi govt and the IMF.

1tealover
11-28-2009, 12:44 PM
Thanks, Medic. This is beyond the KISS theory as related to economics. Great story, easily understood, even for those of us who didn't do so well in econ classes in college.

calldinar
11-28-2009, 12:51 PM
Thanks Medic, a short but thorough example of economics and how they work. Gives us hope for an end to Iraq's economic woes, and a means to an end. RV. Thanks for all the hard work, and continual sacrifice for all of us.

4children
11-28-2009, 12:55 PM
Great Post

bluewaters2u
11-28-2009, 01:20 PM
Awesome Post Medic and a wonderful example of the roll with /with out IMF to monitor and help the world currency exchange within the trade confines of those country's. Thru loans and real value. You continue to be a great teacher of those things outside of ones normal knowledgeable comfort zone. well done my friend....Blue

Stuart56
11-28-2009, 01:24 PM
Excellent Medic, Excellent.

Moses1234
11-28-2009, 02:48 PM
Excelllent piece. Its amazing what citizens of the US take for granted.

mjd
11-28-2009, 03:15 PM
Medic, awesome explanation! Thanks!!

sfcdiaz
11-28-2009, 04:35 PM
thank you medic good info

GreenEyes
11-28-2009, 06:01 PM
Thanks Medic! I am Yaktivated!

oxenjockey
11-28-2009, 06:14 PM
Wow! Thank you!