The International Monetary Fund (IMF)

IMF Headquarters, Washington, DC. 

The International Monetary Fund (IMF) (French : Fonds monétaire international) is an international organization that was initiated in 1944 at the Bretton Woods Conference and formally created in 1945 by 29 member countries. The IMF's stated goal was to assist in the reconstruction of the world's international payment system post–World War II. Countries contribute money to a pool through a quota system from which countries with payment imbalances can borrow funds temporarily. Through this activity and others such as surveillance of its members' economies and the demand for self-correcting policies, the IMF works to improve the economies of its member countries.^[1]

 

The IMF describes itself as “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”^[2] The organization's stated objectives are to promote international economic cooperation, international trade, employment, and exchange rate stability, including by making financial resources available to member countries to meet balance of payments needs.^[3] Its headquarters are in Washington, D.C., United States.

Functions

The IMF works to foster global growth and economic stability. It 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.^[4] The rationale for this is that private international capital markets function imperfectly and many countries have limited access to financial markets. Such market imperfections, together with balance of payments financing, provide the justification for official financing, without which many countries could only correct large external payment imbalances through measures with adverse effects on both national and international economic prosperity.^[5] The IMF can provide other sources of financing to countries in need that would not be available in the absence of an economic stabilization program supported by the Fund.

 

Upon initial IMF formation, its two primary functions were: to oversee the fixed exchange rate arrangements between countries,^[6] thus helping national governments manage their exchange rates and allowing these governments to prioritize economic growth,^[7] and to provide short-term capital to aid balance-of-payments.^[6] This assistance was meant to prevent the spread of international economic crises. The Fund was also intended to help mend the pieces of the international economy post the Great Depression and World War II.^[8]The IMF's role was fundamentally altered after the floating exchange rates post 1971. It shifted to examining the economic policies of countries with IMF loan agreements to determine if a shortage of capital was due to economic fluctuations or economic policy. The IMF also researched what types of government policy would ensure economic recovery.^[9] The new challenge is to promote and implement policy that reduces the frequency of crises among the emerging market countries, especially the middle-income countries that are open to massive capital outflows.^[10] Rather than maintaining a position of oversight of only exchange rates, their function became one of “surveillance” of the overall macroeconomic performance of its member countries. Their role became a lot more active because the IMF now manages economic policy instead of just exchange rates.

 

In addition, the IMF negotiates conditions on lending and loans under their policy of conditionality,^[6] which was established in the 1950s.^[8] Low-income countries can borrow on concessional terms, which means there is a period of time with no interest rates, through the Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF). Nonconcessional loans, which include interest rates, are provided mainly through Stand-By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility. The IMF provides emergency assistance via the newly introduced Rapid Financing Instrument (RFI) to all its members facing urgent balance of payments needs.^[11]

Surveillance of the global economy

The IMF is mandated to oversee the international monetary and financial system^[12] and monitor the economic and financial policies of its 188 member countries. This activity is known as surveillance and facilitates international cooperation.^[13] Since the demise of the Bretton Woods system of fixed exchange rates in the early 1970s, surveillance has evolved largely by way of changes in procedures rather than through the adoption of new obligations.^[12] The responsibilities of the Fund changed from those of guardian to those of overseer of members’ policies.

The Fund typically analyzes the appropriateness of each member country’s economic and financial policies for achieving orderly economic growth, and assesses the consequences of these policies for other countries and for the global economy.^[12]

 

In 1995 the International Monetary Fund began work on data dissemination standards with the view of guiding IMF member countries to disseminate their economic and financial data to the public. The International Monetary and Financial Committee (IMFC) endorsed the guidelines for the dissemination standards and they were split into two tiers: The General Data Dissemination System (GDDS) and the Special Data Dissemination Standard (SDDS). The International Monetary Fund executive board approved the SDDS and GDDS in 1996 and 1997 respectively, and subsequent amendments were published in a revised Guide to the General Data Dissemination System. The system is aimed primarily at statisticians and aims to improve many aspects of statistical systems in a country. It is also part of the World Bank Millennium Development Goals and Poverty Reduction Strategic Papers.

 

The primary objective of the GDDS is to encourage IMF member countries to build a framework to improve data quality and increase statistical capacity building. Upon building a framework, a country can evaluate statistical needs, set priorities in improving the timeliness, transparency, reliability and accessibility of financial and economic data. Some countries initially used the GDDS, but later upgraded to SDDS. Some entities that are not themselves IMF members also contribute statistical data to the systems:

• Palestinian Authority – GDDS
• Hong Kong – SDDS
• Macao – GDDS^[14]
• EU institutions:
  • the European Central Bank for the Eurozone – SDDS
  • Eurostat for the whole EU – SDDS, thus providing data from Cyprus (not using any DDSystem on its own) and Malta (using only GDDS on its own)

Conditionality of loans

IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial resources.^[6] The IMF does not require collateral from countries for loans but rather requires the government seeking assistance to correct its macroeconomic imbalances in the form of policy reform. If the conditions are not met, the funds are withheld.^[6] Conditionality is perhaps the most controversial aspect of IMF policies.^[15] The concept of conditionality was introduced in an Executive Board decision in 1952 and later incorporated in the Articles of Agreement. Conditionality is associated with economic theory as well as an enforcement mechanism for repayment. Stemming primarily from the work of Jacques Polak in the Fund's research department, the theoretical underpinning of conditionality was the “monetary approach to the balance of payments."^[8]

Structural adjustment

Further information: Structural adjustment

Some of the conditions for structural adjustment can include:

• Cutting expenditures, also known as austerity.
• Focusing economic output on direct export and resource extraction,
• Devaluation of currencies,
• Trade liberalization, or lifting import and export restrictions,
• Increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets),
• Balancing budgets and not overspending,
• Removing price controls and state subsidies,
• Privatization, or divestiture of all or part of state-owned enterprises,
• Enhancing the rights of foreign investors vis-a-vis national laws,
• Improving governance and fighting corruption.

These conditions have also been sometimes labeled as the Washington Consensus.

Benefits

These loan conditions ensure that the borrowing country will be able to repay the Fund and that the country won’t attempt to solve their balance of payment problems in a way that would negatively impact the international economy.^[16][17] The incentive problem of moral hazard, which is the actions of economic agents maximizing their own utility to the detriment of others when they do not bear the full consequences of their actions, is mitigated through conditions rather than providing collateral; countries in need of IMF loans do not generally possess internationally valuable collateral anyway.^[17]

Conditionality also reassures the IMF that the funds lent to them will be used for the purposes defined by the Articles of Agreement and provides safeguards that country will be able to rectify its macroeconomic and structural imbalances.^[17] In the judgment of the Fund, the adoption by the member of certain corrective measures or policies will allow it to repay the Fund, thereby ensuring that the same resources will be available to support other members.^[15]

 

As of 2004^[update], borrowing countries have had a very good track record for repaying credit extended under the Fund's regular lending facilities with full interest over the duration of the loan. This indicates that Fund lending does not impose a burden on creditor countries, as lending countries receive market-rate interest on most of their quota subscription, plus any of their own-currency subscriptions that are loaned out by the Fund, plus all of the reserve assets that they provide the Fund.^[5]

Criticisms

In some quarters, the IMF has been criticized for being 'out of touch' with local economic conditions, cultures, and environments in the countries they are requiring policy reform.^[6] The Fund knows very little about what public spending on programs like public health and education actually means, especially in African countries; they have no feel for the impact that their proposed national budget will have on people. The economic advice the IMF gives might not always take into consideration the difference between what spending means on paper and how it is felt by citizens.^[18]For example, some people believe that Jeffrey Sach's work shows that "the Fund's usual prescription is 'budgetary belt tightening to countries who are much too poor to own belts'.^[18] " It has been said that the IMF's role as a generalist institution specializing in macroeconomic issues needs reform. Conditionality has also been criticized because a country can pledge collateral of "acceptable assets" in order to obtain waivers on certain conditions.^[17] However, that assumes that all countries have the capability and choice to provide acceptable collateral.

 

One view is that conditionality undermines domestic political institutions.^[19] The recipient governments are sacrificing policy autonomy in exchange for funds, which can lead to public resentment of the local leadership for accepting and enforcing the IMF conditions. Political instability can result from more leadership turnover as political leaders are replaced in electoral backlashes.^[6] IMF conditions are often criticized for their bias against economic growth and reduce government services, thus increasing unemployment.^[8]Another criticism is that IMF programs are only designed to address poor governance, excessive government spending, excessive government intervention in markets, and too much state ownership.^[18] This assumes that this narrow range of issues represents the only possible problems; everything is standardized and differing contexts are ignored.^[18] A country may also be compelled to accept conditions it would not normally accept had they not been in a financial crisis in need of assistance.^[15]

 

It is claimed that conditionalities retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries.^[20] The IMF sometimes advocates “austerity programmes,” cutting public spending and increasing taxes even when the economy is weak, in order to bring budgets closer to a balance, thus reducing budget deficits. Countries are often advised to lower their corporate tax rate. In Globalization and Its Discontents, Joseph E. Stiglitz, former chief economist and senior vice president at the World Bank, criticizes these policies.^[21] He argues that by converting to a more monetarist approach, the purpose of the fund is no longer valid, as it was designed to provide funds for countries to carry out Keynesian reflations, and that the IMF “was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community.”^[22]

Reform

The IMF is only one of many international organizations and it is a generalist institution for macroeconomic issues only; its core areas of concern in developing countries are very narrow. One proposed reform is a movement towards close partnership with other specialist agencies in order to better productivity. The IMF has little to no communication with other international organizations such as UN specialist agencies like UNICEF, the Food and Agriculture Organization (FAO), and the United Nations Development Program (UNDP).^[18]

J

effrey Sachs argues in The End of Poverty: “international institutions like the International Monetary Fund (IMF) and the World Bank have the brightest economists and the lead in advising poor countries on how to break out of poverty, but the problem is development economics”.^[18] Development economics needs the reform, not the IMF. He also notes that IMF loan conditions need to be partnered with other reforms such as trade reform in developed nations, debt cancellation, and increased financial assistance for investments in basic infrastructure in order to be effective.^[18] IMF loan conditions cannot stand alone and produce change; they need to be partnered with other reforms.

History

The International Monetary Fund was originally laid out as a part of the Bretton Woods system exchange agreement in 1944.^[23] During the earlier Great Depression, countries sharply raised barriers to foreign trade in an attempt to improve their failing economies. This led to the devaluation of national currencies and a decline in world trade.^[24]This breakdown in international monetary cooperation created a need for oversight. The representatives of 45 governments met at the Bretton Woods Conference in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire in the United States, to discuss framework for post-World War II international economic cooperation. The participating countries were concerned with the rebuilding of Europe and the global economic system after the war.

 

There were two views on the role the IMF should assume as a global economic institution. British economist John Maynard Keynes imagined that the IMF would be a cooperative fund upon which member states could draw to maintain economic activity and employment through periodic crises. This view suggested an IMF that helped governments and to act as the US government had during the New Deal in response to World War II. American delegate Harry Dexter White foresaw an IMF that functioned more like a bank, making sure that borrowing states could repay their debts on time.^[25] Most of White's plan was incorporated into the final acts adopted at Bretton Woods.

 

The International Monetary Fund formally came into existence on 27 December 1945, when the first 29 countries ratified its Articles of Agreement.^[26] By the end of 1946 the Fund had grown to 39 members.^[27] On 1 March 1947, the IMF began its financial operations,^[28] and on 8 May France became the first country to borrow from it.^[27]The IMF was one of the key organizations of the international economic system; its design allowed the system to balance the rebuilding of international capitalism with the maximization of national economic sovereignty and human welfare, also known as embedded liberalism.^[29]

 

The IMF's influence in the global economy steadily increased as it accumulated more members. The increase reflected in particular the attainment of political independence by many African countries and more recently the 1991 dissolution of the Soviet Union because most countries in the Soviet sphere of influence did not join the IMF.^[24]The Bretton Woods system prevailed until 1971, when the U.S. government suspended the convertibility of the US$ (and dollar reserves held by other governments) into gold. This is known as the Nixon Shock.^[24] As of January 2012, the largest borrowers from the fund in order are Greece, Portugal, Ireland, Romania and Ukraine.^[30]

Member countries

The 188 members of the IMF include 187 members of the UN and the Republic of Kosovo^[a].^[32][33] All members of the IMF are also International Bank for Reconstruction and Development (IBRD) members and vice versa.^{[citation needed]}Former members are Cuba (which left in 1964)^[34] and the Republic of China, which was ejected from the UN in 1980 after losing the support of then U.S. President Jimmy Carter and was replaced by the People's Republic of China.^[35] However, "Taiwan Province of China" is still listed in the official IMF indices.^[36]Apart from Cuba, the other UN states that do not belong to the IMF are Andorra, Liechtenstein, Monaco, Nauru and North Korea. The former Czechoslovakia was expelled in 1954 for "failing to provide required data" and was readmitted in 1990, after the Velvet Revolution. Poland withdrew in 1950—allegedly pressured by the Soviet Union—but returned in 1986.^[37]

Qualifications

Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar period, rules for IMF membership were left relatively loose. Members needed to make periodic membership payments towards their quota, to refrain from currency restrictions unless granted IMF permission, to abide by the Code of Conduct in the IMF Articles of Agreement, and to provide national economic information. However, stricter rules were imposed on governments that applied to the IMF for funding.^[38]

 

The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates secured at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement.^[39]Some members have a very difficult relationship with the IMF and even when they are still members they do not allow themselves to be monitored. Argentina for example refuses to participate in an Article IV Consultation with the IMF.^[40]

Benefits

Member countries of the IMF have access to information on the economic policies of all member countries, the opportunity to influence other members’ economic policies, technical assistance in banking, fiscal affairs, and exchange matters, financial support in times of payment difficulties, and increased opportunities for trade and investment.^[41]

Leadership

Board of Governors

The Board of Governors consists of one governor and one alternate governor for each member country. Each member country appoints its two governors. The Board normally meets once a year and is responsible for electing or appointing executive directors to the Executive Board. While the Board of Governors is officially responsible for approving quota increases, special drawing right allocations, the admittance of new members, compulsory withdrawal of members, and amendments to the Articles of Agreement and By-Laws, in practice it has delegated most of its powers to the IMF's Executive Board.^[42]

 

The Board of Governors is advised by the International Monetary and Financial Committee and the Development Committee. The International Monetary and Financial Committee has 24 members and monitors developments in global liquidity and the transfer of resources to developing countries.^[43] The Development Committee has 25 members and advises on critical development issues and on financial resources required to promote economic development in developing countries. They also advise on trade and global environmental issues.^[43]

Executive Board

24 Executive Directors make up Executive Board. The Executive Directors represent all 188 member-countries. Countries with large economies have their own Executive Director, but most countries are grouped in constituencies representing four or more countries.^[42]Following the 2008 Amendment on Voice and Participation, eight countries each appoint an Executive Director: the United States, Japan, Germany, France, the United Kingdom, China, the Russian Federation, and Saudi Arabia.^[44] The remaining 16 Directors represent constituencies consisting of 4 to 22 countries. The Executive Director representing the largest constituency of 22 countries accounts for 1.55% of the vote.

Managing Director

The IMF is led by a managing director, who is head of the staff and serves as Chairman of the Executive Board. The managing director is assisted by a First Deputy managing director and three other Deputy Managing Directors.^[42] Historically the IMF's managing director has been European and the president of the World Bank has been from the United States. However, this standard is increasingly being questioned and competition for these two posts may soon open up to include other qualified candidates from any part of the world.^[45][46]In 2011 the world's largest developing countries, the BRIC nations, issued a statement declaring that the tradition of appointing a European as managing director undermined the legitimacy of the IMF and called for the appointment to be merit-based.^[46][47] The head of the IMF's European department is António Borges of Portugal, former deputy governor of the Bank of Portugal. He was elected in October 2010.^[48]