International Monetary Fund

BIBLIOGRAPHY

The International Monetary Fund (IMF) originated at a United Nations (UN) conference in Bretton Woods, New Hampshire, in July 1944. The IMF is thus known as a Bretton Woods institution. The forty-five governments represented at that conference decided to build an institution to facilitate economic cooperation. They hoped the existence of such an institution would help countries avoid a recurrence of the disastrous, self-interested economic policies that led to the Great Depression that began in the United States around 1929 and spread throughout the world. The principal architects of the IMF were the British economist John Maynard Keynes (1883–1946), the author of The General Theory of Employment, Interest, and Money (1936), a work that revolutionized economic theory, and the chief international economist at the U.S. Treasury Department, Harry Dexter White (1892–1948). The IMF actually came into existence in December 1945 when the first twenty-nine countries signed its Articles of Agreement. The goals of the IMF were to encourage international monetary cooperation, remove foreign-exchange restrictions, stabilize exchange rates, and facilitate a multilateral payments system between member countries.

The IMF acts as an umpire in the international market and takes action to ensure the stability of the world’s financial system. Its main role in its first years was to supervise the newly established fixed exchange-rate system initiated in Bretton Woods. After the collapse of the fixed exchange rate in February 1973 and the adoption of flexible exchange rates, the IMF became more involved with member countries’ economic policies by providing advice. In the 1980s the IMF had to confront the problem of mounting foreign debt in developing countries. In the 1990s the IMF addressed the transition of former socialist countries to market capitalism, and more recently it had to assist countries facing currency crises.

The main goal of the IMF is to promote a healthy world economy. The organization’s responsibilities include: (1) promoting international monetary cooperation; (2) facilitating the expansion and balanced growth of international trade; (3) promoting exchange-rate stability; (4) assisting in the establishment of a multilateral system of payments; (5) fostering economic growth and high levels of employment; and (6) providing temporary financial assistance to countries experiencing balance-of-payments problems. The IMF also strives to reduce poverty in countries around the globe, independently and in collaboration with the World Bank and other international organizations.

The IMF had 184 member countries in 2007. With the exception of North Korea, Cuba, Liechtenstein, Andorra, Monaco, Tuvalu, and Nauru, all UN member states are members of the IMF or are represented by other member states. The IMF is headquartered in Washington, D.C., with an international staff of more than 2,500. As of March 2006, the IMF’s total quotas were $308 billion, with loans outstanding of $34 billion to seventy-five countries, of which $6 billion to fifty-six countries was on concessional terms.

The IMF is financed by quota subscriptions, the share of each member in the IMF’s total funds. The quota allocated to each IMF member determines that country’s voting power, the amount of gold or international currency or its own currency that the country initially subscribes, and its access to various borrowing facilities. A large quota offers an IMF member prestige and borrowing power because a large initial subscription provides liability to extend credit to countries that need to borrow. National quotas are periodically revised.

The IMF strives to prevent economic crises by encouraging countries to adopt what IMF directors perceive to be appropriate economic policies. The organization meets these objectives primarily through surveillance, technical assistance, and lending. Surveillance is the regular policy advice that the IMF offers once a year to each of its members. The fund conducts an in-depth analysis of each member country’s economic state of affairs. Members usually allow the publication of their IMF evaluation, supplying the information to the public. Technical assistance and training are offered, mostly free of charge, to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is also offered in several economic areas, including fiscal policy, monetary and exchange-rate policies, banking, financial system supervision and regulation, and statistical collection and analysis. Financial assistance is available to help member countries correct balance-of-payments problems. Countries under financial distress are required to develop a policy program supported by IMF financing, and continued financial support is conditional on the effective implementation of the program.

Major controversies surround the role and practices of the IMF in the world economy, especially concerning the conditionality of financial support, which is provided only if recipient countries implement IMF-approved economic reforms. Indeed, in a world of mostly floating exchange rates, in contrast to the fixed exchange rates in existence when the IMF was established, it is even questionable why this institution remains in existence. The IMF has received extensive criticism from people representing the entire political spectrum, including grassroots protestors and activists objecting to IMF policies in countries subjected to “structural adjustment.” Even the Austrian economist Friedrich Hayek (1899–1992) was deeply troubled by the global “statism” practiced by the IMF. IMF policies are implemented under the principle of “one-size-fits-all” (Stiglitz 2002, p. 141). Jeffrey Sachs, the economic advisor who encouraged transitioning economies to implement shock therapy programs, argued that “the International Monetary Fund’s view, all too often, is … based on a misunderstanding of what its own role should be” (1994, p. 504).

The principles behind IMF policies are based on what John Williamson (1990) referred to as the “Washington Consensus.” Washington, for Williamson, encompassed the World Bank and the U.S. Treasury, in addition to the IMF. Williamson identified ten policy instruments for which Washington-based institutions could muster a reasonable degree of consensus, and he summarized the content of the Washington Consensus as macroeconomic prudence, outward orientation, domestic liberalization, and free market policies. The Washington Consensus, as the set of economic policies implemented by the administrations of U.S. president Ronald Reagan (1911–2004) and British prime minister Margaret Thatcher, has been labeled a “neoliberal manifesto.” The program involves devaluation of the exchange rate, liberalization of markets where prices are regulated, privatization of public sector enterprises, contraction of public sector expenditure, and the implementation of restrictive monetary policy. There is an obvious hostility to inflation, which is strongly influenced by the effect of inflation on foreign investors (Payer 1974, p. 37). The IMF imposes these economic policies on countries in financial distress that request assistance through conditionality. Countries facing a crisis often have little alternative but to accept the terms stipulated by the IMF in order to receive assistance. Thus IMF financial support of a government program concurrently ensures obedient behavior (Payer 1974, p. 31).

Proponents of the IMF’s conditionality policy argue that the fund should not give money away for free. The IMF is a financial institution, and, like any financial institution, when it lends out money it requires borrowers to guarantee the loan that they have signed by accepting IMF-approved policies. Proponents insist that it is reasonable to stipulate that further financial support will only be released after the successful implementation of reforms. At the same time, it is not clear whether the policies enforced by the IMF have been successful. Lance Taylor argues that “a fair assessment would say that the outcomes of orthodox packages ranged to moderately successful to disastrous” (1988, p. 147). Nevertheless, the success or failure of IMF programs should not be measured by monetary criteria alone; qualitative criteria, such as socioeconomic improvements and social reforms, should also be considered in any evaluation of the IMF (Körner et al. 1986, p. 4).

SEE ALSO World Bank, The

BIBLIOGRAPHY

Dell, Sidney. 1986. The History of the IMF. World Development 14 (9) 1203–1212.

Keynes, John Maynard. 1936. The General Theory of Employment, Interest, and Money. London: Macmillan.

Körner, Peter, Gero Maass, Thomas Siebold, and Rainer Tetzlaff. 1986. The IMF and the Debt Crisis: A Guide to the Third World’s Dilemma. Trans. Paul Knight. London: Zed.

Payer, Cheryl. 1974. The Debt Trap: The IMF and the Third World. Harmondsworth, U.K.: Penguin.

Sachs, Jeffrey. 1994. Life in the Economic Emergency Room. In The Political Economy of Policy Reform, ed. John Williamson, 503–523. Washington, DC: Institute for International Economics.

Stiglitz, Joseph. 2002. Globalization and its Discontents. New York: Norton.

Taylor, Lance. 1988. Varieties of Stabilization Experience: Towards Sensible Macroeconomics in the Third World. New York: Oxford University Press.

Williamson, John. 1990. What Washington Means by Policy Reform. In Latin American Adjustment: How Much Has Happened? ed. John Williamson, 7–20. Washington, DC: Institute for International Economics.

Aristidis Bitzenis
John Marangos

International Monetary Fund

Headquartered in Washington, D.C., the International Monetary Fund (widely known as the IMF) is an international cooperative institution whose main mission is to promote and assist in international monetary stability. With its initial organization coming at the end of World War II, for many years the main goal of the IMF was to oversee a system of stable, fixed exchange rates among the currencies of member nations. Since 1971, the exchange rates of the world's currencies have been allowed to float, with supply and demand market forces determining their value. In 2008, the IMF consisted of 185 member countries, which pay an initial quota subscription to become members. The organization works to achieve and enhance a stable world economy through the promotion of open financial disclosure among member nations, the provision of loans during periods of economic crises, and technical assistance provided through educational and promotional means.

The IMF has come under criticism from some sources for its role in high-profile assistance offered to the Mexican, South Korean, and Russian economies, among others. The member nations, however, continue to support the organization in its efforts to sustain international economic stability and promote international trade.

HISTORY

The events that ultimately led to the creation of the IMF had their origins in the conclusion of World War I. The economic terms of surrender were negotiated at the 1919 peace conference in Paris. As part of the peace treaty, known as the Treaty of Versailles, England and France demanded large amounts of war reparation payments from Austria and Germany to help rebuild their war-torn economies. However, the Austrian and German economies were depleted, too. This forced them to rely on foreign imports for goods and services unable to be produced locally. When a country imports more than it exports, it runs a balance of payments deficit. Together with other factors, the result may be a devaluation of the currency, since foreign sellers often demand to be repaid in their own currencies. The addition of war reparations on top of a large balance of payments deficit exacerbated the economic crisis, resulting in hyperinflation and political instability in Germany.

The great British economist John Maynard Keynes had participated in the peace conference following World War I and foresaw the scenario described above. Indeed, his book The Economic Consequences of the Peace predicted a second world war as an inevitable consequence of the severe penalties and lack of political and economic cooperation following the conclusion of World War I.

THE CREATION OF THE IMF

Keynes was determined to avoid repeating the mistakes made in the Treaty of Versailles. As World War II came to a close in 1944, an international conference was held at the resort community of Bretton Woods, New Hampshire. Forty-four nations were represented at the conference, with the chief negotiators being Keynes from Great Britain and Harry Dexter White from the United States. The result of their deliberations was the creation of the International Monetary Fund. The original goals of the fund were to aid members needing foreign exchange to conduct international trade and to promote a system of fixed exchange rates.

The original plan called for the U.S. dollar to be pegged to gold at a rate of $35 per ounce. Other currencies were set at fixed exchange rates to the dollar, and thus indirectly tied to gold. Countries participating agreed to set a “par” value for their currency based on this fixed exchange rate, allowing for a 1 percent fluctuation band. Should a country experience problems maintaining its par value, the IMF stood ready to lend foreign exchange to aid the cause. Member nations made an initial deposit into the fund known as a quota subscription. These deposits formed a pool from which the IMF could extend loans to members. As a special provision, if a member nation experienced chronic problems maintaining its par value, it would be allowed a one-time devaluation of its currency of up to 10 percent.

SPECIAL DRAWING RIGHTS

In 1969 the IMF created a new hybrid asset to serve as a reserve currency. The new financial asset was named a special drawing right, or SDR. The value of an SDR is a function of the current value of five different currencies from which it is comprised. They include the U.S. dollar, the Japanese yen, the United Kingdom pound sterling, and the respective euro values of Germany and France. The respective weights of the currencies, which constitute SDRs value, are revised every five years.

Member nations may use SDRs in a variety of ways. These include exchanging SDRs for other monetary assets or for maintaining operations, and exchanging SDRs directly with other members in exchange for foreign currencies to address a balance of payments problem. Since part of the mission of the IMF is to promote and enhance international trade, the board of governors has the option to decide on periodic special allocations of SDRs to augment members' existing reserve accounts.

THE IMF AND THE WORLD BANK

In addition to the IMF, the Bretton Woods Agreement resulted in the formation of the World Bank. Formally known as the International Bank for Reconstruction and Development, the World Bank's primary goal is to promote economic growth among the world's developing nations. It does so by effectively serving an investment-banking role, issuing bonds and notes to raise new investment capital, which it in turn lends to poor nations to finance specific projects. Typical projects include those associated with enhanced transportation routes, electric power development, and increased agricultural production.

As they share the ancestry of the Bretton Woods conference plus related economic roles, confusion between the IMF and the World Bank is common among the general public. They remain, however, two distinct organizations with their own individual goals and agendas aimed at promoting economic health and development among the world's nations.

THE END OF BRETTON WOODS

The system of fixed exchange rates created by the Bretton Woods Agreement and overseen by the IMF lasted from 1946 until 1971. For much of that period, the system worked very well. The U.S. dollar was pegged to gold and most other currencies were pegged to the dollar. During much of this period the United States ran a trade surplus, exporting more goods and services than it imported. Thus, the amount of U.S. dollars held domestically on net increased, causing little strain on the international monetary system.

This scenario changed during the 1960s. As the United States expanded its level of imports and increased industrial output during the Vietnam War, the amount of dollars held overseas expanded greatly. These dollars were deposited in foreign banks, allowing the banks to extend U.S. dollar denominated loans. The supply of U.S. dollars outstanding expanded significantly. At the same time, as more dollars were presented for redemption, the U.S. gold supply was being depleted. By the end of the decade, there were more dollars outstanding than there was gold to back them. In August 1971 the Nixon administration acknowledged the situation by closing the gold window, refusing to allow foreign central banks to exchange U.S. dollars for gold.

The Smithsonian Agreement of that year began the process of ending the Bretton Woods system of fixed foreign exchange rates. The initial agreement called for expanded fluctuation of exchange rates from 1 percent to2.25 percent; subsequent economic activity made these bands unfeasible. Governments then decided to let their

respective currencies float relative to each other, and the world moved to a floating exchange rate system.

THE ROLE OF THE IMF EVOLVES

In 1978, the IMF formally amended its constitution to alter its role in the world economy. It now plays a number of roles in its overall mission of promoting international stability and growth. These roles fall generally under three areas: surveillance, technical assistance, and financial assistance.

In its surveillance function, the IMF serves as a watchdog over member nations' economic policies. In 2007, the IMF dramatically revised its policies on surveil-lance with its Decision on Bilateral Surveillance of Members' Policies. Some important points from the Decision include:

• Focus on external stability. Country surveillance is focused on exchange rate and monetary, fiscal, and financial strategies, along with assessment of risk and vulnerabilities
• Definite guidelines are set out for countries about how they run their exchange rate policies
• Surveillance is deemed a collaborative process that “has a multilateral, medium-term perspective.”

IMF surveillance is an open process, and currently nearly all member nations publish a Public Information Notice, which creates a transparent oversight environment.

Technical assistance to member nations takes up a large amount of daily operations at the fund. The IMF provides expertise and consultation on matters involving the implementation of both fiscal and monetary policy, trade laws and tariff measures, and programs aimed at strengthening and stabilizing local currency values. The organization has also implemented a regional model for technical assistance, and has six regional technical assistance centers. In addition, it offers training for member countries' officials through a network of seven different regional training institutes. Other forms of technical assistance include placement of experts and resident advisors, online support, and diagnostic studies.

Perhaps the one area that has brought the IMF the most attention and raised its image among the general public has been its role of providing financial assistance to nations experiencing economic crises. This involves providing credits or arranging loans for nations experiencing such problems as severe balance of payments deficits or a sudden devaluation of their currency.

The 1990s saw the IMF make global headlines with several widely publicized financial assistance programs. The first occurred in 1995 with the crisis in Mexico. Faced with a severe devaluation of its currency due to a rapid loss of confidence in its policies, the Mexican government turned to the IMF for what was then a record $17.8 billion financial assistance package. While attempting to move towards a market-oriented economy, Russia required financial assistance several times during the 1990s. Included were large loans in both 1996 and 1998. And, in 1997, an extended crisis throughout much of east Asia resulted in the IMF arranging financial assistance for South Korea, Indonesia, and Thailand.

These financial assistance programs, which have grown successively larger in amount, have met with severe criticism from some sources. The IMF has been labeled a “bailout” source for poorly run economies, serving as a safety net for policymakers unable or unwilling to make difficult decisions which market discipline demanded. In addition, critics claim that IMF policies encourage poor nations to carry huge amounts of international debt, forcing them to use a large proportion of their annual revenues to make interest payments. The IMF has responded to its critics by actively working with both the public and private sectors to promote better information flow and legislation designed to prevent additional financial crises from taking place. The organization continues to develop systems and procedures designed to limit such crises from spreading to other countries and enveloping entire geographical regions.

The modern International Monetary Fund remains a major player on the global economic stage. The fund continues to grow and expand in its new roles within a world of floating exchange rates and rapid capital flows. The modern IMF wears a number of hats, including overseer and communicator of national policies and legislation, consultant and educator on numerous fiscal and monetary issues, and intermediary and lender for nations whose currencies come under pressure.

Critics continue to denounce the IMF for forcing nations in need to adopt its policy recommendations as a condition of assistance. In addition, the fund raises concerns among those who claim it acts as a safety net to alleviate poor or ineffective domestic monetary and trade policies. The IMF is also frequently charged with favoring bankers and elite classes, obstructing debt reduction for the world's poorest countries, and ignoring human rights violations. “Street protesters have it exactly right, for example, when they argue that the economic policies imposed on developing nations by the International Monetary Fund and World Bank have hammered the poor,” Eric Pooley wrote in Time. “Using loans and the threat of default as levers, the IMF has pushed more than 90 countries to accept its brand of free-market shock therapy: lowering trade barriers, raising interest rates, devaluating currencies, privatizing state-owned industries, eliminating subsidies and cutting health, education, and welfare spending.” In a 2007 article in Global Politician, Carol Welch,

coordinator of the U.S. efforts for the United Nations' Millennium Campaign, criticized the dominant role the United States plays in the global economy to “impose SAPs [structural adjustment policies] on developing countries,” and opening “their markets to competition from U.S. economies.” In the article, Welch stated that she believes SAPs are “based on a narrow economic model that perpetuates poverty, inequality, and environmental degradation.”

Such criticisms are not likely to dissipate soon. Nevertheless, the 185 member nations continue to support the IMF in the belief that open communication and coordinated policies will lead to greater stability and promote a climate which fosters growth in international trade and development.

BIBLIOGRAPHY

Cheeseman, Gina-Marie. “International Monetary Fund's Financial Assistance Policies: Pros and Cons.” Global Politician 7 July 2007. Available from: http://www.globalpolitician.com/23066-imf.

International Monetary Fund. “Common Criticisms of the IMF.” Available from: http://www.imf.org/external/np/exr/ccrit/eng/cri.htm.

International Monetary Fund. “The IMF at a Glance.” Available from: http://www.imf.org/external/np/exr/facts/glance.htm.

Pooley, Eric. “The IMF: Dr. Death? A Case Study of How the Global Banker's Shock Therapy Helps Economies but Hammers the Poor.” Time 24 April 2000.

Robertson, David. International Economics and Confusing Politics. London: Edward Elgar, 2006.

INTERNATIONAL MONETARY FUND

The International Monetary Fund was established to foster international trade and currency conversion, which it does through consultation and loan activities. When it was created in 1946, the IMF had thirty-nine member countries. By November 1999 membership in the IMF had grown to 182 member countries and by the mid-2000s membership included every major country, the former communist countries, and numerous small countries. The only exception were Cuba and North Korea.

To join the IMF, a country must deposit a sum of money called a quota subscription, the amount of which is based on the wealth of the country's economy. Quotas are reconsidered every five years and can be increased or decreased based on IMF needs and the prosperity of the member country. In 2005, the United States contributed the largest percentage of the annual contributions—18 percent—because it had the largest, richest economy in the world. Voting rights are allocated in proportion to the quota subscription.

HISTORICAL DEVELOPMENT

The Depression in the 1930s devastated international trade and monetary exchange, creating a great loss of confidence on the part of those engaged in international business and finance. Because international traders lost confidence in the paper money used in international trade, there was an intense demand to convert paper money into gold—a demand beyond what the treasuries of countries could supply. Nations that defined the value of their currency in terms of a given amount of gold were unable to meet the conversion demand and had to abandon the gold standard. Valuing currencies in terms of given amounts of gold, however, had given currencies stable values that made international trade flow smoothly.

The relationship between money and the value of products became confused. Some nations hoarded gold to make their currency more valuable so that their producers could buy raw materials at lower prices. Other countries, desperate for foreign sales of their goods, engaged in competitive devaluations of their currencies. World trade became difficult. Countries restricted the exchange of currency, and even encouraged barter. In the early 1940s Harry Dexter White (1892–1948) of the United States and John Maynard Keynes (1883–1946) of the United Kingdom proposed the establishment of a permanent international organization to bring about the cooperation of all nations in order to achieve clear currency valuation and currency convertibility as well as to eliminate practices that undermine the world monetary system.

Finally, at an international meeting in Bretton Woods, New Hampshire, in July 1944, it was decided to create a new international monetary system and a permanent international organization to monitor it. Forty-four countries agreed to cooperate to solve international trade and investment problems, setting the following goals, for the new permanent, international organization:

• Unrestricted conversion of currencies
• Establishment of a value for each currency in relation to others
• Removal of restrictive trade practices

CREATION OF THE INTERNATIONAL MONETARY FUND

In 1946 in Washington, D.C., the international organization to monitor the new international monetary system came into existence—the International Monetary Fund (IMF). The purposes of the IMF are as follows:

To promote international monetary consultation, cooperation, and collaboration

To facilitate the expansion and balanced growth of international trade

To promote exchange stability

To assist in the establishment of a multilateral system of payments

To make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards

To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members

The Bretton Woods agreement created fixed exchange rates between countries based on the value of each country's currency in relation to gold or indirectly in relation to gold by relating their currency to the U.S. dollar. The United States in turn guaranteed that the dollar could be exchanged for gold at a fixed exchange rate. The United States, however, ultimately could not maintain the dollar's promised convertibility, ending it in 1971, in large part because of inflation and a subsequent run on the U.S. gold reserve. The fixed-exchange-rate system collapsed. This led to a managed flexible-exchange-rate system with agreement among major countries that they would try to coordinate exchange rates based on price indexes. How ever, without operational criteria for managing currency relationships, exchange rates have been increasingly determined by volatile international capital movements rather than by trade relationships.

ORGANIZATIONAL STRUCTURE

The organization of the IMF has at its top a board of governors and alternate governors, who are usually the ministers of finance and heads of central banks of each member country. Because of their positions, they are able to speak authoritatively for their countries. The entire board of governors and alternate governors meets once a year in Washington, D.C., to formally determine IMF policies. During the rest of the year, a twenty-four-member executive board, composed of representatives or the total board of governors, meets a number of times each week to supervise the implementation of the policies adopted by the board of governors. The IMF staff is headed by its managing director, who is appointed by the executive board. The managing director chairs meetings of the executive board after appointment. Most staff members work at IMF headquarters in Washington, D.C. A small number of staff members are assigned to offices in Geneva, Paris, and Tokyo and at the United Nations.

SURVEILLANCE AND CONSULTATIONS

At least annually, a team of IMF staff members visits each member country for two weeks. The team of four or five meets with government officials, makes inquiries, engages in discussions, and gathers information about the country's economic policies and their effectiveness. If there are currency exchange restrictions, the consultation includes inquiry as to progress toward the elimination of such restrictions. Statistics are also collected on such matters as exports and imports, tax revenues, and budgetary expenditures. The team reports the results of the visit to the IMF executive board. A summary of the discussion is transmitted to the country's government, and for countries agreeing to the release of the summary, to the public.

FINANCIAL ASSISTANCE

The IMF endeavors to stabilize the international monetary system by temporarily lending resources in the form of foreign currencies and gold to countries experiencing international payment difficulties. There are a number of reasons why a country may need such assistance. One possibility is that the country has a trade deficit, which is often offset by lending, capital investment, and possibly aid from richer countries. However, confidence in the country's economic system and its ability to repay its debts becomes diminished in such a situation. The IMF requires that the borrowing country provide a plan for reform that will ultimately result in resolving the payments problems. Reforms such as tighter fiscal and monetary policies, good government control of expenditures, elimination of corruption, and provision for greater disclosure are required.

The most immediate assistance to a member country with payments difficulty is permission to withdraw 25 percent of the quota subscription that was initially paid in the form of gold or convertible currency. If the country still cannot meet its payments obligations it can, ultimately, borrow up to three times its original quota payment. The borrowing country must produce a plan of reform that will overcome the payments problem.

The IMF has a number of additional lending plans to meet various problems experienced by its members as well as emergency lending programs. There are Stand-By Arrangements disbursed over one to two years for temporary deficits, the Compensatory and Contingency Financing Facility for sudden drops in export earnings, Emergency Assistance for natural disasters, Extended Fund Facility to correct structural problems with maturities of greater length, the Supplemental Reserve Facility to provide loans to countries experiencing short-term payments problems due to a sudden loss of market confidence in the country's currency, and the Systemic Transformation Facility for the former communist countries in Eastern Europe and Russia.

SPECIAL DRAWING RIGHTS (SDRS)

In the 1960s, during an expansion of the world economy while gold and the U.S. dollar were the reserve currencies, it appeared that reserves were insufficient to provide for international trade needs. The IMF was empowered to create a new reserve asset, called the special drawing right (SDR), which it could lend to member countries. The value assigned to the SDR is the average of the world's major currencies. Countries with strong currencies agreed to buy SDRs when needed by a country because of payment problems, and in turn sell other currencies. However, at present SDRs are used mostly for repayment of IMF loans. Creation of SDRs is limited by the IMF constitution to times when there is a long-term global reserve shortage. The board of governors and alternate governors is empowered to make such a determination.

LOANS TO POOR, INDEBTED COUNTRIES

The IMF has created various loan facilities such as the Trust Fund to provide loans to its poorest member countries. In addition, the IMF works cooperatively with the World Bank, other international organizations, individual countries, and private lenders to assist poor, debt-ridden countries. It encourages such countries to restructure their economies to create better economic conditions and better balance of payment conditions.

There have been critics of the IMF's effectiveness. Such critics have noted, for example, instances of massive corruption on the part of recipient governments that resulted in IMF funds being stolen and/or wasted. Also, there have been a number of instances in which IMF efforts have been assessed as unsuccessful. Recommended restrictive fiscal policies have been seen as causing troublesome conditions, such as food shortages and citizen unrest. Nobel-prize-winning economist Robert Mundell, for example, has taken the position that current IMF policy options are insufficient to achieve stable international currency exchange and thereby foster international trade. He recommends that a global currency and world central bank be created to establish a stable international currency.

see also Global Economy; International Investment; International Trade

bibliography

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Kenen, Peter B., ed. (1996, October). Essays in International Finance, No. 200. "From Halifax to Lyons: What Has Been Done About Crisis Management?" Princeton, NJ: International Finance Section, Department of Economics, Princeton University.

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Bernard H. Newman

International Monetary Fund

What It Means

The International Monetary Fund (IMF) is an organization of nations that helps shape economic policies related to international trade, debt, and the exchange of money among participating countries. With a membership of over 180 nations, the IMF has three principal goals: to evaluate world economic trends, to provide financial assistance to poor countries, and to promote commerce between all nations.

Economic activity does not stop at national borders. Consumers in most nations buy goods and services imported from abroad, and businesses often sell their goods and services beyond the borders of their home countries. A wide variety of other transactions, including purchases made by foreign tourists, loans from an institution in one country to people in other countries, and the business activity of corporations that operate in many countries, occur across borders as well. Transactions with foreign countries have a great impact on individual national economies, so all countries keep track of them.

The record of the financial transactions between people in one country and people in foreign countries is called that country’s balance of payments. For a country’s currency (the form of money used within national borders, such as dollars in the United States) to remain stable, its balance of payments must be in good order. A country’s currency might become devalued (worth less) compared to other currencies if the money leaving its borders outweighs the money coming in. If this situation (called a balance-of-payments deficit) goes too far, that country might experience severe economic problems.

The International Monetary Fund was established in 1944 to help stabilize currencies. Member countries contribute their own currency to the IMF and are therefore entitled to borrow from the fund when they experience difficulties with their balance of payments. These loans help nations stabilize their currencies and, hopefully, their economies. The IMF also provides assistance to countries that need help with their exchange policy (their rules about determining the value of their currency compared to that of other currencies).

When Did It Begin

Anticipating the end of World War II (1939–45), representatives of 44 countries met at Bretton Woods, New Hampshire, in July 1944 to discuss economic recovery and other important postwar financial affairs. The results of this meeting, called the United Nations Monetary and Financial Conference, included the establishment of the organization that became known as the World Bank, as well as the creation of the IMF. These organizations were (and still are) meant to tackle two related aspects of global economic affairs. The World Bank makes loans and provides other assistance to countries in need, with the intent of helping them expand and stabilize their economies. The IMF pursues the same basic goals by helping countries keep their currencies stable.

Initially the IMF promoted stable currencies by regulating exchange rates, or the amount of any currency that can be exchanged for any other currency. The standard that the IMF used for establishing exchange rates was the U.S. dollar. All countries were allowed to declare how many dollars their own currencies were worth, and the exchange rates that any country imposed could only vary within strict limits thereafter. The U.S. dollar itself was expressed in terms of its value in gold and was backed up by the country’s gold reserves (gold had for centuries been used as one of the most universal and reliable standards for monetary value, and the United States was the only member country with enough gold to support the arrangement). This method of currency exchange required that the United States be willing to sell gold at a specific, fixed dollar value that set the standard for the dollar and, by extension, all of the other currencies. In 1971, with its gold reserves shrinking, it decided to stop providing its gold for sale in this way, and countries began establishing their own exchange rates.

More Detailed Information

The IMF is a specialized agency of the United Nations (an organization that promotes peaceful international relations), but in practice it operates independently of its parent organization. More than 180 countries are members of the IMF, and each is represented by a governor. The governors do not have equal voting rights in matters of IMF policy, however. Voting is weighted according to how much money the member government contributes to the IMF. The day-to-day decisions of the IMF are made by an executive board that is dominated by eight of the world’s wealthiest countries: the United States, the United Kingdom, Japan, China, France, Germany, Russia, and Saudi Arabia.

All members of the IMF contribute a quota, or an amount of money calculated according to the country’s wealth. The richer a country is, the larger its required quota. The United States, for example, has contributed roughly 18 percent of the IMF’s pool of quotas. Once a country has contributed its quota, it is entitled to borrow up to that same amount if it needs to correct deficits in its balance of payments (which occur when there is more money leaving the country than coming in). The size of a country’s quota also determines the amount of voting power it has on the board of governors. The United States, the United Kingdom, Japan, Canada, Germany, France, and Italy together control approximately half of the votes on the board of governors.

When a country experiences a deficit in its balance of payments and its currency becomes devalued, it would be likely, without the IMF’s intervention, to engage in defensive behavior that might be harmful to other economies. A country in such a crisis, for instance, might try to reduce its balance-of-payments deficit by restricting the imports of goods from other countries (in an effort to keep its own money inside the country) or by setting the exchange rates for its own currency at levels that could do economic harm to other countries.

The IMF wants to prevent countries from behaving in this way, so it allows members to borrow money from the pool of quotas to restore their balances of payment. Member countries can usually borrow up to 25 percent of their quota amount without being subject to many restrictions. As a country borrows more than this amount, however, it becomes increasingly subject to IMF regulation. This usually means that the IMF will force the country, as a condition of the loan, to save money by taking often-difficult economic steps, such as increasing taxes or cutting funds for domestic programs (health care and education, for instance). The IMF requires countries to take such steps with the goal of helping them correct their balance-of-payments deficits and pave the way for long-term economic health.

The IMF also provides technical assistance to countries experiencing currency and balance-of-payments problems. Most of this assistance is free of charge.

Recent Trends

In the 1970s, having lost its authority to set exchange rates, the IMF began focusing greater attention on the economic needs of the world’s developing countries. A developing country is a nation with basic modes of economic production and a relatively low per capita (in other words, per person) income. Some economists have argued that IMF policies during the 1980s and 1990s helped build strong global economies in a number of Asian nations. Over this period countries such as China, Thailand, South Korea, Indonesia, and numerous others witnessed annual growth rates of approximately 10 percent in their gross domestic products, or GDPs (the value of all goods and services produced in a particular nation over a given time).

Along with the World Bank and the World Trade Organization, whose aim is to reduce global trade barriers (such as fees or limits on the goods and services that can move across borders), the IMF is today one of the leading forces in the trend called globalization. Globalization refers broadly to the increasing mobility of money, labor, equipment, and other economic resources across national borders. The rise of globalization has created greater demand for economic policies oriented toward promoting international trade. The IMF has played an important role in promoting globalization through the introduction of debt relief (in other words, assistance with the repayment of debts) for developing countries. In 1996 the IMF established the Heavily Indebted Poor Countries Initiative (HIPC), a program aimed at offering debt relief to developing countries. By alleviating the financial burdens associated with high levels of debt, the HIPC is designed to help poorer countries build the foundations of solid, stable economies. At the same time, the IMF has provided consulting and educational programs geared toward teaching poor countries to manage their economies more effectively.

The IMF also played a central role in helping Asian economies recover from the financial crisis of 1997, when currency and stock values in dozens of Asian countries fell suddenly and dramatically. To counter the resulting economic instability, the IMF provided large-scale debt relief, while also helping nations devise sounder financial policies to prevent future disasters. While some economists applauded IMF efforts in the wake of the crisis, many opponents of the IMF argued that the economic downturn was the result of IMF policies in the first place; according to these critics, the economic growth in Asia during the 1980s and 1990s was too rapid to be sustained, largely because of IMF failures to create the infrastructures necessary to support these growing economies.

Another criticism of the IMF has to do with the regulations it sometimes imposes on countries that borrow money. While economic conditions are unique in every country, the IMF tends to impose the same kinds of restrictions on all struggling nations. According to critics, this blanket approach is especially hard on the poorest member countries, whose level of suffering increases as a result of IMF regulations, without any corresponding increase in economic growth.

International Monetary Fund (IMF)

The International Monetary Fund (IMF) is a multilateral financial institution that has supervised the global financial system since the end of World War II. Headquartered in Washington, D.C., it acts as a lender of last resort for member governments who face problems in meeting their external financial obligations. The relationship between the IMF and Latin American governments has been a contentious one, as the latter have faced chronic payments difficulties since the 1950s.

The IMF and the World Bank, its sister organization, institutionalized the international cooperation that their architects hoped would prevent a recurrence of the economic instability that had led to political upheaval and, ultimately, world war. Soon after the Japanese attack on Pearl Harbor, Harry Dexter White and his colleagues in the U.S. Treasury Department developed a blueprint for a multilateral fund to stabilize exchange rates and control private capital flows. White and his colleagues believed that foreign lending and speculative movements of capital by Wall Street banks constituted a major cause of the Great Depression. In their view, the establishment of such a fund, anchored by the dollar, would "drive the usurious money lenders from the temple of international finance," as Treasury Secretary Henry Morgenthau put it.

The IMF gave member governments more flexibility over their domestic policies than they had enjoyed under the gold standard, which had collapsed under the weight of World War I and the Great Depression. Its designers intended it to provide liquidity that governments needed to replenish foreign exchange reserves while their policy changes took effect. Governments would not have to engineer sharp recessions to stem outflows of capital that depleted reserves, as the gold standard had required.

Members paid in subscriptions to both the IMF and the World Bank based on the size of their economies. These subscriptions, or quotas, formed the basis of both voting and drawing rights. As the member with the largest economy, the United States enjoyed the largest vote and wielded an effective veto over IMF policy; this power was an acute source of controversy during the Cold War. Members could draw automatically only on the 25 percent of the subscription that they paid in gold. Access to the balance of the quota (and beyond, as credits) required consultation with and surveillance from the IMF. Under procedures formalized in 1952, the IMF divided drawings into units of 25 percent of the quota, known as tranches, and used financial incentives to encourage short-term borrowing (three to five years) of small amounts. The IMF facilitated access to these resources by means of stand-by agreements, whereby governments agreed to change their monetary and fiscal policies to alleviate their balance-of-payments problems.

The IMF and the World Bank lacked the resources to address the reconstruction of postwar Europe and Asia. Instead, U.S. bilateral assistance met these needs, principally through the Marshall Plan. Once it emerged from its institutional dormancy in the 1950s, the IMF operated more conservatively than its designers intended. Indeed, critics routinely charged the IMF with abetting U.S. political hegemony and derailing development programs on behalf of liberal economic orthodoxy.

LATIN AMERICAN DEVELOPMENT STRATEGIES

During the 1930s Latin American countries adopted import substitution industrialization (ISI) as a development strategy. The value of their commodity exports had plummeted, and the United States and Europe had erected barriers to trade. ISI involved state-directed investment in manufacturing and infrastructure at the expense of agriculture. It aimed to reduce the dependence of national income on commodities, whose value relative to manufactured goods many experts expected to fall over time, and trade with industrialized countries. ISI also involved the heavily subsidized redistribution of population and income from rural to urban areas. For two decades Latin Americans enjoyed relatively high growth rates, owing to increased consumption and the U.S. demand for strategic minerals during World War II and the Korean conflict. By the 1950s expanded government bureaucracies, state control of the "commanding heights" of the economy, fiscal deficits, inflation, overvalued exchange rates, and inefficient industry characterized the political economy of many Latin American countries.

The fall of commodity prices at the end of the Korean conflict precipitated balance-of-payments crises across the region. ISI was not autarkical: governments accumulated foreign debt because the strategy required large imports of capital equipment. Now they were unable to sell their manufactured goods overseas and their investment-starved agricultural sectors were too weak to generate the foreign exchange needed for debt service. At the same time, governments sustained imports of capital equipment to maintain the industrial production that provided jobs and growth. By the 1960s almost all the governments of the region were turning to the IMF for financial assistance.

For IMF economists, the solution to balance-of-payments difficulties broadly entailed reducing the role of the state in economic decision making. To access IMF funds, borrowers agreed to balance budgets by cutting spending and subsidies and raising taxes; control inflation by limiting credit and suppressing wages; and remove price distortions by reducing tariffs, removing ceilings, eliminating exchange rate discrimination, and devaluing their currencies. By adopting these changes, the IMF believed, borrowers would alleviate their payments problems and improve the performance of their economies.

IMF austerity programs alleviated balance-of-payments problems, to be sure, but delivered little of the economic growth or stability that they promised. They failed to balance budgets, quell inflation, or reduce state direction of the economy. At the same time, they redistributed income from labor to capital, even as economies overall suffered recession. One reason was that a stand-by agreement was politically risky for the borrower. It represented capitulation to foreign interests and the interference of Washington in a country's domestic affairs. Needing to show that they had driven a hard bargain, governments often won concessions that reduced the effectiveness of the program. Moreover, the IMF favored the political elites and capitalists whose approval of any agreement was required. Thus, for instance, taxes were invariably regressive, imposed on consumption rather than income. The IMF also paid scant attention to structural rigidities that characterized many Latin American societies, such as concentrated land and corporate ownership. With the IMF's seal of approval came foreign loans and direct investments that enabled governments to delay structural reforms. As a result, payments problems recurred and external debts accumulated, culminating in the Latin American debt crisis of the 1980s.

The IMF now became responsible for coordinating the actions of both creditors—mainly U.S. commercial banks—and debtors to prevent a collapse of the international financial system, which widespread defaults might have precipitated. Its lending rose to unprecedented levels in the late 1980s and early 1990s, even though the economic conditions of the borrowers were poor by historical standards. As a result, IMF put greater emphasis on institutional reform as a condition for borrowing, recommending a set of market-oriented policies that the economist John Williamson dubbed the Washington Consensus. Nevertheless, subsequent Latin American growth rates were below their post-World War II averages and poverty remained widespread.

See alsoEconomic Development; Foreign Debt; Foreign Investment.

BIBLIOGRAPHY

James, Harold. International Monetary Cooperation since Bretton Woods. Washington, DC: International Monetary Fund, and New York: Oxford University Press, 1996.

Kofas, Jon V. The Sword of Damocles: U.S. Financial Hegemony in Colombia and Chile, 1950–1970. Westport, CT: Praeger, 2002.

Manzetti, Luigi. The International Monetary Fund and Economic Stabilization: The Argentine Case. New York: Praeger, 1991.

Pastor, Manuel, Jr. The International Monetary Fund and Latin America: Economic Stabilization and Class Conflict. Boulder, CO: Westview, 1987.

Woods, Ngaire. The Globalizers: The IMF, the World Bank and Their Borrowers. Ithaca, NY: Cornell University Press, 2006.

                                          Michael Adamson