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International Monetary Fund
The International Monetary Fund(IMF) is aninternational organizationthat was initiated in 1944 at
theBretton Woods Conferenceand formally created in 1945 by 29 member countries. The IMF's
stated goal was to assist in the reconstruction of the world'sinternational payment systempostWorldWar II.Countries contribute money to a pool through a quota system from which countries with
payment imbalances can borrowfundstemporarily. 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 co-operation,international trade,employment, and
exchange rate stability, including by making financial resources available to member countries to
meetbalance of paymentsneeds.[3]
Its headquarters are inWashington, D.C.,United States.
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Abbreviation IMF
FMI
Formation Formally formed 27 December 1945 (68 years ago)
Began financial operations (de factoformation) 1 March 1947 (66 years ago)
Type International Financial Organization
Headquarters Washington, D.C.,United States
Membership 29 countries (founding); 188 countries (to date)
Official languages English, French, and Spanish
Managing Director Christine Lagarde
Main organ Board of Governors
Website www.imf.org
From the early 19th century till the past First World War period most of the
industrialized countries of the world followed gold standard. Under gold standard each
country following gold standard expressed its currency in terms of gold. In 1900 for
example the dollar was equal to 1/20lh ounce of gold and the Pound sterling was equal
to 5/20th ounce of gold. Hence 1=S5. Secondly the countries also agreed to convert its
paper currency in the gold on demand. Thirdly there was no restriction on the shipment
of gold from one country to another. The gold standard provided for an automatic
corrector of balance of payments disequilibrium. If the country imported goods more
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than its exports then gold flowed out.
Conversely when a country exported goods more than its imports gold flowed in.
Many supply in the country also depended on the receipt and payment of gold. In case
receipt of gold money supply expanded in the country conversely in case of payment of
gold money supply contracted in the country. The increase in money supply led to
increase in prices. While the contraction in money supply led to fall in the price level.
Until the outbreak of First World War (1914) the gold standard worked remarkably well
and the stability in the exchange rate was maintained. Gold standard countries were
very eager to abide by the golden rule of gold standard to expand money and credit.
When it coming in and to contract the volume of money and credit when gold is going
out. The gold standard was, shattered in the first week of first world war (1914-1918).
The conversion of paper currency notes in the gold was prohibited and the import and
export of gold was stopped. After the First World War the international gold standard
was restored line due to the following reasons:-
i) There was a natural wish to return to normalcy
ii) People wished to go back to pre-war conditions
iii) Post war inflation
However, after a decade the international gold standard once again was abandoned by
majority of the world countries due to 1930's great depression. Great Britain suspended
international gold standard in 1931 followed by majority of the countries of the world
including U.S.A.
The breakdown of the international gold standard created a vacuum in the field of
international trade. All the countries of the world realised the need for international
economic co-operation. The breakdown of international gold standard created a chaos in the field of
foreign exchange rates. In order to take the advantage of increase in
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exports each country deliberately switched over to competitive devaluation. Each
country tried to prosper at the cost of the other. They followed, "beggar thy neighbour
policy." Competitive devaluation, exchange controls, import quota, tariffs 73, export
regulations and bilateral pacts were the order of the day. Thus the volume of
international trade declined to a considerable extent. Due to uncertainly, international
investment suffered a lot.
It was realised that mutual agreements between world countries having international
economic relation would solve the problem of international monetary disorder.
International monetary Co-operation became the need of the hour. It was impossible to
revive the international gold standard, a new system had to we devised which would
provide sufficient flexibility through international assistance without disturbing the
internal economies. Different nations put forwarded different plans to solve the problem
of international trade and monetary disorder, in 1943 the United States Treasury
published a proposal for the establishment of an International stabilization Fund of the
United and Associated Nations. Great Britain also proposed the establishment of an
International clearing union. The American proposal was known as "white plan" while
the British proposal was known as, "Keynes plan". The author of "white plan" was Mr.
White while the author of "Keynes plan" was Lord J.M. Keynes. In 1944 a joint plan in
the shape of" Joint statement by Experts on the Establishment of International Monetary
Fund of the United and Associated Nation" emerged which become the basis for the
United Nations monetary and Financial conference. Which was held at Bretton woods,
New Hampshire from July 1 to July 22, 1944. The purpose of the Bretton woods
conference was to devise means for assuring a system of international trade and
payments consistent with the dual objections of high world productivity and trade and
domestic income and employment with economic stability. At the meeting it was
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decided that an 'International Monetary Fund (IMF)' be organised for the smooth
settlement of international payments.
The IMF was organised in 1946 and it commenced its operation in March 1947. The
International monetary system introduced at Bretton woods rested on two pillars viz. the
maintenance of stable exchange rates and a multilateral credit mechanism
institutionalized in he IMF and supervised by it. The International Monetary System that
existed from 1947 to 1971 in generally known as the par value system or pegged
exchange rate system. Under this system each member country of IMF is required to
define the value of its currency in terms of gold or U.S. dollar and to maintain (to peg)
the market value of its currency within of the defined par value. The value of US dollar
was set at 1/ 35 of an ounce of gold and the limited states promised that all US dollars
in the hands of central banks would be redeemed in gold, up on demand at the fixed
price of $ 35 per ounce of gold. Every country defined its currency in items of gold or dollar. The dollar
was not merely as good as gold, but it was better than gold because
dollar reserves earned interest while gold did not. The exchange rate between two
currencies would not remain constant for-ever. It would change under following
conditions :-
i) A member shall not propose to change except to correct the fundamental
disequilibrium in the balance of payments and it shall act only after consultation with
IMF.
ii) The fund will not object to change not exceeding 10% of the initial par value.
iii) It a change in proposed exceeding 10% but not exceeding 20% of the initial par
value. The IMF may agree or object but must declare its attitude within 72 hours.
iv) If the proposed change is longer than 20% the Fund may concur or object without
limit of time.
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v) The Fund must agree "if it is satisfied that the change is necessary to correct
fundamental disequilibrium in the balance of payments.
Concept
The international monetary fund is a landmark in the history of international monetary
Co-operation. It is an international Financial Institution. The abbreviation IMF stands for
International Monetary Fund. The International Monetary Fund (IMF) is an organization
of countries that seeks to promote international monetary co-operation. It facilitates the
expansion of international trade. Thus, it contributes towards increased employment
and improved economic conditions in all member countries. Membership of IMF is open
to-every country of the world that controls its foreign relations and is able and prepared
to fulfill the obligations of membership. Membership of IMF is a pre - requisite for
membership in the IBRD i.e. the World Bank. There is a close relationship between the
IMF and the IBRD. The Fund is a specialized agency within the United Nation system, it
cooperates with the UN on matters of mutual interest.
The IMF can be designated as a central bank of central Banks of the world countries
because it collects the resources and maintains the reservoir of nations currencies just
like that of the central bank of a country which collects cash reserves of the commercial
banks of the country. However, there is a difference in the functioning of the central
bank of the respective countries and IMF. The central banks of the world countries can
control the volume of money and credit through the monetary policy while IMF can't
control the volume of money and credit of any member country.
Functions and Objectives
The fundamental objective of the IMF was the avoidance of competitive devaluation and
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exchange control. Basically there are three general objectives of IMF viz.
i) The elimination or reduction of existing exchange controls.
ii) The establishment of maintenance of currency convertibility with stable exchange
rates.
iii) The establishment of multilateral trade and payments.
Objectives As per the Article 1 of the IMF Agreement are as follows:
ary co-operation through a permanent institution
which provides machinery for consultation and collaboration on international monetary
problems.
contribute thereby to the promotion and maintenance of high level of employment and
real income and to the development of the productive resources of all member countries
as the primary objective of economic policy.
ngements
among members and to avoid competitive exchange depreciation.
current transactions between member countries and in the elimination foreign exchange
restrictions which hamper the growth of world trade.
under adequate safeguards, thus providing them with opportunity to correct mal
adjustments in the balance of payments without resorting to measures destructive to
national and international prosperity.
disequilibrium in the balance of payments of the member countries.
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To fulfill the above objectives, the IMF performs the following functions:
1. The IMF operates in such a way as to fulfil its objectives as laid down in the Bretton
Woods Articles of Agreements. It is the IMFs duty to to see that these provisions are observed
by member countries. Some of the provisions of the original Articles such
as relating to exchange rates have become obsolete due to international monetary
events. Accordingly IMF has amended its Articles of Agreement to make appropriate
adjustment.
2. The fund gives short-term loans to its members, so that they may correct their
temporary balance of payments disequilibrium.
3. The fund is regarded as the guardian of good conduct in the sphere of balance of
payments. It aims at reducing tariff and other trade restrictions by the member
countries. Article VII of the Charter provides that no member shall ,without the
approval of the fund, imposes restrictions on the making of payments or engage in
discriminatory currency arrangement or multiple currency practices. It is the
functions of the IMF to have surveillance of the policies being adopted by the
member countries.
4. The fund also renders technical advice to its members on monetary and fiscal
policies.
5. It conducts research studies and publishes them in IMF staff papers, Finance and
Development, etc.
6. It provides technical experts to member countries having balance of payment
difficulties and other problems.
7. It also conducts short training courses on fiscal, monetary and balance of payments
for personnel from member nations through its Central Banking Services
Development, the Fiscal Affairs Department, the Bureau of Statistics and the IMF
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institute.
Thus the Fund performs Financial, Supervisory and Controlling functions.
Surveillance of the global economy
The IMF is mandated to oversee the international monetary and financial system and monitor
the economic and financial policies of its 188 member countries. This activity is known as
surveillance and facilitates international co-operation. Since the demise of theBretton 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. The
responsibilities of the Fund changed from those of guardian to those of overseer of members
policies.
The Fund typically analyses the appropriateness of each member countrys economic and
financial policies for achieving orderly economic growth, and assesses the consequences of
these policies for other countries and for theglobal economy.
2]
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 theSpecial 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.
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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.
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. The incentive problem of moral hazard,
which is the actions of economic agents maximising 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.
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. 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.
As of 2004, 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 assetsthat they provide the Fund.
Criticisms
In some quarters, the IMF has been criticised for being 'out of touch' with local economic
conditions, cultures, and environments in the countries they are requiring policy reform. 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.
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'. It
has been said that the IMF's role as a generalist institution specialising in macroeconomic
issues needs reform. Conditionality has also been criticised because a country can pledge
collateral of "acceptable assets" to obtain waivers on certain conditions. However, that
assumes that all countries have the capability and choice to provide acceptable collateral.
One view is that conditionality undermines domestic political institutions. 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
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electoral backlashes. IMF conditions are often criticised for their bias against economic
growth and reduce government services, thus increasing unemployment.
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. This assumes that this narrow range of issues represents the only possibleproblems; everything is standardised and differing contexts are ignored. 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.
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. The IMF sometimes advocates austerity programmes, cutting public spending
and increasing taxes even when the economy is weak, 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 criticises these policies. He argues that by converting to amore monetarist approach, the purpose of the fund is no longer valid, as it was designed to
provide funds for countries to carry outKeynesian reflations, and that the IMF "was not
participating in a conspiracy, but it was reflecting the interests and ideology of the Western
financial community.
Reform
The IMF is only one of many international organisations 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 to better productivity. The IMF has little to no communication with other
international organisations such as UN specialist agencies like UNICEF the Food andAgriculture Organization (FAO), and the United Nations Development Program (UNDP).
Jeffrey 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". 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 to be effective. IMF loan conditions cannot stand alone and produce change;
they need to be partnered with other reforms or other conditions as applicable.
History
The International Monetary Fund was originally laid out as a part of the Bretton Woods
system exchange agreement in 1944.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.
This breakdown in international monetary co-operation 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, todiscuss framework for post-World War II international economic co-operation. The
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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 employmentthrough 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. 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. By the end of 1946 the Fund had
grown to 39 members. On 1 March 1947, the IMF began its financial operations, and on 8
May France became the first country to borrow from it.
The IMF was one of the key organisations of the international economic system; its designallowed the system to balance the rebuilding of international capitalism with the
maximisation of national economic sovereignty and human welfare, also known as embedded
liberalism. 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.
The Bretton Woods system prevailed until 1971, when the US government suspended the
convertibility of the US$ (and dollar reserves held by other governments) into gold. This is
known as theNixon Shock. As of January 2012, the largest borrowers from the fund in order
are Greece, Portugal, Ireland, Romania and Ukraine.
In the October 2013 Financial Monitorpublication, the IMF suggested that a capital
levy capable of reducing Euro-area government debt ratios to "end-2007 levels" would
require a very high tax rate; about 10 percent.
The 188 members of the IMF include 187 members of the UN and the Republic of
Kosovo All members of the IMF are alsoInternational Bank for Reconstruction and
Development (IBRD) members and vice versa.
Former members are Cuba (which left in 1964) and the Republic of China, which was ejectedfrom the UN in 1980 after losing the support of then US President Jimmy Carter and was
replaced by the People's Republic of China. However, "Taiwan Province of China" is still
listed in the official IMF indices.
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 1950allegedly
pressured by the Soviet Unionbut returned in 1986.
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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.
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.
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.
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.
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 normallymeets 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.
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. The Development Committee has 25 members and advises
on critical development issues and on financial resources required to promote economicdevelopment in developing countries. They also advise on trade and global environmental
issues.
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.
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.[45]
The remaining 16 Directors represent
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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 andthree other Deputy Managing Directors. 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.
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. The head of the
IMF's European department is Antnio Borges of Portugal, former deputy governor of
the Bank of Portugal. He was elected in October 2010.
Effects of the quota system
The IMF's quota system was created to raise funds for loans. Each IMF member country is
assigned a quota, or contribution, that reflects the country's relative size in the global
economy. Each member's quota also determines its relative voting power. Thus, financial
contributions from member governments are linked to voting power in the organisation.
This system follows the logic of a shareholder-controlled organisation: wealthy countries
have more say in the making and revision of rules. Since decision making at the IMF reflects
each member's relative economic position in the world, wealthier countries that provide more
money to the fund have more influence in the IMF than poorer members that contribute less;
nonetheless, the IMF focuses on redistribution.
Developing countr ies
Quotas are normally reviewed every five years and can be increased when deemed necessary
by the Board of Governors. Currently, reforming the representation of developing
countries within the IMF has been suggested. These countries' economies represent a large
portion of the global economic system but this is not reflected in the IMF's decision making
process through the nature of the quota system. Joseph Stiglitz argues "There is a need to
provide more effective voice and representation for developing countries, which now
represent a much larger portion of world economic activity since 1944, when the IMF wascreated." In 2008, a number of quota reforms were passed including shifting 6% of quota
shares to dynamic emerging markets and developing countries.
Uni ted States inf luence
A second criticism is that the United States' transition to neoliberalism and global capitalism
also led to a change in the identity and functions of international institutions like the IMF.
Because of the high involvement and voting power of the United States, the global economic
ideology could effectively be transformed to match the US's. This is consistent with the IMF's
function change during the 1970s after the Nixon Shock ended the Bretton Woods system.
Another criticism is that allies of the United States are able to receive bigger loans with fewer
conditions.
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Overcoming borr ower/creditor divide
The IMF's membership is divided along income lines: certain countries provide the financial
resources while others use these resources. Both developed country "creditors"
and developing country" borrowers" are members of the IMF. The developed countries
provide the financial resources but rarely enter into IMF loan agreements; they are the
creditors. Conversely, the developing countries use the lending services but contribute little to
the pool of money available to lend because their quotas are smaller; they are the borrowers.
Thus, tension is created around governance issues because these two groups, creditors and
borrowers, have fundamentally different interests in terms of the conditions of these loans.
The criticism is that the system of voting power distribution through a quota system
institutionalises borrower subordination and creditor dominance. The resulting division of the
Fund's membership into borrowers and non-borrowers has increased the controversy around
conditionality because the borrowing members are interested in making loan access easier
while the creditor members want to maintain reassurance that the loans will be repaid.
Use
A recent study reveals that the average overall use of IMF credit per decade increased, in real
terms, by 21% between the 1970s and 1980s, and increased again by just over 22% percent
from the 1980s to the 19912005 period. Another study has suggested that since 1950 the
continent of Africa alone has received $300 billion from the IMF, the World Bank and
affiliate institutions.
A study done by Bumba Mukherjee found that developing democratic countries benefit more
from IMF programs than developing autocratic countries because policy-making, and the
process of deciding where loaned money is used, is more transparent within a democracy.
One study done by Randall Stone found that although earlier studies found little impact ofIMF programs on balance of payments, more recent studies using more sophisticated
methods and larger samples "usually found IMF programs improved the balance of
payments.
IMF and globalization
Globalization encompasses three institutions: global financial markets and transnational
companies, national governments linked to each other in economic and military alliances led
by the US, and rising "global governments" such as World Trade Organization (WTO), IMF,
and World Bank. Charles Derber argues in his bookPeople Before Profit,"These interacting
institutions create a new global power system where sovereignty is globalized, taking powerand constitutional authority away from nations and giving it to global markets and
international bodies.Titus Alexander argues that this system institutionalises global
inequality between western countries and the Majority World in a form of global apartheid, in
which the IMF is a key pillar.
The establishment of globalised economic institutions has been both a symptom of and a
stimulus for globalisation. The development of the World Bank, the IMF regional
development banks such as the European Bank for Reconstruction and
Development (EBRD), and, more recently, multilateral trade institutions such as the WTO
indicates the trend away from the dominance of the state as the exclusive unit of analysis in
international affairs. Globalization has thus been transformative in terms of areconceptualising of state sovereignty.
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Following US President Bill Clinton's administration's aggressive
financial deregulation campaign in the 1990s, globalisation leaders overturned long-standing
restrictions by governments that limited foreign ownership of their banks, deregulated
currency exchange, and eliminated restrictions on how quickly money could be withdrawn by
foreign investors.
Criticisms
Overseas Development Institute (ODI) research undertaken in 1980 pointed to five main
criticisms of the IMF which support the analysis that it is a pillar of what activist Titus
Alexander calls global apartheid. Firstly, developed countries were seen to have a more
dominant role and control over less developed countries (LDCs) primarily due to the Western
bias towards a capitalist form of the world economy with professional staff being Western
trained and believing in the efficacy of market-oriented policies.
Secondly, the Fund worked on the incorrect assumption that all payments disequilibria were
caused domestically. The Group of 24 (G-24), on behalf of LDC members, and the UnitedNations Conference on Trade and Development (UNCTAD) complained that the Fund did
not distinguish sufficiently between disequilibria with predominantly external as opposed to
internal causes. This criticism was voiced in the aftermath of the 1973 oil crisis. Then LDCs
found themselves with payments deficits due to adverse changes in their terms of trade, with
the Fund prescribing stabilisation programmes similar to those suggested for deficits caused
by government over-spending. Faced with long-term, externally generated disequilibria, the
Group of 24 argued that LDCs should be allowed more time to adjust their economies and
that the policies needed to achieve such adjustment are different from demand-management
programmes devised primarily with internally generated disequilibria in mind.
The third criticism was that the effects of Fund policies were anti-developmental. Thedeflationary effects of IMF programmes quickly led to losses of output and employment in
economies where incomes were low and unemployment was high. Moreover, it was
sometimes claimed that the burden of the deflationary effects was borne disproportionately
by the poor.
Fourthly is the accusation that harsh policy conditions were self-defeating where a vicious
circle developed when members refused loans due to harsh conditionality, making their
economy worse and eventually taking loans as a drastic medicine.
Lastly is the point that the Fund's policies lack a clear economic rationale. Its policy
foundations were theoretical and unclear due to differing opinions and departmental rivalries
whilst dealing with countries with widely varying economic circumstances.
ODI conclusions were that the Fund's very nature of promoting market-oriented economic
approach attracted unavoidable criticism, as LDC governments were likely to object when in
a tight corner. Yet, on the other hand, the Fund could provide a 'scapegoat service' where
governments could take loans as a last resort, whilst blaming international bankers for any
economic downfall. The ODI conceded that the fund was to some extent insensitive to
political aspirations of LDCs, while its policy conditions were inflexible.
Argentina, which had been considered by the IMF to be a model country in its compliance to
policy proposals by the Bretton Woods institutions, experienced a catastrophic economic
crisis in 2001, which some believe to have been caused by IMF-induced budget restrictionswhich undercut the government's ability to sustain national infrastructure even in crucial
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areas such as health, education, and securityand privatisation of strategically vital national
resources. Others attribute the crisis to Argentina's misdesigned fiscal federalism, which
caused subnational spending to increase rapidly. The crisis added to widespread hatred of this
institution in Argentina and other South American countries, with many blaming the IMF for
the region's economic problems. The currentas of early 2006trend toward moderate left-
wing governments in the region and a growing concern with the development of a regionaleconomic policy largely independent of big business pressures has been ascribed to this
crisis.
In an interview, the former Romanian Prime Minister claimed that "Since 2005, IMF is
constantly making mistakes when it appreciates the country's economic performances.
Support of military dictatorships
The role of the Bretton Woods institutions has been controversial since the late Cold
War period, due to claims that the IMF policy makers supported military
dictatorships friendly to American and European corporations and other anti-
communist regimes. Critics also claim that the IMF is generally apathetic or hostile to their
views of human rights, and labour rights. The controversy has helped spark the Anti-
globalization movement.
Arguments in favour of the IMF say that economic stability is a precursor to democracy;
however, critics highlight various examples in which democratised countries fell after
receiving IMF loans.
Impact on access to food
A number of civil society organisations have criticised the IMF's policies for their impact on
people's access to food, particularly in developing countries. In October 2008, former USpresident Bill Clinton presented a speech to the United Nations World Food Day, which
criticised the World Bank and IMF for their policies on food and agriculture:
We need the World Bank, the IMF, all the big foundations, and all the governments to admit
that, for 30 years, we all blew it, including me when I was president. We were wrong to
believe that food was like some other product in international trade, and we all have to go
back to a more responsible and sustainable form of agriculture.
Impact on public health
In 2009 a study by analysts from Cambridge and Yale universities published on the open-
access Public Library of Science concluded that strict conditions on the international loans by
the IMF resulted in thousands of deaths in Eastern Europe by tuberculosis as public health
care had to be weakened. In the 21 countries to which the IMF had given loans, tuberculosis
deaths rose by 16.6%.
In 2009, a book by Rick Rowden titled The Deadly Ideas of Neoliberalism: How the IMF has
Undermined Public Health and the Fight Against AIDS, claimed that the IMFs monetarist
approach towards prioritising price stability (low inflation) and fiscal restraint (low budget
deficits) was unnecessarily restrictive and has prevented developing countries from beingable to scale up long-term public investment as a percent of GDP in the underlying public
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health infrastructure. The book claimed the consequences have been chronically underfunded
public health systems, leading to dilapidated health infrastructure, inadequate numbers of
health personnel, and demoralising working conditions that have fuelled the push factors
driving the brain drain of nurses migrating from poor countries to rich ones, all of which has
undermined public health systems and the fight against HIV/AIDS in developing countries.
Impact on environment
IMF policies have been repeatedly criticised for making it difficult for indebted countries to
avoid ecosystem-damaging projects that generate cash flow, in particular oil, coal, and forest-
destroying lumber and agriculture projects. Ecuador for example had to defy IMF advice
repeatedly to pursue the protection of its rain forests, though paradoxically this need was
cited in IMF argument to support that country. The IMF acknowledged this paradox in a
March 2010 staff position report which proposed the IMF Green Fund, a mechanism to
issue special drawing rights directly to pay for climate harm prevention and potentially other
ecological protection as pursued generally by other environmental finance.
While the response to these moves was generally positive possibly because ecological
protection and energy and infrastructure transformation are more politically neutral than
pressures to change social policy. Some experts voiced concern that the IMF was not
representative, and that the IMF proposals to generate only US$200 billion a year by 2020
with the SDRs as seed funds, did not go far enough to undo the general incentive to pursue
destructive projects inherent in the world commodity trading and banking systems
criticisms often levelled at the World Trade Organization and large global banking
institutions.
In the context of the May 2010 European banking crisis, some observers also noted that Spainand California, two troubled economies within Europe and the United States respectively, and
also Germany, the primary and politically most fragile supporter of a euro currency bailout
would benefit from IMF recognition of their leadership in green technology, and directly
from Green Fundgenerated demand for their exports, which might also improve their credit
standing with international bankers.
Credit facilities of IMF
In order to help the member countries to correct disequilibrium in their balance of payments,
the IMF operates various borrowing facilities.
1. Basic Credit Facility:
The loan is repaid when the member repurchases its own currency with other
currencies or SDRs. A member can unconditionally borrow from the Fund in a year
equal to 25% of its quota. This unconditional borrowing right is called the reserve
tranche. It addition, four tranches (each equal to 25% of the quota) are available to a
country.
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Thus, a member country has the basic credit facility of 5 tranches (i.e., 125% of its quota)
from the Fund. In other words, the borrowings from the IMF should not increase the currency
of a member country with the Fund more than 200% of its quota.
2. Buffer Stock Facility:
The buffer stock financing facility was started in 1969. The purpose of this scheme was to
help the primary producing countries to finance contributions to buffer stock arrangements
for the stabilisation of primary product prices.
3. Extended Fund Facility:
In September 1974, the IMF started extended fund facility to assist the member countries
with sever balance of payments problem for long periods. Under this arrangement, the
IMF provides additional borrowing facility up to 140% of the member's quota, over and
above the basic credit facility. The extended facility is limited for a period up to 3 years
and the rate of interest is low, i.e., from 4% to 6.5%.
4. Special Oil Facility:
In 1974, the IMF established a temporary credit facility called Special Facility to extend
credit to countries with payments difficulties caused by oil price hikes. The facility was
terminated in 1976.
5. Structural Adjustment Facility:
The IMF established in March 1986 Structural Adjustment Facility (SAF) to provide
additional balance of payments assistance on concessional terms to the poorer member
countries. In December 1987, the Enhanced Structural Adjustment Facility (ESAF) was set
up to augment the availability of concessional resources to low income countries.The purpose
of SAF and ESAF is to help the poor countries to undertake strong macroeconomic and
structural programmes to improve their balance of payments positions and promote economic
growth.
6. Trust Fund:
The IMF has sold gold in public auctions at prices much above the price prevailing in the
market. Part of the profits so earned has been used to establish a Trust Fund in 1976 for
making conditional loans to the less-developed countries with payments problems.
7. Compensatory Financing Facility:
In 1963, IMF established compensatory financing facility to provide additional financial
assistance to the member countries, particularly primary producing countries facing shortfall
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in export earnings. In 1981, the coverage of the compensatory financing facility was extended
to payment problem caused by the fluctuations in the cost of cereal inputs.
IMF AND INTERNATIONAL LIQUIDITY
Major function of IMF is to provide International liquidity in accordance with the purpose of
the Fund specified in Articles of Agreement. The IMF provides two types of International
Liquidity viz.
i) Conditional Liquidity and
ii) Unconditional Liquidity
The conditional liquidity is provided by IMF under its various lending facilities. Most of the
funds credit extended under these arrangements require an adjustment programme for themembers which is intended to promote a sustainable external position. When the member
countries obtain Fund's finance under agreed condition, its access to International capital
market is enhanced. This gets referred to as a catalytic role of the fund which has become
more important in recent times when private lending institutions have been less willing to
engage in international lending.
The unconditional liquidity is supplied by the Fund through the allocation or SDRs and also
in the form of reserve positions in the Funds which are the claims corresponding to the
resources that countries have made available to the Fund. The member countries holding
SDRs and reserve positions in the Fund can use them finance balance of payments deficitswithout having to enter into policy commitments with the Fund The fund makes its resources
available to members under agreed conditions in support of efforts on their parts to overcome
balance of payments problems in an orderly manner without undue disruption of the flows to
International trade. Several facilities are available for extending credit to members for
varying periods up to ten years subjected to different degrees of conditionality the credit
arrangements that envisage policy actions to be taken by the member, the use of the Funds
resources is normally made conditional upon the policy action in accordance with the
programme agreed between the member country and the Fund.
The limits placed under present policies on members use of Fund's credit facilities are
defined in terms of members quota with the fund, for e.g. to meet a short fall in export
earning a member may draw from the Fund up to 100% of its quota on the other hand in
order to meet the structural balance of payments problem a member may borrow under
certain conditions Funds reserves up to 150% of the quota in any year, up to 450% over three
years.
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ACHIEVEMENTS OF IMF
Undoubtedly the IMF has made a remarkable success in achieving most of its principal
objectives:
1. The primary goal of the IMF was to promote stability in exchange rates. The measure ofexchange stability that the world has witnessed in the IMF era is remarkably superior to what
was seen during the inter-war period or gold standard regime. Under IMF arrangements,
stable exchange rates do not imply rigid exchange rates. IMF's object is to combine the merits
of stability with flexibility in exchange management.
2. The IMF also served as an expert institution for consultation and guidance in international
monetary matters. It serves as an excellent forum for discussions, practically on a day-to-day
basis, of the economic, fiscal and financial policies of member nations, with particular
reference to their balance of payments impact.
3. The Fund has contributed in certain ways to the expansion of world trade by providing
credit facilities to member countries. It assists the deficit countries in meeting their temporary
disequilibrium in the balance of payments. It also "works for facilitating multi-lateral
payments and trade, promoting thereby, international trade as a whole.
4. In recent years the Fund has achieved some success in bringing about a simplification of
the multiple exchange system at least in countries that have sought financial assistance from
the Fund.
5. The Fund has been instrumental in ensuring steady progress in the establishment of a
multilateral system of payments in respect of current transactions.
6. IMF has changed its attitude by accepting a more liberal credit policy. Today, the Fund
grants development loans, too. Hence, the quantum of borrowings from the Fund has shown a
marked increase in recent years.
7. In a nutshell, the Fund has thus, been able to secure all the advantages of managed paper
standard by maximizing employment and accelerating the pace of economic development and
of the gold standard by maintaining comparative economic stability, while carefully avoiding
the disadvantages of either.
8. Moreover, the Fund has been particularly interested-in the newly developing countries of
the world and has been liberally assisting them to maintain a healthy balance of payments and
monetary stability at home.
9. The Fund has been already providing technical assistance to its members in this respect.
10. To solve the current international liquidity problem, the IMF has succeeded in
establishing the SDR scheme. In recent years, however, underdeveloped countries have
started looking to the Fund to assist them in their economic development programme also.
Furthermore, most of the new member countries who have acquired independence recentlyare facing difficult problems in organizing their monetary, fiscal and exchange systems.
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These countries, thus, require Fund's growing assistance in constructing a solid monetary and
exchange base for their economic growth.
ROLE OF IMF
Since the onset of the global economic crisis in 2007, The IMF introduced several changes inits lending reforms, policy of lending aid to poor countries, governance reforms,
conditionalitys of getting funds etc. which are as follows:
GOVERNANCE REFORM
On December 15, 2010, the Board of Governors approved far-reaching governance reforms
under the 14th General Review of Quotas. The package includes a doubling of quotas, which
will result in more than a 6 percentage point shift in quota share to dynamic emerging market
and developing countries while protecting the voting shares of the poorest member countries.
The reform will also lead to a more representative, fully-elected Executive Board. Changes inConditionality of Fund: The conditionality of IMF are no longer set in quantitative targets
such as reducing fiscal expenditure, or contracting the supply of credit to bring aggregate
demand in balance with the aggregate supply. The conditionalitys are now set in qualitative
targets such as structural reforms, passing of new legislations such as bankruptcy codes,
reform of tax administration and removing rigidities that hold back growth.
CREDIT LINE FOR STRONG PERFORMERS
The Flexible Credit Line (FCL), introduced in April 2009 and further enhanced in August
2010, is a lending tool for countries with very strong fundamentals that provides large and
upfront access to IMF resources, as a form of insurance for crisis prevention. There are no
policy conditions to be met once a country has been approved for the credit line. Colombia,
Mexico, and Poland have been provided combined access of over $100 billion under the
FCL (no drawings have been made under these arrangements). FCL use has lead to lower
borrowing costs and increased room for policy scheme.
SOCIAL SAFETY NET PROGRAMS
The IMF is promoting measures to increase spending on, and improve the targeting of, social
safety net programs that can mitigate the impact of the crisis on the most vulnerable in
society.
REFORMS IN THE LENDING FRAMEWORK OF THE IMF
To provide better support to countries during the global economic crisis, the IMF beefed up
its lending capacity and approved a major overhaul of how it lends money by offering higher
amounts and tailoring loan terms to countries varying strengths and circumstances.
POLICIES FOR LOW INCOME COUNTRIES
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In response to the global financial crisis, the IMF undertook policy reforms towards low-
income countries. As a result, the IMF programs are now more flexible and modified to the
individual needs of low-income countries, with streamlined conditionality, higher
concessions and more emphasis on more safeguarding social spending.
AVAILABILITY OF RESOURCES
Resources available to low-income countries through the Poverty Reduction and Growth
Trust over the period 20092014 were boosted to $17 billion, consistent with the call by G-20
leaders in April 2009 of doubling the IMFs concessional lending capacity and providing $6
billion additional concessional financing over the next two to three years. The IMFs
concessional lending to low-income countries amounted to $3.8 billion in 2009, an increase
of about four times the historical levels. In 2010 and 2011, concessional lending reached $1.8
billion and $1.9 billion respectively.
Establishment of a Post-Catastrophe Debt Relief (PCDR) Trust:
This allows the IMF to join international debt relief efforts for very poor countries that are
hit by the most catastrophic of natural disasters. PCDR-financed debt relief amounted to $268
million in 2010.
Efforts against Global Crisis:
As a key part of efforts to overcome the global financial crisis, the Group of Twenty
industrialized and emerging market economies (G-20) agreed in April 2009 to increase
borrowed resources available to the IMF (complementing its quota resources) by up to $500
billion (which tripled the total pre-crisis lending resources of about $250 billion) to support
growth in emerging market and developing countries. In April 2010, the Executive Board
adopted a proposal on an expanded and more flexible New Arrangements to Borrow (NAB),
by which the NAB was expanded to about SDR 367.5 billion (about $560 billion), with the
addition of 13 new participating countries and institutions, including a number of emerging
market countries that made significant contributions to this large expansion. On November
15, 2011, the National Bank of Poland joined the NAB as a new participant, bringing the total
to about SDR 370 billion (about $570 billion) and the number of new participants to 14 (once
all new participants have joined). In addition to increasing the Funds own lending capacity,
in 2009, the membership agreed to make a general allocation of SDRs equivalent to $250billion, resulting in a near ten-fold increase in SDRs. This represents a significant increase in
own reserves for many countries, including low-income countries.
SUGGESTED REFORMS IN THE IMF
The IMF is the pillar of the edifice of the international monetary system. The world is
changing very fast with dynamism to embrace the 21st century. Over 50 years old institution
like the IMF need reformation to meet the emerging challenges and tackle the new problems
in the modern global finance system. Time has ripped to undertake certain reformatory
measures immediately in the interest of the new economic order of the world economy and itsprogress, besides wiping out the tarnished image of the IMF in its working as a financial
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institution. Power relationship within the IMF structure of the monetary system need a
change. The SDRs scheme is a substitution for gold. SDRs should be made more significant
in the international monetary system. SDRs should play the role of the main denominator in
determining parties of different currencies and the exchange rate instead of the US dollar.
Nowadays, there is de facto dollar standard in the global monetary system.
Instead of dollar, the SDRs should become the principal reserve asset, then only one can hope
for the minimization of the American dominance into the global monetary system. The IMF
should become more strong, fair and neutral. This requires restructuring of its power
relationships. With adoption of the SDR standard and its equitable distribution with due
consideration for the liquidity need of developing countries, the power relationships can
hopefully be rationalized. The problem of currency speculation also deserves an immediate
attention of the IMF. Ways should be formed to alleviate currency trading under speculation
motive; When speculation leads to currency crises, it endangers the world trade, growth and
welfare of the global economy. The IMF should intervene and cooperate with the Central
Bank of a country whose currency tends to be a target of speculative attack. Even if acountry's currency appears to be weak, speculation is not to be justified as a method for de
facto devaluation or to teach a lesson and forcing it to correct its BOP situation. Heavy
speculation, on the contrary, will ruin the country's economy and worsen its BOP further.
Further, if currency speculation is checked immediately with IMF intervention when it is
targeted on a country, it would be less costlier (in terms of assistance) then to assist the
country to recover after the damage as often currency crisis forced by heavy speculation
attack generates economic crisis as is evidenced by the recent Malaysian experience. The
IMF should also realize that in reality today liberalized market-oriented global economy is
based on floating rate system and not on the fixed exchange rate ideology.
As such, its policies and strategy of assistance to stabilize the exchange rate and economies of
the countries should be revised appropriately as per the emerging need. The bureaucratic
approach of the IMF must change with positive thinking and pragmatic consideration.
Further, IMF should be decentralized its working. There should be a few more regional
centers in major parts of the world such as South Asia, East Asia, Africa, Europe, Middle
East, etc., and deal with the problems locally. These regional centers may be established with
the assistance and local personnel - experts from the countries in each region.
CRITICISMS OF IFM
The IMF has been severely criticized in recent years for mishandling global financial crises in
East Asia and Latin America, aggravating poverty in developing countries, encouraging bad
policies by governments and financial investors and favouring the developed countries. We
discuss below some points of criticism.
The IMF is not familiar with local economic conditions, cultures, and environments in the
countries they are requiring policy reform. The Fund has very little knowledge about the
impact of public spending on programs like public health and education, especially in Africancountries.
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The IMF proposed to give short term loans to correct the fundamental disequilibrium in the
balance payments. But the post second world war and the 1930s great depression scenario
required long Term loans and aid for reconstruction of the economies.
In order to reduce the budget deficits the IMF sometimes advocates austerity measures,
cutting public spending and increasing taxes even when the economy is weak, in order tobring budgets closer to a balance.
The IMF has failed to prevent dollar crisis. No timely action and the measures were taken by
the fund.
As per the agreement the member countries were required to fix the par value of their
currencies in terms of gold or US dollar but the members had to fix the par values when there
was already over valuation.
A research undertaken by overseas development Institution (ODI) in 1980 pointed to findmain criticisms of the IMF which support the analysis that it is a pillar of global apartheid.
Firstly, developed countries were seen to have a more dominant role and control over less
developed countries (LDCs) primarily due to the Western bias towards a capitalist form of
the world economy with professional staff being Western trained and believing in the
efficacy of market-oriented policies.
The third criticism was that the effects of Fund policies were anti-developmental. The
deflationary effects of IMF programmes quickly led to losses of output and employment in
economies where incomes were low and unemployment was high. Moreover, it was
sometimes claimed that the burden of the deflationary effects was borne disproportionately
by the poor.
Fourthly is the accusation that harsh policy conditions were self-defeating where a vicious
circle developed when members refused loans due to harsh conditionality, making their
economy worse and eventually taking loans as a drastic medicine.
Lastly is the point that the Fund's policies lack a clear economic rationale. Its policy
foundations were theoretical and unclear due to differing opinions and departmental rivalries
whilst dealing with countries with widely varying economic circumstances. Despite the
various shortcomings, the fund has achieved a tremendous success in the field of international
monetary cooperation.
CONCLUSION
The future of both Bretton Woods institutions remains uncertain. Both the IMF and World
Bank escaped the efforts of the Republican U.S. Congress in the mid-1990s to sharply curtail
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and even eliminate both organizations. These agencies have been less successful in answering
the charges from the left, as the IMF retains its demand for "structural adjustments" and the
World Bank still favors funding for large, project-driven funding. While both the IMF and the
World Bank have instituted some reforms, they have been unable to appease the concerns ofoutraged environmentalists, labor unionists, and nationalists and advocates of indigenous
peoples in the developing world.
Still, as this essay has suggested, these two organizations are really the misguided target for
the legitimate concerns people of all ideological stripes have had about the rapid pace of
globalization in the past half century. It is likely this globalization would have occurred
whether or not there had been a Bretton Woods conference, and it is all but certain it will
continue in the future regardless of the policies pursued by the IMF and World Bank. While it
is true that they have often been too driven by U.S. foreign policy concerns, in the end the
influence of both institutions has been widely overstated. And despite their mistakes during
the past half century, they have rarely been given credit for many of the little things they do
well. For example, both institutions perform economic surveillance over most of the world's
economy, a valuable task that no other international or private organization could perform
with such skill. Both agencies also serve as a store of expert knowledge and wisdom for
countries throughout the world that lack trained specialists. While neither the IMF nor the
World Bank has met the lofty goals of their founders or wielded the nefarious influence
charged by their critics, they have and should continue to play a small but important role in
promoting prosperity and economic stability worldwide.