The International Monetary Fund

The International Monetary Fund (IMF) is an international financial organization made up of 190 member countries. Headquartered in Washington, D.C., the IMF works to foster global monetary cooperation, secure financial stability, facilitate fair international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

History of the IMF 

The IMF was originally conceived as the key element of the Bretton Woods system agreement in 1944. During the first half of the 20th century, World War I and World War II caused tremendous human, physical and economic destruction in Europe and a Great Depression that resulted in economic devastation in both Europe and the United States from 1921 through 1941. Along with the United States, the 1944 Bretton Woods system of monetary management established the rules for commercial and financial relations between Canada, several Western European countries, Australia, and Japan.

As countries sharply raised barriers to free trade in an attempt to revive their failing economies, national currencies lost value and world trade declined sharply. These unilateral, often harmful, measures kindled a desire to create a new international monetary system that would: (1) stabilize currency exchange rates without backing currencies entirely with gold rather than fiat money; (2) reduce the frequency and severity of balance-of-trade deficits; and (3) eliminate economically destructive protectionist trade policies, such as tariffs, subsidies, import quotas, or other restrictions—all while, as far as practical, maintaining each country’s ability to create and pursue independent monetary policies.

In an attempt to reach a multilaterally agreed to solution, the UN Monetary and Financial Conference convened in Bretton Woods, New Hampshire, U.S., in July 1944. Representatives from 44 countries drafted Articles of Agreement for a proposed International Monetary Fund that would supervise the new international monetary system. The framers hoped the new Bretton Woods monetary system, based on maintaining convertible and flexible currencies at stable exchange rates, would promote world trade, investment, and economic growth.

The new system expected countries with temporary moderate balance-of-payments deficits to finance their deficits by borrowing foreign currencies from the IMF rather than by imposing trade controls, devaluations, or deflationary economic policies that could spread their economic problems to other countries. Deflation, as the opposite of inflation, occurs when the price levels in an economic decline, where people prefer to hoard cash instead of spending it on goods that will be cheaper in the future. Deflation is a serious economic issue that can exacerbate a crisis and turn a recession into a full-blown depression.

American delegate, and senior U.S. Treasury Department official, Harry Dexter White envisioned an IMF that functioned much like a traditional bank, making sure that its loans were made with reasonable assurance that borrowing countries could repay their debts on time. Most of White's plan was incorporated into the final acts adopted at Bretton Woods. In contrast, British economist John Maynard Keynes, whose ideas would fundamentally change the theory and practice of macroeconomics and the economic policies of governments, imagined that the IMF would be a cooperative fund from which member states could draw to maintain economic activity and employment through periods of crises. Keynes's view suggested an IMF that helped governments to act as the United States government had during President Franklin D. Roosevelt’s New Deal response to the great recession of the 1930s.

After being ratified by 29 of the 44 countries in attendance, the Bretton Woods Articles of Agreement entered into force on December 27, 1945. The following year, the fund’s board of governors convened in the United States in Savannah, Georgia, to adopt bylaws and to elect the IMF’s first executive board of directors. The governors voted to locate the fund’s permanent headquarters in Washington, D.C., where its 12 original executive directors met for the first time in May 1946. The IMF’s actual financial operations began the following year. On May 8, 1947, France became the first country to borrow money from the IMF.

As one of the key organizations of the international economic system, the IMF was designed to support a combination of free trade with the freedom for states to enhance their provision of welfare and to regulate their economies to reduce unemployment, the basis of embedded liberalism as it existed from the end of World War II to the 1970s.

20th Century

Throughout the 20th century, the IMF's influence on the global economy steadily increased as it accumulated more member countries. This increase resulted largely from the attainment of political independence by many African countries and the dissolution of the Soviet Union in 1991, which led to the recognition of the independence of several states formerly under the Soviet Union’s sphere of influence.

When it began operations, the IMF based its lending rates on exchange rates— the value of one nation's currency versus the currency of another nation. For example, how many U.S. dollars does it take to buy one euro? As of June 3, 2022, the exchange rate is 1.0721, meaning it takes $1.0721 to buy one euro. This system prevailed until 1971 when the United States government halted the convertibility of the US dollar into gold. This change, known as “Nixon Shock,” made then U.S. currency fiat money once again—as it has remained since. Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.

21st Century

In the early 2000s, the IMF provided two major lending packages to Argentina during its great depression from 1998 to 2002, and Uruguay after its banking crisis in 2002. However, by the mid-2000s, IMF lending had fallen to its lowest share of world GDP since the 1970s.

As of January 2012, the largest borrowers from the IMF in order were Greece, Portugal, Ireland, Romania, and Ukraine.

At the end of March 2014, the IMF secured an $18 billion bailout fund for the provisional government of Ukraine in the aftermath of the country’s Revolution of Dignity. 

Response to the Coronavirus Pandemic

While in late 2019, the IMF had estimated the global growth to reach 3.4%, in 2020, it issued a far more pessimistic prediction that due to the onset of the coronavirus pandemic in November 2020, the global economy would shrink by 4.4%.

In March 2020, the IMF announced that it stood ready to mobilize $1 trillion as its response to the pandemic. This was in addition to the $50 billion fund it had announced two weeks earlier, of which $5 billion had already been requested by Iran.  On March 28, 2020, the United Kingdom pledged 150 million pounds ($183 million) to the IMF catastrophe relief fund. One day earlier, the IMF had announced that "more than 80 poor and middle-income countries" had sought bailouts to deal with coronavirus.

On April 13, 2020, the IMF said that it "would provide immediate debt relief to 25 member countries under its Catastrophe Containment and Relief Trust program.

By November 2020, the Fund warned that the economic recovery may be faltering as COVID-19 infections began to rise again and that more economic help would be needed.

On April 8, 2021, IMF managing director Kristalina Georgieva stated, “The global economy is on firmer footing as millions of people benefit from vaccines. But while the recovery is underway, too many countries are falling behind and economic inequality is worsening.” As a result, Georgieva continued: “Strong policy action is needed to give everyone a fair shot—a shot in the arm to end the pandemic everywhere, and a shot at a better future for vulnerable people and countries.” 

How It Works 

The IMF is both accountable to and governed by its near-global membership of 190 countries. The Board of Governors is the highest decision-making body of the IMF. It consists of one governor and one alternate governor from each member country. The governor is appointed by the member country and is usually the minister of finance or the head of the central bank. The Managing Director is the head of the IMF staff and Chair of the 24-member Executive Board, which oversees the day-to-day work of the IMF. The Managing Director is the head of the IMF staff and Chair of the Executive Board and is assisted by four Deputy Managing Directors.

The primary functions of the IMF are lending, economic condition surveillance, and technical assistance to member countries. 

Lending

As envisioned in the original Bretton Woods Articles of Agreement conceived in 1944, the main function of the IMF is providing loans—including emergency necessity loans—to member countries experiencing actual or potential balance of payments problems. The aim is to help the borrowing countries rebuild their reserves of international funds, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth while correcting the underlying problems. 

The IMF's lending resources come mainly from money that countries pay as their capital subscription when they become members. Each member country of the IMF is assigned a “quota,” based broadly on its relative position in the world economy. Countries can then borrow from this pool when they suffer financial hardship. The IMF regularly conducts general reviews of quotas to assess the adequacy of overall quotas and their distribution among members. The most recent increase in total quotas, to US$ 651 billion, was agreed to under the 14th Review and took effect in January 2016. The largest member of the IMF is the United States, with a current quota of about US$118 billion.

IMF loans are made conditionally based on a set of policies that the IMF requires in exchange for financial assistance. While the IMF does not require collateral from countries for loans, it does require the government seeking assistance to correct its macroeconomic imbalances in the form of policy reform. If the conditions are not met, the funds may be withheld. The concept of conditionality was introduced in a 1952 executive board decision and later incorporated into the Articles of Agreement.

Surveillance 

As an essential part of evaluating future funding levels, the IMF closely tracks the global monetary system and international economic developments to identify risks and recommend policies for growth and financial stability. In doing so, the Fund can check the health and effectiveness of the economic and financial policies of its 190 member countries. When necessary, the IMF identifies possible risks to the economic stability of its member countries and advises their governments on possible policy adjustments that could resolve those risks.

Technical Assistance

Using its array of financial expertise ranging from taxation through central bank operations to the reporting of macroeconomic data, the IMF provides technical assistance and training to governments. This training and assistance help member countries’ central banks, finance ministries, revenue administrations, and financial sector supervisory agencies deal with cross-cutting issues, such as income inequality, gender equality, corruption, and climate change.

Criticisms and Issues 

Many scholars have expressed concerns that IMF decision-making is more deeply influenced by political concerns than by proven and clearly defined global macroeconomics guidelines. 

Almost since its inception, the IMF has been criticized as being American-and-European-dominated. This perception has led to what some critics have called the “disenfranchising the world” from the most essential governance of the IMF. Raúl Prebisch, the founding secretary-general of the UN Conference on Trade and Development (UNCTAD), wrote that one of “the conspicuous deficiencies of the [IMF’s] general economic theory, from the point of view of the periphery, is its false sense of universality.”

As the IMF’s most powerful member country, the United States’ global influence reaches even into the Fund’s decision-making concerning individual loan agreements. The United States has historically been openly opposed to losing what U.S. Treasury Secretary Jacob Lew described in 2015 as its “leadership role” at the IMF, and the United States' “ability to shape international norms and practices.”

For most of the IMF’s history, emerging markets have been under-represented within its voting structure. For example, despite being its most populous member nation, China's vote share was the sixth-largest. Similarly, Brazil's vote share was smaller than that of Belgium. Reforms to give more power to emerging economies were agreed to at the G20 summit in 2010. However, the reforms could not pass until they were ratified by the United States Congress since 85% of the Fund's voting power was required for the reforms to take effect, and the U.S. held more than 16% of the voting power at the time. After repeated criticism, the United States finally ratified the voting reforms at the end of 2015. Even with these reforms, the United States retained its IMF voting share at over 16%.

Support of Dictatorships

Since late in the Cold War, the IMF policymakers have been criticized for helping to support countries ruled by military dictatorships that were friendly to American and European corporations. For example, Mobutu Sese Seko’s rule in Zaire and Nicolae Ceausescu's reign over Romania. Zaire received a substantial IMF loan despite a report from its envoy, Erwin Blumenthal, detailing entrenched corruption and embezzlement and the inability of the country to pay back any loans.  Critics also claim that the IMF is generally apathetic or hostile to human and labor rights violations. The controversy has helped spark the anti-globalization movement. 

Defenders of these IMF policies argue that economic stability is a prerequisite of democracy. However, critics highlight various examples in which democratized countries fell after receiving IMF loans.

On 28 June 28, 2021, the IMF approved a US$1 billion loan to Uganda under dictator General Kaguta Museveni despite protests from Ugandans who marched in Washington, London, and South Africa.

Access to Food

Several civil society organizations have criticized the IMF's policies for their impact on access to food, particularly in developing countries. In October 2008, former United States president Bill Clinton delivered a speech to the United Nations on World Food Day, criticizing 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,” said Clinton. “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.”

The multinational think tank Foreign Policy in Focus, for example, blamed what it called a “recurring pattern” in IMF agricultural market policy. “The destabilization of peasant producers by a one-two punch of IMF-World Bank structural adjustment programs that gutted government investment in the countryside followed by the massive influx of subsidized U.S. and European Union agricultural imports after the WTO's Agreement on Agriculture pried open markets."

Impact on Public Health

According to a 2009 study by PLOS Medicine, the IMF’s strict conditions resulted in thousands of deaths in Eastern Europe due to tuberculosis. In his 2009 book, The Deadly Ideas of Neoliberalism: How the IMF has Undermined Public Health and the Fight Against AIDS, scholar, and author Rick Rowden claimed that the Fund’s tendency to place a premium on maintaining low inflation and minimal budget deficits has prevented developing countries from scaling up long-term investment in public health infrastructure. Rowden submits that the consequences have been chronically underfunded public health systems that have fueled a "brain drain" of medical personnel, all of which have undermined public health and the fight against HIV/AIDS in developing countries.

In 2016, the IMF’s finance and development division published a report titled "Neoliberalism: Oversold?" which, while praising some aspects of the "neoliberal agenda," suggests that the Fund has been “overselling” fiscal austerity policies and financial deregulation, which they claim has worsened both financial crises and economic inequality around the world. The neoliberal agenda stresses increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition, and a smaller role for the state—achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.

Impact on Environment

IMF policies have been criticized for making it difficult for indebted countries to avoid approving environmentally harmful projects —such as oil, coal, and forest-destroying lumber and agriculture projects— that generate revenues necessary for them to pay off their loans. 

For example, Ecuador had to defy repeated IMF recommendations to allow increased lumbering to pursue the protection of its rainforests. The IMF acknowledged this paradox in its 2010 report, “Financing the Response to Climate Change,” that proposed creation of the IMF Green Finance program, a mechanism to issue special drawing rights directly to pay for climate harm prevention and potentially other ecological protection.

Sources

• Dosman, J. Edgar. “The Life and Times of Raúl Prebisch, 1901-1986.” McGill-Queen University Press, 2008, ISBN-10: 0773534121.
• Stuckler, David. “International Monetary Fund Programs and Tuberculosis Outcomes in Post-Communist Countries.” PLOS Medicine, July 22, 2008, https://journals.plos.org/plosmedicine/article?id=10.1371/journal.pmed.0050143#.
• Rowden, Rick. “The Deadly Ideas of Neoliberalism: How the IMF has Undermined Public Health and the Fight Against AIDS.” Zed Books, 2009, ISBN 978-1-84813-284-9.
• Ostry, Jonathan D. “Neoliberalism: Oversold?” IMF Finance and Development, June 2016, https://www.imf.org/external/pubs/ft/fandd/2016/06/pdf/ostry.pdf.
• Udland, Myles. “IMF: The last generation of economic policies may have been a complete failure.” Business Insider, May 27, 2016, https://www.businessinsider.com/imf-neoliberalism-warnings-2016-5.
• Bredenkamp, Hugh. “Financing the Response to Climate Change.” International Monetary Fund, March 25, 2010, https://www.imf.org/external/pubs/ft/spn/2010/spn1006.pdf.