Science Fair Project Encyclopedia
International Monetary Fund
- This page is about the International Monetary Fund; IMF can also mean the International Metalworkers' Federation, a global union federation.
The International Monetary Fund (IMF) is the international organization entrusted with overseeing the global financial system by monitoring foreign exchange rates and balance of payments, as well as offering technical and financial assistance when asked.
Organization and Purpose
The IMF describes itself as: "an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". Of all UN member states only North Korea, Cuba, Liechtenstein, Andorra, Monaco, Tuvalu and Nauru are either integrated and represented by other member states or choose not to participate.
Agreement for its creation came at the United Nations-sponsored Monetary and Financial Conference in Bretton Woods, New Hampshire, United States, on July 22, 1944. The principle architects of the IMF at the Bretton Woods Conference were Fabian Society member John Maynard Keynes and the Assistant Secretary of the United States Treasury, Harry Dexter White. The Articles of Agreement came into force on December 27, 1945, the organization came into existence in May 1946, as part of a post-WWII reconstruction plan, and it began financial operations on March 1, 1947.
It is sometimes referred to as "a Bretton Woods institution", along with the Bank for International Settlements (BIS) and the World Bank. Together, these three institutions define the monetary policy shared by almost all countries with market economies.
The IMF was instituted in and operated as a short-term credit fund for exchange rate stabilization throughout the Keynesian Welfare State era of 1945 - 1971. With the removal of the fixed exchange rate system in the early 70s - the orignal role for the IMF has changed. As neo-liberalism took hold in the US and Western Europe through the 70s and 80s, the IMF has assisted debtor nations with problems meeting balance of payment deficits on condition they insitute reforms in line with neo-liberal and classical economic theory. Arguably there has been a qualification of this stance with the recent HIPC initiatives, but it is safe to conclude that the IMF remains a neo-liberal institution, arguably much removed from its original mandate.
A country may apply for membership status within the IMF. The application will be considered, first, by the IMF's Executive Board. After its consideration, the Executive Board will submit a report to the Board of Governors of the IMF with recommendations in the form of a "Membership Resolution." These recommendations cover the amount of quota in the IMF, the form of payment of the subscription, and other customary terms and conditions of membership. After the Board of Governors has adopted the "Membership Resolution," the applicant state needs to take the legal steps required under its own law to enable it to sign the IMF's Articles of Agreement and to fulfill the obligations of IMF membership.
A member's quota in the IMF determines the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.
Assistance and Reforms
Part of its mission has become to provide assistance to countries that experience serious economic difficulties. Member states with balance of payments problems may request assistance in the form of loans and/or organizational management of their national economies. In return, the countries are obliged to launch certain reforms, an example of which is the "Washington Consensus".
Critics and Criticism
The role of the three Bretton Woods institutions has been controversial to many since the late Cold War period. Critics claim that IMF policy makers deliberately supported capitalist military dictatorships friendly to American and European corporations. Critics also claim that the IMF is generally apathetic or hostile to their views of democracy, human rights, and labor rights. These criticisms generated a controversy that helped spark the anti-globalization movement. Others claim the IMF has little power to democratize sovereign states, nor is that its stated objective: to advise and promote financial stability. Arguments in favor of the IMF say that economic stability is a precursor to democracy.
Two criticisms from economists have been that financial aid is always bound to so-called "Conditionalities", including Structural Adjustment Programs. Conditionalities, it is claimed, retard social stability and hence inhibit the stated goals of the IMF.
Typically the IMF and its supporters advocate a Keynesian approach. As such, adherents of supply-side economics generally find themselves in open disagreement with the IMF. The IMF frequently advocates currency devaluation, criticized by proponents of supply-side economics as inflationary. Secondly they link higher taxes under "austerity programmes" with economic contraction .
Currency devaluation is recommended by the IMF to the governments of poor nations with struggling economies. Supply-side economists claim these Keynesian IMF policies are destructive to economic prosperity, although many other economists disagree.
Complaints are also directed toward International Monetary Fund gold reserve being undervalued. At its inception in 1945, the IMF pegged gold at 35 dollars per ounce of gold. In 1973 the Nixon administration lifted the fixed asset value of gold in favour of a world market price. Hence the fixed exchange rates of currencies tied to gold was switched to a floating rate, also based on market price and exchnage. This largely came about because of Petrodollars outside the United States, more than could be backed by the gold at Fort Knox under the fixed exchange rate system. The fixed rate system only served to limit the amount of assistance the organization could use to help debt-ridden countries.
That said, the IMF sometimes advocates "austerity programmes," increasing taxes even when the economy is weak, in order to generate government revenue and balance budget deficits, which is the opposite of Keynesian policy.
Opposition to the IMF can be very fragmented. For instance advocates of supply-side economics would in general regard the policies advocated by ATTAC to be little different in form to the ideas peddled by the IMF. In other words, they would see ATTAC tax-and-spend policies and the IMFs austerity policies as being fundamentally similar.
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, generally believed to have been caused by IMF-induced budget restrictions — which undercut the government's ability to sustain national infrastructure even in crucial areas such as health, education, and security — and privatization of strategically vital national resources. 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 current — as of 2005 — trend towards moderate left-wing governments in the region and a growing concern with the development of a regional economic policy largely independent of big business pressures can be seen as a result, at least partially of this crisis.
Another example of where IMF Structural Adjustment Programmes aggravated the problem was in Kenya. Before IMF got involved in the country, the Kenya central bank oversaw all currency movement in and out of the country. IMF mandated that Kenya central bank had to allow easier currency movement. However, the adjustment resulted in very little foreign investment, but allowed Kamlesh Manusuklal Damji Pattni, with the help of corrupt government officials, to syphon out billions of Kenya shillings in what came to be known as the Goldenberg scandal. The net result was the country ended up worse than before the IMF got involved.
That the IMF intervenes only in countries that are already in dire financial straits has certainly hurt its reputation. The financial collapses it intervenes to help are the product of decades of mismanagement, but mismanagement that is often invisible to the outside world. These collapses tend to lead to years of economic difficulty, and since this period is often coextensive with IMF involvement in the economy it has in many cases quickly become associated with the malaise. Politicians have also long used the IMF as an easy target for blame when they themselves have erred, using nationalism and the poor public relations of the IMF to gain easy political points.
Overall the IMF success record is limited. While it was created to help stabilize the global economy, since 1980 over 100 countries have experienced a banking collapse that reduced GDP by four percent or more. Far more than any previous time in history. The considerable delay in IMF response to a crisis, and the fact that it tends to only respond to rather than prevent them, has led many economists to argue for reform.
Whatever the feelings people in the Western world have for the IMF, research by the Pew Research Center shows that more than 60 percent of Asians and 70 percent of Africans feel that the IMF and the World Bank have a positive effect on their country . Such research has made proponents of IMF claim the IMF-critique misleading, as it would be difficult to speak of suffering if the sufferers don't feel hurt.
Difference Between IMF and World Bank
There is much confusion about the difference between the IMF and its sister NGO the World Bank. The IMF keeps account of trade balances between member states, basically who owes who how much, as an independent auditor. The World Bank on the other hand, gives more long term loans for more general purposes. What it does, as an investment bank, is essentially to intermediate between lenders and borrowers. It sells bonds to corporations, individuals, and sometimes governments, and lends that money to borrowing governments.
The IMF was originally founded to stabilise countries’ currencies in relation to each other, and to oversee the currency exchange market. Since the IMF is not really a bank, it doesn’t give loans as such. Rather, it has a pool of money from which member countries can borrow when they need to stabilise their currency quickly. This can be compared with an overdraft (Wiktionary - Entry on overdraft ) on a current account. All loans from the IMF must be paid back within 5 years.
Past Managing Directors
An unwritten rule establishes that the IMF's managing director must be European and the president of the World Bank from United States.
- Bretton Woods Institutions
- Bank for International Settlements
- Organization for Economic Co-Operation and Development
- Special Drawing Rights
- World Bank
- The Best Democracy Money Can Buy by Greg Palast (2002)
- The IMF and The World Bank: How do they differ? by David D. Driscoll
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