The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development. It also offers highly leveraged loans, mainly to poorer countries. Its headquarters are in Washington, D.C., United States.
Organization and purpose
The International Monetary Fund was created in July 1944, originally with 45 members, with a goal to stabilize exchange rates and assist the reconstruction of the world's international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances (Condon, 2007). The IMF was important when it was first created because it helped the world stabilize the economic system. The IMF is still important because it works to improve the economies of its member countries.
The IMF describes itself as "an organization of 186 countries (as of June 29, 2009), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". With the exception of Taiwan (expelled in 1980), North Korea, Cuba (left in 1964), Andorra, Monaco, Liechtenstein, Tuvalu and Nauru, all UN member states participate directly in the IMF. Member states are represented on a 24-member Executive Board (five Executive Directors are appointed by the five members with the largest quotas, nineteen Executive Directors are elected by the remaining members), and all members appoint a Governor to the IMF's Board of Governors.
The International Monetary Fund was conceived in July 1944 during the United Nations Monetary and Financial Conference. The representatives of 45 governments met in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire, United States, with the delegates to the conference agreeing on a framework for international economic cooperation. The IMF was formally organized on December 27, 1945, when the first 29 countries signed its Articles of Agreement. The statutory purposes of the IMF today are the same as when they were formulated in 1943.
The IMF's influence in the global economy steadily increased as it accumulated more members. The number of IMF member countries has more than quadrupled from the 44 states involved in its establishment, reflecting in particular the attainment of political independence by many developing countries and more recently the collapse of the Soviet bloc. The expansion of the IMF’s membership, together with the changes in the world economy, has required the IMF to adapt in a variety of ways to continue serving its purposes effectively.
In 2008, faced with a shortfall in revenue, the International Monetary Fund's executive board agreed to sell part of the IMF's gold reserves. On April 27, 2008, IMF Managing Director Dominique Strauss-Kahn welcomed the board's decision of April 7, 2008 to propose a new framework for the fund, designed to close a projected $400 million budget deficit over the next few years. The budget proposal includes sharp spending cuts of $100 million until 2011 that will include up to 380 staff dismissals.
At the 2009 G-20 London summit, it was decided that the IMF would require additional financial resources to meet prospective needs of its member countries during the ongoing global financial crisis. As part of that decision, the G-20 leaders pledged to increase the IMF's supplemental cash tenfold to $500 billion, and to allocate to member countries another $250 billion via Special Drawing Rights.
Any country may apply for membership to 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. Similarly, any member country can withdraw from the Fund, although that is rare. For example, in April 2007, the president of Ecuador, Rafael Correa announced the expulsion of the World Bank representative in the country. A few days later, at the end of April, Venezuelan president Hugo Chavez announced that the country would withdraw from the IMF and the World Bank. Chavez dubbed both organizations as “the tools of the empire” that “serve the interests of the North”. As of June 2009, both countries remain as members of both organizations. Venezuela was forced to back down because a withdrawal would have triggered default clauses in the country's sovereign bonds.
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 Special Drawing Rights (SDRs). A member state cannot unilaterally increase its quota—increases must be approved by the Executive Board and are linked to formulas that include many variables such as the size of a country in the world economy. For example, in 2001, China was prevented from increasing its quota as high as it wished, ensuring it remained at the level of the smallest G7 economy (Canada). In September 2005, the IMF's member countries agreed to the first round of ad hoc quota increases for four countries, including China. On March 28, 2008, the IMF's Executive Board ended a period of extensive discussion and negotiation over a major package of reforms to enhance the institution's governance that would shift quota and voting shares from advanced to emerging markets and developing countries. The Fund's Board of Governors must vote on these reforms by April 28, 2008.
Assistance and reforms
The primary mission of the IMF is to provide financial assistance to countries that experience serious financial and economic difficulties using funds deposited with the IMF from the institution's 186 member countries. Member states with balance of payments problems, which often arise from these difficulties, may request loans to help fill gaps between what countries earn and/or are able to borrow from other official lenders and what countries must spend to operate, including to cover the cost of importing basic goods and services. In return, countries are usually required to launch certain reforms, which have often been dubbed the "Washington Consensus". These reforms are thought to be beneficial to countries with fixed exchange rate policies that may engage in fiscal, monetary, and political practices which may lead to the crisis itself. For example, nations with severe budget deficits, rampant inflation, strict price controls, or significantly over-valued or under-valued currencies run the risk of facing balance of payment crises. Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.
Criticism of I M F
"The interests of the IMF represent the big international interests that seem to be established and concentrated in Wall Street."
Two criticisms from economists have been that financial aid is always bound to so-called "Conditionalities", including Structural Adjustment Programs (SAP). It is claimed that conditionalities (economic performance targets established as a precondition for IMF loans) 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.
One of the main SAP conditions placed on troubled countries is that the governments sell up as much of their national assets as they can, normally to western corporations at heavily discounted prices.
IMF sometimes advocates "austerity programmes," increasing taxes even when the economy is weak, in order to generate government revenue and balance budget deficits. Countries are often advised to lower their corporate tax rate. These policies were criticized by Joseph E. Stiglitz, former chief economist and Senior Vice President at the World Bank, in his book Globalization and Its Discontents. He argued that by converting to a more Monetarist approach, the fund no longer had a valid purpose, as it was designed to provide funds for countries to carry out Keynesian reflations, and that the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community".
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 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. 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 current — as of early 2006 — 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 has been ascribed to this crisis.
Another example of where IMF Structural Adjustment Programmes aggravated the problem was in Kenya. Before the IMF got involved in the country, the Kenyan central bank oversaw all currency movements in and out of the country. The IMF mandated that the Kenyan 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 siphon off billions of Kenyan shillings in what came to be known as the Goldenberg scandal, leaving the country worse off than it was before the IMF reforms were implemented. In an interview, the former Romanian Prime Minister Tăriceanu stated that "Since 2005, IMF is constantly making mistakes when it appreciates the country's economic performances".
In September 2007 the IMF said "given the Irish economy's strong fundamentals and the authorities' commitment to sound policies, the Directors expected economic growth to remain robust over the medium term". Seventeen months later in April 2009 the New York Times quoted Nobel prize-winning economist, Paul Krugman, who identified Ireland as a model for the worst-case scenario for the global economy?
Overall the IMF success record is perceived as limited. While it was created to help stabilize the global economy, since 1980 critics claim over 100 countries (or reputedly most of the Fund's membership) have experienced a banking collapse that they claim have reduced GDP by four percent or more, far more than at any time in Post-Depression history. The considerable delay in the IMF's response to any crisis, and the fact that it tends to only respond to them (or even create them) rather than prevent them, has led many economists to argue for reform. In 2006, an IMF reform agenda called the Medium Term Strategy was widely endorsed by the institution's member countries. The agenda includes changes in IMF governance to enhance the role of developing countries in the institution's decision-making process and steps to deepen the effectiveness of its core mandate, which is known as economic surveillance or helping member countries adopt macroeconomic policies that will sustain global growth and reduce poverty. On June 15, 2007, the Executive Board of the IMF adopted the 2007 Decision on Bilateral Surveillance, a landmark measure that replaced a 30-year-old decision of the Fund's member countries on how the IMF should analyse economic outcomes at the country level.
Impact on access to food
A number of civil society organizations have criticized the IMF's policies for their impact on peoples' access to food, particularly in developing countries. In October 2008, former US President Bill Clinton joined this chorus in a speech to the United Nations World Food Day, which criticized the World Bank and IMF for their policies on food and agriculture:
Impact on public health
In 2008, 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 %.
Criticism from free-market advocates
Typically the IMF and its supporters advocate a monetarist 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. Some economists claim these IMF policies are destructive to economic prosperity.
Complaints have also been directed toward the International Monetary Fund gold reserve being undervalued. At its inception in 1945, the IMF pegged gold at US$35 per Troy ounce of gold. In 1973, the Nixon administration lifted the fixed asset value of gold in favor of a world market price. This need to lift the fixed asset value of gold had largely come about because Petrodollars outside the United States were worth more than could be backed by the gold at Fort Knox under the fixed exchange rate system. Following this, the fixed exchange rates of currencies tied to gold were switched to a floating rate, also based on market price and exchange. The fixed rate system had only served to limit the nominal amount of assistance the organization could provide to debt-ridden countries. Current IMF rules prohibit members from linking their currencies to gold.[
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. Executive Directors, who confirm the managing director, are voted in by Finance Ministers from countries they represent. The First Deputy Managing Director of the IMF, the second-in-command, has traditionally been (and is today) an American.
The IMF is for the most part controlled by the major Western Powers, with voting rights on the Executive board based on a quota derived from the relative size of a country in the global economy. Critics claim that the board rarely votes and passes issues contradicting the will of the US or Europeans, which combined represent the largest bloc of shareholders in the Fund. On the other hand, Executive Directors that represent emerging and developing countries have many times strongly defended the group of nations in their constituency. Alexandre Kafka, who represented several Latin American countries for 32 years as Executive Director (including 21 as the dean of the Board), is a prime example. Mohamed Finaish from Libya, the Executive Director representing the majority of the Arab World and Pakistan, was a tireless defender of the developing nations' rights at the IMF until the 1992 elections.
Rodrigo Rato became the ninth Managing Director of the IMF on June 7, 2004 and resigned his post at the end of October 2007.EU ministers agreed on the candidacy of Dominique Strauss-Kahn as managing director of the IMF at the Economic and Financial Affairs Council meeting in Brussels on July 10, 2007. On September 28, 2007, the International Monetary Fund's 24 executive directors elected Mr. Strauss-Kahn as new managing director, with broad support including from the United States and the 27-nation European Union. Strauss-Kahn succeeded Spain's Rodrigo de Rato, who retired on October 31, 2007. The only other nominee was Josef Tošovský, a late candidate proposed by Russia.
Prepared by Biju P R,Assitant Professor in Political Science,Govt Brennen College,Thalassery.