International Monetary Fund
The International Monetary Fund (IMF) is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance. Its headquarters are located in Washington, D.C., USA.
Organization and purpose
IMF describes itself as “an organization of 185 countries, Montenegro being the 185th as of January 18th, 2007, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty”.
In the Great Depression of the 1930s, economic activity in the major industrial nations slumped. Ricardian comparative advantage states that all countries gain from trade without restrictions. It is noteworthy to mention that, although the “size of the pie” is enhanced according to this theory of free trade, improving all industries, when distributional concerns are taken into account, there are always industries that lose out even as others benefit in any given country. World trade declined sharply, as did employment and living standards in many countries.
As World War II came to a close, the leading allied countries considered various plans to restore order to international monetary relations, and at the Bretton Woods conference the IMF emerged. The founding members drafted a charter of an international institution to oversee the international monetary system and to promote both the elimination of exchange restrictions relating to trade in goods and services, and the stability of exchange rates.
The IMF came into existence in December 27, 1945, when the first 29 countries signed its Articles of Agreement.
From the end of World War II until the late-1970s, the capitalist world experienced unprecedented growth in real incomes. Within the capitalist system, the benefits of growth have not flowed equally to all but overall there has been an increase in prosperity that contrasts starkly with the conditions within capitalist countries during the interwar period. The lack of a recurring global depression is likely due to improvements in the conduct of international economic policies that have encouraged the growth of international trade and helped smooth the economic cycle of boom and bust.
Rapid advances in technology and communications have contributed to the increasing international integration of markets and to closer linkages among national economies. As a result, financial crises, when they erupt, now tend to spread more rapidly among countries.
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, have required the IMF to adapt in a variety of ways to continue serving its purposes effectively.
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.
Assistance and reforms
The primary mission of the IMF is to provide financial assistance to countries that experience serious financial difficulties. Member states with balance of payments problems may request loans and/or organizational management of their national economies. In return, the countries are usually required to launch certain reforms, which have often been dubbed the “Washington Consensus“. These reforms are generally required because countries with fixed exchange rate policies can 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 in their future.
Many proponents of the IMF contend that some criticisms are the result of the fact that many people are not familiar with the operations and objectives of the IMF, and blame a lack of transparency within the IMF for this, as well as the dense nature of international finance in general.
Critics claim that IMF policy makers deliberately supported capitalistic 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. The controversy has helped spark the anti-globalization movement. Others claim the IMF has little power to democratize sovereign states, although that is not its stated objective, which is 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, while Structural Adjustment Programs lead to an increase in poverty in recipient countries.
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.
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.
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 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 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.