International Monetary Fund Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The International Monetary Fund (IMF) is one of the international financial organizations that came out of the Bretton Woods conference, and thus a key institutional component of the international economy since World War II. An international lender of last resort (extending credit and assistance when no one else will), it is the closest thing to an international central bank—lacking control over interest rates and the size of the money supply, it lends money to member states in need, seeking to stabilize exchange rates. Countries receiving loans are, when necessary, required to adopt various reforms to reshape their economy to better reflect the economic values and objectives of the Bretton Woods institutions (the so-called Washington Consensus).

The IMF was founded in 1944, after the Bretton Woods Conference at the Mount Washington Hotel in Bretton Woods, New Hampshire—a meeting of the Allied nations to discuss the shape of the international economy upon the end of World War II. It took another year and a half to implement the ideas forwarded at that conference, and when the founding countries—29 of the 45 attending the conference—signed the Articles of Agreement, the IMF began operations at the end of 1945. Membership has increased since, to 185 countries, including all United Nations members except Andorra, Cuba, Liechtenstein, Monaco, North Korea, Taiwan, Tuvalu, and Nauru. What was originally an Allied operation, then, now encompasses former Axis nations as well as nations of the former Soviet bloc.

The United States has exclusive veto power in the decisions of the IMF. The voting weight in other members is determined by its quota, the amount of money it has contributed to the fund, measured in special drawing rights (SDRs). SDRs are potential claims on the currencies in a figurative basket composed of U.S. dollars (44 percent), euros (34 percent), yen (11 percent) and pounds sterling (11 percent), a composition that will hold through 2010. The makeup of the basket is determined by the IMF’s Executive Board every five years. The SDR is used for IMF accounting, and to provide a stable standard against which currencies can be pegged (though the euro is quickly displacing it in that role). Sometimes called “paper gold,” the SDR was conceived at a time when the gold standard was still a topic of mainstream discussion, and was designed to replace it internationally. At the end of May 2008, the total value of the IMF’s quotas was $352 billion; $19.4 billion in loans were outstanding to 65 countries.

The 20 countries with the most voting power in the IMF are (percentage of total votes in parentheses): the United States (16.79 percent), Japan (6.02 percent), Germany (5.88 percent), France (4.86 percent), the United Kingdom (4.86 percent), China (3.66 percent), Italy (3.2 percent), Saudi Arabia (3.17 percent), Canada (2.89 percent), Russia (2.7 percent), the Netherlands (2.34 percent), Belgium (2.09 percent), India (1.89 percent), Switzerland (1.57 percent), Australia (1.47 percent), Mexico (1.43 percent), Spain (1.39 percent), Brazil (1.38 percent), South Korea (1.33 percent), and Venezuela (1.21 percent).

Structural Adjustments

The reforms prescribed by the IMF for nations receiving loans are called “structural adjustments,” because they were conceived of as a way to reshape national economies into something more closely resembling the ideal described at Bretton Woods. These adjustments are free-market-minded, focusing on the reduction of trade barriers (such as is encouraged by the World Trade Organization) and the privatization and deregulation of industries. The underlying assumption is that if the borrower nation had implemented these economic changes earlier, it might be less likely to need the loan, but even when that logic does not apply, the conditions are generally imposed; loans are the carrot, structural adjustments the more important goal than simply recouping the loan.

Balanced budgets, a softening or removal of price controls, and the reduction of corruption are all common conditions of structural adjustments, depending on the country. If the nation has a history of protectionism, it will be required to become more friendly to foreign investment and foreign business; in the past, countries were encouraged to open and enhance domestic stock markets, but in the 21st century such exchanges usually already exist.

Naturally, structural adjustments have come under criticism as a breach of national sovereignty—the very reason why the United States refused to ratify the International Trade Organization. The counterargument is that borrowing from the IMF is voluntary; that these adjustments are not imposed on any nation that does not seek help, knowing what the conditions will be. Since the adjustments are tied to the IMF’s beliefs about economic health—they are reforms that the institution believes will better enable the borrower to repay the loan—they are intrusive, but not arbitrary.

On the other hand, some adjustments are more intrusive than others, more beneficial than others. The “austerity” adjustment comes under particular criticism, because it requires the borrower nation to reduce its spending on social programs, and usually specifies an amount that needs to be cut rather than recommending particular budget cuts; health and education programs are generally the first to go, and it seems clear that cutting education funding is in fact not in the economic best interests of any country, and furthermore that any country placed on a path of economic betterment through free market initiatives will in the long run have more need for a well-educated citizenry, not less.

Though structural adjustments have been part of the IMF’s approach since its inception, they have been especially detailed and deep since the 1970s, when stagflation and the oil crises suggested their necessity.

The 2009 G-20 Summit

In the midst of the acute phase of the 2007–09 global economic crisis, the G-20 summit of the world’s largest national economies was held among their heads of state rather than their ministers of finance. Going into the summit, the press and several attendees referred to it as “the next Bretton Woods,” and the summit later turned out to be largely a planning session for the April 2009 G-20 summit in London. All of the Brettons Woods institutions are to be reexamined. The IMF’s articles of agreement have not changed substantially since the fund’s inception; some of the G-20 participants have called for a ground-up rethinking of the world’s financial environment and the institutions that maintain it, and major changes to the IMF will at least be discussed.

The IMF planned lending up to $100 billion to countries with overall healthy economies that were having problems borrowing in the tumultuous global market conditions.

Bibliography:

Eduard H. Brau and Ian McDonald, Successes of the International Monetary Fund: Untold Stories of Cooperation at Work (Palgrave Macmillan, 2009);
Warren Coats, “The Future of the International Monetary Fund,” Economic and Political Weekly (v.43/35, 2008);
Susan George, A Fate Worse Than Debt (Penguin Books, 1988);
Atish R. Ghosh, IMF Support and Crisis Prevention (International Monetary Fund, 2008);
Graham Hancock, Lords of Poverty: The Free-Wheeling Lifestyles, Power, Prestige, and Corruption of the Multibillion Dollar Aid Business (Mandarin, 1991);
John W. Head, Losing the Global Development War: A Contemporary Critique of the IMF, the World Bank, and the WTO (Martinus Nijhoff Publishers, 2008);
Jiro Honda, Do IMF Programs Improve Economic Governance? IMF working paper, WP/08/114 (International Monetary Fund, African Department, 2008);
Rhona MacDonald, “Experts Call for Reform of the International Monetary Fund,” Lancet (v.370/9601, 2007);
Jan Joost Teunissen and Age Akkerman, eds., Helping the Poor? The IMF and Low-Income Countries (Fondad, 2005);
“The International Monetary Fund: Fait Accompli,” Economist (v.384/8537, 2007);
Hector Torres, “Reforming the International Monetary Fund: Why Its Legitimacy Is at Stake,” Journal of International Economic Law (v.10/3, 2007).

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