Twenty-nine member countries including the United States, Canada, France and the United Kingdom ratified the initial agreements that gave birth to the International Monetary Fund, or the IMF, and the World Bank in 1944, largely as a response to the decimated state of European finances and infrastructure as a result of the Second World War (Marshall 9).
The original purposes of the International Money Fund were “to monitor members’ economies – especially their exchange rates and balance of payments, and…to act as an international lender” (Marshall 10).
From the outset, the architects of the IMF sought to establish “an international monetary system…to stabilize exchange rates, to obtain the maximum productive benefits of foreign trade and investment [and]…keep capital resources circulating rather than allow them to sit idle” (Shelton 505). Almost immediately this mandate changed, when the United States took a leadership role in the rebuilding of Europe after the Second World War and the IMF turned its attention to non-industrialized nations (Marshall 10).
The “loans to developing countries were consistent with the IMF mandate to provide balance of payments assistance, but instead of intervening in the exchange rates of the industrialized nations, it provided assistance – at increasing rates over time – to the developing world from the 1950s onward” (Marshall 10).
In order for troubled countries to receive assistance from the IMF, they must agree to certain “specific policy prescriptions” designed to facilitate their economic stability (Vreeland 1). In recent years this so-called conditionality policy of the IMF has come under fire from scholars and journalists alike.
One of the principal goals of the IMF remains economic growth, and the IMF holds clear ideologies toward the meaning of economic growth, its value and what steps need to be taken to achieve it – ideologies which often conflict with the countries it supports. According to James Raymond Vreeland, critics view the IMF as a “technocracy. Its task is to sign agreements with countries facing low reserves or balance of payments deficits and impose best policies to address the problems.
A loan is held out as the carrot, with conditionality as the stick. Some argue…that the Fund may seek only to aggrandize its influence in the world without concern for its mandate” (Vreeland 15). Numerous critics level vitriol against the “IMF, the World Bank, and the bank’s 51 per cent owner, the US Treasury” (Palast 1). The conditionality policy, these critics assert, masks a far more sinister agenda driven by the American financial elite.
According to Gregory Palast, a journalist with The Observer, “step one is privatization…rather than objecting to the sell-offs of state industries, some politicians – using the World Bank’s demands to silence local critics – happily flog…their electricity and water companies” (Palast 1). Once the country privatizes its assets, Palast claims, “step two is capital market liberalization. In theory this allows investment capital to flow in and out. Unfortunately, as in Indonesia and Brazil, the money often simply flows out” (Palast 1).
The remaining two steps in the IMF’s conditionality policy in Palast’s estimation are “step three: market-based pricing – a fancy term for raising prices on food, water and cooking gas [and] step four: free trade…by the rules of the World Trade Organization and the World Bank” (Palast 2).
These rules, according to Palast, seek to “open…markets”; however, Palast’s translation of this term is “Europeans and Americans…kicking down barriers to sales in Asia, Latin American and Africa while barricading [their] own markets against the Third World ‘s agriculture” (Palast 2).
Major concerns about the conditionality policy of the IMF include the fact that the conditionality policy is a proscribed four step plan that the IMF applies to all applicants regardless of the country’s individual situation. Also, on a darker note, critics assert that IMF “plans are devised in secrecy and driven by an absolutist ideology, never open for discourse or dissent, [and] they undermine democracy” (Palast 2).
Not only that, Palast claims, the IMF’s attempts to boost economic growth of member countries “don’t work. Under the guiding hand of IMF structural assistance, Africa’s income dropped by 23 per cent” (Palast 2). One issue remains conflicting political interests of the main contributors to the IMF – the industrialized nations of the world, including the United States, Germany, Japan, France and the United Kingdom (Vreeland 16).
As Seonjou Kang points out, the IMF cannot afford to hand money out freely to every country that asks. “Loans with a few weak conditions or no conditions attached could induce moral hazard in borrowing countries, prolonging their uses of IMF resources…Without strong conditions, borrowing countries would leave untreated the root causes of the problems that brought them to the IMF, and sooner or later relapse into the same problems.
Thus, the IMF might believe that more conditions are conducive to obtaining good compliance with its programs, thwarting evasion and detecting slippage at an early stage” (Kang 690). The IMF’s insistence on conditionality therefore functions as a bridge between two “different but inseparable imperatives: assistance and self-preservation” (Kang 688).
In offering financial assistance to member countries the IMF aids economically distressed countries to achieve stability and maintain the equilibrium of their economies through loan agreements; however the IMF itself controls a finite consortium of funds. A mechanism to ensure that loan agreements will be honored and funds repaid becomes a necessity to preserve the IMF’s economic viability (Kang 688).
That said, critics often point to the disproptionate power of the G7 nations in the IMF as the main problem with the fund. While the cumulative vote share of the G7 nations equals only 46.08 per cent of the whole, voting power of the G7 nations, particularly the United States, “dwarfs” that of other member nations (Marshall 16). Even with 40 per cent of the voting share, the G7 nations can exercise 60 per cent of the voting power when they vote as a unified group (Marshall 17).
However, the IMF’s conditionality policy remains a complex, multilayered issue. As Seonjou Kang states, while “IMF conditionality is pertinent to the economy and thus supposed to be determined by economic criteria, non-economic criteria infiltrate and make IMF conditionality a political decision,” and in some cases conditionality actually serves the interests of the governments in charge (Kang 686).
Corrupt or incompetent governments may “desire conditionality so they can blame the IMF for unpopular policies” and use the IMF to shield themselves from recrimination if internal policies fail (Vreeland 13).
The IMF defends its conditionality clause on several fronts. According to Kenneth Rogoff, economic counselor and the director of the research department at the IMF, there are four main criticisms leveled against the conditionality policy: the most oft quoted is the austerity charge – that IMF conditions “impose harsh fiscal austerity on cash strapped countries” (Rogoff 39).
The second charge is that the IMF loans themselves encourage reckless investments by local officials, wrongly “confident that the fund will bail them out…the so-called moral hazard problem” (Rogoff 39). A third common criticism is that the IMF’s “advice to countries suffering debt or currency crises only aggravates economic conditions. And fourth, [that] the fund has irresponsibly pushed countries to open themselves up to volatile and destabilizing flows of foreign capital” (Rogoff 39).
For a country to approach the IMF, the situation must already be dire, Rogoff argues. “Policymakers in distressed economies know the fund will intervene where no private creditor dares tread and will make loans at rates their countries could only dream of” (Rogoff 39). In essence, were the country to be subjected to market forces, Rogoff assures critics, the economic austerity would be far more strict, namely “outright default…or the free fall in the value of their currencies” (Rogoff 39).
Rogoff echoes the sentiment that the IMF functions as a “convenient whipping boy” for politicians to shift blame upon once the economic policy changes take root (Rogoff 39).
Decisions as to where cuts take place, Rogoff assures the reader, generally remains in the hands of the governments, although many government officials will still claim that the IMF “forced us to do it” (Rogoff 39). The IMF does encourage reckless lending, Rogoff admits, “despite the IMF’s strong repayment record in major emerging-market loan packages” (Rogoff 42).
However, the economist does caution that private investors still lose money regardless of whether or not the IMF loans money to a country in financial crisis, and cites the 100 billion losses suffered by private investors after Russia defaulted in 1998 as proof (Rogoff 41).
Rogoff scoffs at the idea that the IMF’s fiscal advice interferes with a country growth potential; rather, raw economics typically make a struggling economy struggle further (Rogoff 43). Tax cuts and lowered interest rates, Rogoff argues, often do not work: Reagan’s tax cuts generated a monstrous deficit; investors demand higher interest rates from countries that might default to cover risk and when citizens lose faith in their own currency they very often relocate their assets to foreign institutions (Rogoff 43).
Rogoff does acknowledge that the IMF was remiss in the advice it gave to Mexico and South Korea, and states that “the fund didn’t warn these countries forcefully enough about the dangers of opening up to international capital markets before domestic financial markets and regulators were prepared to handle the resulting volatility” (Rogoff 44). Often however, Rogoff concludes, the IMF bears the blame for unavoidable economic realities.
Highly developed domestic financial markets with strong regulation can weather open capital markets, Rogoff argues, which explains why historically some economies survive and some fail (Rogoff 44). “The biggest danger lurks in the middle…for economies that combine weak and under-developed financial markets with poor regulation. Moreover, a country needs export earnings to support foreign debt payments, and export industries do not spring up overnight” (Rogoff 44).
Rogoff maintains that the “increasingly globalized world will still need a global economic forum,” and that the IMF stands as the most viable body to fulfill this role (Rogoff 46). An example, in Rogoff’s mind, is the “current patchwork system of exchange rates [that] seems too unstable to survive into the 22nd century. How will the world make the transition toward a more stable, coherent system? That is a global problem, and dealing with it requires a global perspective the IMF can help provide” (Rogoff 46)
The future of the IMF depends on its ability to direct its policies to adapt to a country’s reality, as opposed to the cookie-cutter approach that works for some and not for others. The economic situation of a country is as individual as its culture and language, yet the IMF prescribes general solutions without taking into consideration the needs of a particular nation state.
The governments of struggling countries have the right to emphasize and fight for national ownership; each country has the right to partner with the IMF to develop policies that go well with their particular economic circumstances.
Privatization and liberalization do not always work; the IMF needs to move toward fiscal responsibility and away from the moral hazard problem that the conditionality policy sets in motion. There is no reason why the borrowing nation and the IMF cannot draw up a conditionality agreement as a team; in its current manifestation, the borrowing country loses all agency in the process of accepting a loan from the IMF.
A more efficient conditionality policy would focus more on fiscal transparency, would provide a method to combat corruption within the borrowing nation’s government and would contain built in educational components to help economies transition to a more free market system, particularly in the area of regulation.
The IMF’s opportunity would be to rise as a world leader in economic education, as a resource for developing economies, rather than a last resort for desperate nations. To ensure an open, instructive and democratic political process, the IMF can consult with the borrowing nation to determine the most useful and specific conditionality agreement before the exchange of funds occurs.
The future of the IMF may also benefit from placing its considerable resources behind the development of a global currency. The global currency debate rages on decades after the death of its inventor and one of its chief proponents, John Maynard Keynes. “Price stability across borders was the impetus behind concepts put forward by both Keynes and White for an international currency” (Shelton 507). The IMF is perfectly poised to assemble its resources and power and mobilize them to realize Keynes’ vision.
John Maynard Keynes understood that debtor nations do not have power; they cannot do much expect hope to pay off their debts, and they are not in a position to effect policy. The main cause of financial crises is “the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit.
They can easily become trapped in a vicious spiral: the bigger their debt, the harder it is to generate a trade surplus” (Monbiot n.p.). Only wealthy countries – those that consistently show a trade surplus – have real power, so logic dictates that a change in the policies of wealthy nations would generate real and lasting economic change.
John Maynard Keynes – one of the architects of the original IMF and World Bank – devised a “solution [that] was an ingenious system for persuading the creditor nations to spend their surplus money back into the economies of the debtor nations. He proposed a global bank, which he called the International Clearing Union” (Monbiot n.p.)
The International Clearing Union would mint its own currency – what Keynes called the bancor – a unit that would be “exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations…[and]…be used to measure a country’s trade deficit or trade surplus. Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over a five-year period” (Monbiot n.p.).
In order to allow the system to work, Keynes devised a way for the countries that showed a surplus to want to get their bancor accounts equal to zero every year. “The members of the union would need a powerful incentive to clear their bancor accounts…to end up with neither a trade deficit nor a trade surplus….Keynes proposed that any country racking up a large trade deficit…equating to more than half of its bancor overdraft allowance…would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital” (Monbiot n.p.).
The cornerstone of Keynes’ bancor system depended on the law that “the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10 per cent.
It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated” (Monbiot n.p.). Theoretically, the IMF could operate such a system. Most definitely, member nations of the IMF with a surplus – were the International Clearing Union idea to finally take shape – “would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations’ deficits” (Monbiot n.p.)
In light of the current state of the global economy, “as the world struggles in the aftermath of a financial crisis that is compared to the Great Depression,” the IMF has not yet taken any share of the blame for the “conditions of global finance” that allowed such a disaster to occur in the first place (Shelton 506).
Were the IMF to undertake a leadership role in the development of the International Clearing Union and the bancor, it would function as an innovative force in the modernizing and streamlining of global finance. “Given that the purpose of money, besides providing a medium of exchange, is to serve as a meaningful unit of account and reliable store of value, the IMF’s reticence to embrace global monetary stability as a primary objective is troubling.
How can we speak of a global economy and a global marketplace, and not think in terms of a global monetary unit of account?” (Shelton 507). The IMF has the power and the influence to affect global markets, to affect global financial policy and to organize its member nations into a responsive voting unit. A global currency might provide the IMF with a purpose and presence beyond its current role as a last chance global lender.
Reference List
Kang, Seonjou. “Agree to Reform? The Political Economy of Conditionality.” European Journal of Political Research 46 (2007): 685–720. Print.
Marshall, Katherine. The World Bank: From Reconstruction to Development to Equity. New York: Taylor & Francis, 2008. Print.
Monbiot, George. “Keynes is Innocent: The Toxic Spawn of Bretton Woods was No Plan of His.” The Guardian 18 November 2008. Web.
Palast, Gregory. “IMF’s Four Steps to Damnation.” The Observer 29 April 2001. Print.
Rogoff, Kenneth. “The IMF Strikes Back.” Foreign Policy 134 (2003): 38-46. Print.
Shelton, Judy. “The IMF and its barbarous relic.” The Cato Journal 30.3 (2010): 505+.
Vreeland, James Raymond. The IMF and Economic Development. Cambridge: Cambridge University Press, 2003. Print.