International Monetary Fund
Project submitted in partial fulfillment of the course in
M.Com. Part I
Waghmare Shivangi Ashok Anjali
University Of Mumbai
V.G Vaze College
I hereby declare that the Project titled ‘International Monetary Fund’ Submitted
by me is based on actual work carried out by me under the guidance and
supervision of Prof.Kurusu and Prof.Rangasai. The contents of project are not
copied from any other source such as internet, earlier projects, text book etc. It is
further to state that this work has not been submitted for any other degree of this or
any other university.
Waghmare Shivangi Ashok Anjali
This is to certify that the project Titled ―International Monetary Fund‖ is being
submitted by me in partial fulfillment of the course in Economics At M.Com. Part
I during 2013-14.
Waghmare Shivangi Ashok Anjali
At the Beginning I could like to thank God for its showers of blessings. The
desire for explaining the project given by Prof.Kurusu and Prof.Rangasai. I am
very thankful to their guidelines, support and the time given by them.
I would fail in my duties if I doesn‘t thank my Parents who are the
pillars of my life. Finally I will express my gratitude to all those who directly or
indirectly helped me in completing my project.
The International Monetary Fund (IMF) is an organization of 188 countries, working to foster
global monetary cooperation, secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty around the world.
After 55 years of existence there are strongly conflicting views on the importance and
role of the IMF for today‘s international economy, and on its effectiveness. On the one hand
there are those who see the Fund as having adapted well to the changing world environment with
perhaps the need for some reforms to the International Architecture. On the other hand are those
who believe that its useful time has passed in the environment of exchange rate flexibility and
open capital markets. These radically conflicting views require the need for a balanced
perspective on the role and performance of the IMF within the context of its historical evolution.
In this paper we describe what the IMF is and what it does. We consider its origins as the
guardian of the Bretton Woods adjustable peg exchange rate system and financier of temporary
current account deficits for advanced countries, to its present primary roles as development
financier and crisis manager for the emerging world. We consider the externalities or market
failures that the IMF is believed by many to correct and the public goods that the IMF provides.
Critics of the IMF downplay the extent of market failure and the scope of public goods provided.
They attach greater importance to market solutions. We consider their views as well.
The reincarnation of the Fund occurred against the backdrop of a series
of major economic and political shocks: the oil price shocks of the 1970‘s, the debt crisis of the
80‘s, the collapse of the Soviet empire in the late 1980‘s, and the recent emerging market crises
in Mexico and East Asia. These events served as a template for the creation of new Fund
responsibilities, facilities and enhanced resources. As we document, the expansion of the Fund
served different constituencies: the United States, the other advanced countries, the emerging
countries and the very poor LDC‘s. Most importantly, the evolution of the IMF has reflected the
geopolitics of the international economy, which we discuss in Section 6. We conclude by raising
some questions that should be considered in the course of a serious evaluation of the IMF‘s role
at the beginning of a new millennium.
IMF "Headquarters 1" in Washington, D.C.
The International Monetary Fund was originally laid out as a part of the Bretton Woods system
exchange agreement in 1944.During the earlier Great Depression, countries sharply raised
barriers to foreign trade in an attempt to improve their failing economies. This led to the
devaluation of national currencies and a decline in world trade.
This breakdown in international monetary co-operation created a need for oversight. The
representatives of 45 governments met at the Bretton Woods Conference in the Mount
Washington Hotel in the area of Bretton Woods, New Hampshire in the United States, to discuss
framework for post-World War II international economic co-operation. The participating
countries were concerned with the rebuilding of Europe and the global economic system after the
There were two views on the role the IMF should assume as a global economic institution.
British economist John Maynard Keynes imagined that the IMF would be a cooperative fund
upon which member states could draw to maintain economic activity and employment through
periodic crises. This view suggested an IMF that helped governments and to act as the US
government had during the New Deal in response to World War II. American delegate Harry
Dexter White foresaw an IMF that functioned more like a bank, making sure that borrowing
states could repay their debts on time. Most of White's plan was incorporated into the final acts
adopted at Bretton Woods.
The International Monetary Fund formally came into existence on 27 December 1945, when the
first 29 countries ratified its Articles of Agreement.By the end of 1946 the Fund had grown to 39
members. On 1 March 1947, the IMF began its financial operations, and on 8 May France
became the first country to borrow from it.
The IMF was one of the key organisations of the international economic system; its design
allowed the system to balance the rebuilding of international capitalism with the maximisation of
national economic sovereignty and human welfare, also known as embedded liberalism. The
IMF's influence in the global economy steadily increased as it accumulated more members. The
increase reflected in particular the attainment of political independence by many African
countries and more recently the 1991 dissolution of the Soviet Union because most countries in
the Soviet sphere of influence did not join the IMF.
The 188 members of the IMF include 187 members of the UN and the Republic of Kosovo. All
members of the IMF are also International Bank for Reconstruction and Development (IBRD)
members and vice versa.
Former members are Cuba (which left in 1964) and the Republic of China, which was ejected
from the UN in 1980 after losing the support of the US President Jimmy Carter and was replaced
by the People's Republic of China. However, "Taiwan Province of China" is still listed in the
official IMF indices.
Apart from Cuba, the other UN states that do not belong to the IMF are Andorra, Liechtenstein,
Monaco, Nauru and North Korea.
The former Czechoslovakia was expelled in 1954 for "failing to provide required data" and was
readmitted in 1990, after the Velvet Revolution. Poland withdrew in 1950—allegedly pressured
by the Soviet Union—but returned in 1986.
Board of Governors
The Board of Governors consists of one governor and one alternate governor for each member
country. Each member country appoints its two governors. The Board normally meets once a
year and is responsible for electing or appointing executive directors to the Executive Board.
While the Board of Governors is officially responsible for approving quota increases, special
drawing right allocations, the admittance of new members, compulsory withdrawal of members,
and amendments to the Articles of Agreement and By-Laws, in practice it has delegated most of
its powers to the IMF's Executive Board.
The Board of Governors is advised by the International Monetary and Financial Committee and
the Development Committee. The International Monetary and Financial Committee has 24
members and monitors developments in global liquidity and the transfer of resources to
developing countries. The Development Committee has 25 members and advises on critical
development issues and on financial resources required to promote economic development in
developing countries. They also advise on trade and global environmental issues.
24 Executive Directors make up Executive Board. The Executive Directors represent all 188
member-countries. Countries with large economies have their own Executive Director, but most
countries are grouped in constituencies representing four or more countries.
Following the 2008 Amendment on Voice and Participation, eight countries each appoint an
Executive Director: the United States, Japan, Germany, France, the United Kingdom, China, the
Russian Federation, and Saudi Arabia. The remaining 16 Directors represent constituencies
consisting of 4 to 22 countries. The Executive Director representing the largest constituency of
22 countries accounts for 1.55% of the vote.
The IMF is led by a managing director, who is head of the staff and serves as Chairman of the
Executive Board. The managing director is assisted by a First Deputy managing director and
three other Deputy Managing Directors. 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.
In 2011 the world's largest developing countries, the BRIC nations, issued a statement declaring
that the tradition of appointing a European as managing director undermined the legitimacy of
the IMF and called for the appointment to be merit-based. The head of the IMF's European
department is António Borges of Portugal, former deputy governor of the Bank of Portugal. He
was elected in October 2010
Voting power in the IMF is based on a quota system. Each member has a number of "basic
votes" (each member's number of basic votes equals 5.502% of the total votes) plus one
additional vote for each Special Drawing Right (SDR) of 100,000 of a member country's quota.
The Special Drawing Right is the unit of account of the IMF and represents a claim to currency.
It is based on a basket of key international currencies. The basic votes generate a slight bias in
favour of small countries, but the additional votes determined by SDR outweigh this bias.
Sources of Fund financing:
(a) members quota subscriptions (currently about $305 billion);
(b) borrowing to supplement the resources available from quotas (e.g., General
Arrangements to Borrow (GAB) since 1962; New Arrangements to Borrow (NAB) in 1997);
(c) Income from investments (Article XII, Section 6(f)(i)).
o Each member of the Fund is assigned a quota which broadly determined by its
economic position relative to other members (economic considerations include
the member‘s GDP, volume of current account transactions, and official reserves)
o Determines a member‘s : (i) maximum financial commitment to the IMF, (ii)
voting power in the IMF, (iii) size of its access to financial resources and (iv)
share in any allocation of ―Special Drawing Rights‖ (SDR)
o Quotas are reviewed every 5 years to determine whether any adjustments are
needed in light of the growth of the world economy and changes in individual
countries‘ economic positions. The Thirteenth general review is to be completed
by January 30, 2008.
o Members must pay subscription equal to their quotas. Up to 25 percent must be
paid in reserve assets specified by the IMF (foreign currencies acceptable to the
IMF or SDRs); the balance may be paid in the member‘s own currency
o Voting power of each member
Each member has 250 votes (referred to as ―basic votes‖) plus one vote
per 100,000 SDRs of quota. Significance of the basic votes have
diminished from their original level of 11 percent of total votes to
approximately 2 percent because of quota increases
o A member‘s quota cannot be changed without its consent (Article III, Section
o If a member consents to a reduction of its quota, the Fund shall within 60 days
pay to the member an amount equal to the reduction (Article III, Section 3(c))
Over time some member‘s quota‘s and representation in the Fund got out of line with the
members‘ relative positions in the world economy. Thus there was need for reform of quota and
Article I(v) – ―To give confidence to members by making the general resources of the
Fund temporarily available to them under adequate safeguards, thus providing them with
opportunity to correct maladjustments in their balance of payments...‖
IMF financing can only be provided to deal with balance of payments problems; cannot
be provided for other purposes or specific projects. The requested use of the resources
must be consistent with the provisions of the Articles and policies adopted under the
IMF financing from the GRA does not take the form of loans, but rather the member
receiving assistance ―purchases‖ the currencies of other members that have strong
balances of payments positions or SDRs with its own currency. Fund arrangements are
not international agreements.
IMF‘s resources are only meant for temporary use (―revolving‖ character) – a member is
required to repurchase its currency within a specified period of time.
IMF financing is provided under adequate safeguards
Only if a member is prepared to take the steps necessary to address its
balance of payments difficulties
Achieved through the member implementing a program of economic
reform that deals with problem
Member can purchase the reserve tranche subject to representation of
balance of payments need which cannot be challenged ex-ante by the Fund
and free from conditionality, charges, or repurchase obligations
IMF financing is subject to access limits – provided on the basis of quota and the amount
of access is normally subject to maximum limits specified by the IMF
IMF makes financial resources available to members in accordance with policies it
adopts. Special policies may be adopted for special balance of payment problems to assist
members to solve their problems in a manner consistent with the provisions of the
Articles of Agreement (Article V, Section 3). Examples of policies: policy on stand-by
arrangements, extended Fund facility, supplemental reserve facility, emergency natural
disaster and emergency post conflict assistance).
A member can walk away from the arrangement/program and repay outstanding Fund
resources at any time.
Conditionality seeks to ensure that IMF resources are provided to assist the member in
resolving its balance of payments problems in a manner that is consistent with the
Articles and establishes adequate safeguards for the temporary use of IMF resources.
Principle of uniform treatment - the use of IMF resources is based on the uniform and
nondiscriminatory treatment of members.
Members must provide the Fund with information necessary for it to carry out its
functions (Article VIII, Section 5).
The Fund also provides concessional financing to qualifying members under the Poverty
Reduction and Growth Facility (PRGF) and Exogenous Shocks Facility (ESF).
Some other obligations under the Articles of Agreement
Article V, Section 3(e): Obligations to ensure exchange of members‘ currencies
for freely usable currencies
Article VIII, Section 5: Obligation to Furnish Information
The IMF relies on information provided by members in order to carry out
its mandate and functions effectively. IMF acts ―as a centre for the
collection and exchange of information on monetary and financial
The procedures for obtaining data from members are founded on a
cooperative approach and trust in members to provide the required
Information is important for effective surveillance and ensuring that the
IMF‘s resources are used for their intended purposes. Section 5(a) requires
members to provide the IMF with the information ―necessary‖ for its
activities; thus Article VIII, Section 5 applies both in the context of use of
the IMF resources and surveillance.
The required minimum of data is listed in Article VIII, Section 5. The list
was expanded by Executive Board Decision No. 13183-(04/10), January
4, 2004 on Strengthening the Effectiveness of Article VIII, Section 5
Obligation to provide information is continuous, not just limited to
provision of data at time of Article IV consultations.
Obligation is not absolute, must take into account varying abilities of members to provide
information—defense of capacity; ―benefit of any doubt‖ given to member in assessing
its ability to provide information (Article VIII, Section 5(b)):
Section 5(b) only calls for information to be furnished ―in as
detailed and accurate a manner as is practicable and, so far as
possible, to avoid mere estimates‖.
Not in such detail that affairs of individuals or corporations are
International investment position (IIP): so far as it is possible to
furnish this information.
No breach of obligation if failure to provide information/accurate
information is due to lack of capacity.
Whether a member has capacity is determined on a case-by-case
Members have an ongoing obligation to improve their reporting
systems and the accuracy of information provided.
Section 5(c) deals mostly with the IMF‘s authority to enter into voluntary
arrangements with members ―to obtain further information‖.
Article VIII, Section 2: members shall not, without the approval of the Fund,
impose restrictions on the making of payments and transfers for current
Payments for current transactions means payments which are not for the
purpose of transferring capital (Article XXX)
The Fund may approve exchange restrictions and multiple currency
practices under certain circumstances (e.g., if necessary (imposed for BOP
reasons), temporary and non-discriminatory, if imposed for national
Article VIII, Section 3: members shall not, without Fund‘s approval, engage, or
permit any of its fiscal agencies to engage in, any discriminatory currency
arrangements or multiple currency practices. Exception – transitional
arrangements under Article XIV.
Article VIII, Section 4: obligation on convertibility of foreign-held balances
Article XIV allows members to avail themselves of transitional arrangements
before accepting obligations of Article VIII, Sections 2,3 and 4. A member may
―maintain and adapt to changing circumstances the exchange restrictions that
were in effect on the date on which it became a member‖ but should make efforts
to remove those restrictions as soon as they can.
Article VIII, Section 7: members shall collaborate with the Fund and with other
members to ensure that the members‘ policies with respect to reserve assets shall
be consistent with the objectives of promoting better international surveillance of
Article IX: members shall grant certain privileges and immunities to the Fund, its
officers and employees, premises, property, assets and archives
Article XI: relations with non-members. Members cannot engage in transactions
or cooperate with non-members or with persons in non-member territories if such
transactions or cooperation is contrary to the provisions of the Articles of
Article XII, Section 8: the Fund may, by a 70 percent majority of the total voting
power, decide to publish a report made to a member regarding its monetary or
economic conditions and developments which directly tend to produce a serious
disequilibrium in the international balance of payment of members.
Services provided under Article V, Section 2(b) shall not impose any obligation
on a member without its consent
Administration of the Poverty Reduction and Growth Facility and Exogenous
Shocks Facility (PRGF-ESF) Trust (1987) and PRGF-HIPC Trust are examples of
financial services provided under this Article
The PRGF is a concessional lending facility for low-income members
(annual interest rate of 0.5 percent, loan maturity stretching from five-anda-half to 10 years).
Resources from the PRGF-HIPC Trust are used for debt relief operations.
Other examples of technical assistance: in fiscal area (drafting of tax or budget
legislation); in statistics (helping to set a framework for collection and analysis of
data); banking sector reform (banking laws, supervision matters, financial sector
restructuring); law reform (judicial reform). Mainly in support of private sector
development. Reports on Observance of Standards and Codes (ROSCs):
summarize countries‘ observance of certain internationally recognized standards
and codes. The Fund has recognized 12 areas and associated standards:
accounting; auditing; anti-money laundering and countering the financing of
terrorism (AML/CFT); banking supervision; corporate governance; data
dissemination; fiscal transparency; insolvency and creditor rights; insurance
supervision; monetary and financial policy transparency; payments systems;
securities regulation; and AML/CFT;
are prepared and published at the request of the member country.
Financial Sector Assessment Program (FSAP): a joint IMF and World Bank effort
introduced in May 1999 aimed at increasing the effectiveness of efforts to
promote the soundness of financial systems in member countries.
The FSAP forms the basis of Financial System Stability Assessments
(FSSAs), in which IMF staff address issues of relevance to IMF
surveillance, including risks to macroeconomic stability stemming from
the financial sector
Current challenge – better incorporate financial sector work into Fund
Technical services are provided by the IMF staff under the authority of the
Key IMF activities
The IMF supports its membership by providing policy advice to governments and central banks
based on analysis of economic trends and cross-country experiences, research, statistics,
forecasts, and analysis based on tracking of global, regional, and individual economies and
markets; loans to help countries overcome economic difficulties; concessional loans to help fight
poverty in developing countries; and technical assistance and training to help countries improve
the management of their economies.
The International Monetary Fund (IMF) is an international organization that was initiated in
1944 at the Bretton Woods Conference and formally created in 1945 by 29 member countries.
The IMF's stated goal was to assist in the reconstruction of the world's international payment
system post–World War II. Countries contribute money to a pool through a quota system from
which countries with payment imbalances can borrow funds temporarily. Through this activity
and others such as surveillance of its members' economies and the demand for self-correcting
policies, the IMF works to improve the economies of its member countries.
The IMF describes itself as ―an organization of 188 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty around the world.‖The organization's
stated objectives are to promote international economic co-operation, international trade,
employment, and exchange rate stability, including by making financial resources available to
member countries to meet balance of payments needs. Its headquarters are in Washington, D.C.,
The IMF works to foster global growth and economic stability. It provides policy advice and
financing to members in economic difficulties and also works with developing nations to help
them achieve macroeconomic stability and reduce poverty. The rationale for this is that private
international capital markets function imperfectly and many countries have limited access to
financial markets. Such market imperfections, together with balance of payments financing,
provide the justification for official financing, without which many countries could only correct
large external payment imbalances through measures with adverse effects on both national and
international economic prosperity. The IMF can provide other sources of financing to countries
in need that would not be available in the absence of an economic stabilization program
supported by the Fund.
Upon initial IMF formation, its two primary functions were: to oversee the fixed exchange rate
arrangements between countries, thus helping national governments manage their exchange rates
and allowing these governments to prioritise economic growth, and to provide short-term capital
to aid balance-of-payments. This assistance was meant to prevent the spread of international
economic crises. The Fund was also intended to help mend the pieces of the international
economy post the Great Depression and World War II.
The IMF's role was fundamentally altered after the floating exchange rates post 1971. It shifted
to examining the economic policies of countries with IMF loan agreements to determine if a
shortage of capital was due to economic fluctuations or economic policy. The IMF also
researched what types of government policy would ensure economic recovery. The new
challenge is to promote and implement policy that reduces the frequency of crises among the
emerging market countries, especially the middle-income countries that are open to massive
capital outflows. Rather than maintaining a position of oversight of only exchange rates, their
function became one of ―surveillance‖ of the overall macroeconomic performance of its member
countries. Their role became a lot more active because the IMF now manages economic policy
instead of just exchange rates.
In addition, the IMF negotiates conditions on lending and loans under their policy of
conditionality, which was established in the 1950s. Low-income countries can borrow on
concessional terms, which means there is a period of time with no interest rates, through the
Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility
(RCF). Non-concessional loans, which include interest rates, are provided mainly through StandBy Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line
(PLL), and the Extended Fund Facility. The IMF provides emergency assistance via the newly
introduced Rapid Financing Instrument (RFI) to all its members facing urgent balance of
Surveillance of the global economy
The IMF is mandated to oversee the international monetary and financial system and
monitor the economic and financial policies of its 188 member countries. This activity is known
as surveillance and facilitates international co-operation. Since the demise of the Bretton
Woods system of fixed exchange rates in the early 1970s, surveillance has evolved largely by
way of changes in procedures rather than through the adoption of new obligations. The
responsibilities of the Fund changed from those of guardian to those of overseer of members‘
The Fund typically analyses the appropriateness of each member country‘s economic and
financial policies for achieving orderly economic growth, and assesses the consequences of these
policies for other countries and for the global economy.
In 1995 the International Monetary Fund began work on data dissemination standards with the
view of guiding IMF member countries to disseminate their economic and financial data to the
public. The International Monetary and Financial Committee (IMFC) endorsed the guidelines for
the dissemination standards and they were split into two tiers: The General Data Dissemination
System (GDDS) and the Special Data Dissemination Standard (SDDS).
The International Monetary Fund executive board approved the SDDS and GDDS in 1996 and
1997 respectively, and subsequent amendments were published in a revised Guide to the General
Data Dissemination System. The system is aimed primarily at statisticians and aims to improve
many aspects of statistical systems in a country. It is also part of the World Bank Millennium
Development Goals and Poverty Reduction Strategic Papers.
The primary objective of the GDDS is to encourage IMF member countries to build a framework
to improve data quality and increase statistical capacity building. Upon building a framework, a
country can evaluate statistical needs, set priorities in improving the timeliness, transparency,
reliability and accessibility of financial and economic data. Some countries initially used the
GDDS, but later upgraded to SDDS.
Conditionality of loans
IMF conditionality is a set of policies or conditions that the IMF requires in exchange for
financial resources. The IMF does not require collateral from countries for loans but rather
requires the government seeking assistance to correct its macroeconomic imbalances in the form
of policy reform. If the conditions are not met, the funds are withheld. Conditionality is
perhaps the most controversial aspect of IMF policies. The concept of conditionality was
introduced in an Executive Board decision in 1952 and later incorporated in the Articles of
Conditionality is associated with economic theory as well as an enforcement mechanism for
repayment. Stemming primarily from the work of Jacques Polak in the Fund's research
department, the theoretical underpinning of conditionality was the "monetary approach to the
balance of payments.
Some of the conditions for structural adjustment can include:
Cutting expenditures, also known as austerity.
Focusing economic output on direct export and resource extraction,
Devaluation of currencies,
Trade liberalisation, or lifting import and export restrictions,
Increasing the stability of investment (by supplementing foreign direct investment with
the opening of domestic stock markets),
Balancing budgets and not overspending,
Removing price controls and state subsidies,
Privatization, or divestiture of all or part of state-owned enterprises,
Enhancing the rights of foreign investors vis-a-vis national laws,
Improving governance and fighting corruption.
These loan conditions ensure that the borrowing country will be able to repay the Fund and that
the country won't attempt to solve their balance of payment problems in a way that would
negatively impact the international economy. The incentive problem of moral hazard, which is
the actions of economic agents maximising their own utility to the detriment of others when they
do not bear the full consequences of their actions, is mitigated through conditions rather than
providing collateral; countries in need of IMF loans do not generally possess internationally
valuable collateral anyway.
Conditionality also reassures the IMF that the funds lent to them will be used for the purposes
defined by the Articles of Agreement and provides safeguards that country will be able to rectify
its macroeconomic and structural imbalances. In the judgment of the Fund, the adoption by the
member of certain corrective measures or policies will allow it to repay the Fund, thereby
ensuring that the same resources will be available to support other members.
As of 2004, borrowing countries have had a very good track record for repaying credit extended
under the Fund's regular lending facilities with full interest over the duration of the loan. This
indicates that Fund lending does not impose a burden on creditor countries, as lending countries
receive market-rate interest on most of their quota subscription, plus any of their own-currency
subscriptions that are loaned out by the Fund, plus all of the reserve assets that they provide the
The IMF is only one of many international organisations and it is a generalist institution for
macroeconomic issues only; its core areas of concern in developing countries are very narrow.
One proposed reform is a movement towards close partnership with other specialist agencies to
better productivity. The IMF has little to no communication with other international
organisations such as UN specialist agencies like UNICEF, the Food and Agriculture
Organization (FAO), and the United Nations Development Program (UNDP).
Jeffrey Sachs argues in The End of Poverty: "international institutions like the International
Monetary Fund (IMF) and the World Bank have the brightest economists and the lead in
advising poor countries on how to break out of poverty, but the problem is development
economics". Development economics needs the reform, not the IMF. He also notes that IMF loan
conditions need to be partnered with other reforms such as trade reform in developed nations,
debt cancellation, and increased financial assistance for investments in basic infrastructure to be
effective. IMF loan conditions cannot stand alone and produce change; they need to be partnered
with other reforms or other conditions as applicable.
Effects of the quota system
The IMF's quota system was created to raise funds for loans. Each IMF member country is
assigned a quota, or contribution, that reflects the country's relative size in the global economy.
Each member's quota also determines its relative voting power. Thus, financial contributions
from member governments are linked to voting power in the organisation.
This system follows the logic of a shareholder-controlled organization, wealthy countries have
more say in the making and revision of rules. Since decision making at the IMF reflects each
member's relative economic position in the world, wealthier countries that provide more money
to the fund have more influence in the IMF than poorer members that contribute less;
nonetheless, the IMF focuses on redistribution.
Quotas are normally reviewed every five years and can be increased when deemed necessary by
the Board of Governors. Currently, reforming the representation of developing countries within
the IMF has been suggested. These countries' economies represent a large portion of the global
economic system but this is not reflected in the IMF's decision making process through the
nature of the quota system. Joseph Stiglitz argues "There is a need to provide more effective
voice and representation for developing countries, which now represent a much larger portion of
world economic activity since 1944, when the IMF was created."In 2008, a number of quota
reforms were passed including shifting 6% of quota shares to dynamic emerging markets and
United States influence
A second criticism is that the United States' transition to neo liberalism and global capitalism
also led to a change in the identity and functions of international institutions like the IMF.
Because of the high involvement and voting power of the United States, the global economic
ideology could effectively be transformed to match the US's. This is consistent with the IMF's
function change during the 1970s after the Nixon Shock ended the Bretton Woods system.
Another criticism is that allies of the United States are able to receive bigger loans with fewer
Overcoming borrower/creditor divide
The IMF's membership is divided along income lines: certain countries provide the financial
resources while others use these resources. Both developed country "creditors" and developing
country "borrowers" are members of the IMF. The developed countries provide the financial
resources but rarely enter into IMF loan agreements; they are the creditors. Conversely, the
developing countries use the lending services but contribute little to the pool of money available
to lend because their quotas are smaller; they are the borrowers. Thus, tension is created around
governance issues because these two groups, creditors and borrowers, have fundamentally
different interests in terms of the conditions of these loans.
The criticism is that the system of voting power distribution through a quota system
institutionalises borrower subordination and creditor dominance. The resulting division of the
Fund's membership into borrowers and non-borrowers has increased the controversy around
conditionality because the borrowing members are interested in making loan access easier while
the creditor members want to maintain reassurance that the loans will be repaid
IMF and globalization
Globalization encompasses three institutions: global financial markets and transnational
companies, national governments linked to each other in economic and military alliances led by
the US, and rising "global governments" such as World Trade Organization (WTO), IMF, and
World Bank. Charles Derber argues in his book People Before Profit, "These interacting
institutions create a new global power system where sovereignty is globalized, taking power and
constitutional authority away from nations and giving it to global markets and international
bodies."Titus Alexander argues that this system institutionalises global inequality between
western countries and the Majority World in a form of global apartheid, in which the IMF is a
The establishment of globalised economic institutions has been both a symptom of and a
stimulus for globalisation. The development of the World Bank, the IMF regional development
banks such as the European Bank for Reconstruction and Development (EBRD), and, more
recently, multilateral trade institutions such as the WTO indicates the trend away from the
dominance of the state as the exclusive unit of analysis in international affairs. Globalization has
thus been transformative in terms of a reconceptualising of state sovereignty.
Following US President Bill Clinton's administration's aggressive financial deregulation
campaign in the 1990s, globalisation leaders overturned long-standing restrictions by
governments that limited foreign ownership of their banks, deregulated currency exchange, and
eliminated restrictions on how quickly money could be withdrawn by foreign investors.
Overseas Development Institute (ODI) research undertaken in 1980 pointed to five main
criticisms of the IMF which support the analysis that it is a pillar of what activist Titus
Alexander calls global apartheid. Firstly, developed countries were seen to have a more
dominant role and control over less developed countries (LDCs) primarily due to the
Western bias towards a capitalist form of the world economy with professional staff
being Western trained and believing in the efficacy of market-oriented policies.
Secondly, the Fund worked on the incorrect assumption that all payments disequilibria
were caused domestically. The Group of 24 (G-24), on behalf of LDC members, and the
United Nations Conference on Trade and Development (UNCTAD) complained that the
Fund did not distinguish sufficiently between disequilibria with predominantly external
as opposed to internal causes. This criticism was voiced in the aftermath of the 1973 oil
crisis. Then LDCs found themselves with payments deficits due to adverse changes in
their terms of trade, with the Fund prescribing stabilisation programmes similar to those
suggested for deficits caused by government over-spending. Faced with long-term,
externally generated disequilibria, the Group of 24 argued that LDCs should be allowed
more time to adjust their economies and that the policies needed to achieve such
adjustment are different from demand-management programmes devised primarily with
internally generated disequilibria in mind.
The third criticism was that the effects of Fund policies were anti-developmental. The
deflationary effects of IMF programmes quickly led to losses of output and employment
in economies where incomes were low and unemployment was high. Moreover, it was
sometimes claimed that the burden of the deflationary effects was borne
disproportionately by the poor.
Fourthly is the accusation that harsh policy conditions were self-defeating where a
vicious circle developed when members refused loans due to harsh conditionality,
making their economy worse and eventually taking loans as a drastic medicine.
Lastly is the point that the Fund's policies lack a clear economic rationale. Its policy
foundations were theoretical and unclear due to differing opinions and departmental
rivalries whilst dealing with countries with widely varying economic circumstances.
ODI conclusions were that the Fund's very nature of promoting market-oriented
economic approach attracted unavoidable criticism, as LDC governments were likely to
object when in a tight corner. Yet, on the other hand, the Fund could provide a 'scapegoat
service' where governments could take loans as a last resort, whilst blaming international
bankers for any economic downfall. The ODI conceded that the fund was to some extent
insensitive to political aspirations of LDCs, while its policy conditions were inflexible.
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 IMFinduced budget restrictions—which undercut the government's ability to sustain national
infrastructure even in crucial areas such as health, education, and security—and
privatisation of strategically vital national resources.
Others attribute the crisis to Argentina's mis designed fiscal federalism, which caused sub
national 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 toward 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.
In an interview, the former Romanian Prime Minister Călin Popescu-Tăriceanu claimed that
"Since 2005, IMF is constantly making mistakes when it appreciates the country's economic
Support of military dictatorships
The role of the Bretton Woods institutions has been controversial since the late Cold War period,
due to claims that the IMF policy makers supported military dictatorships friendly to American
and European corporations and other anti-communist regimes. Critics also claim that the IMF is
generally apathetic or hostile to their views of human rights, and labour rights. The controversy
has helped spark the Anti-globalization movement.
Arguments in favour of the IMF say that economic stability is a precursor to democracy;
however, critics highlight various examples in which democratised countries fell after receiving
Impact on access to food
A number of civil society organisations have criticised the IMF's policies for their impact on
people's access to food, particularly in developing countries. In October 2008, former US
president Bill Clinton presented a speech to the United Nations World Food Day, which
criticised the World Bank and IMF for their policies on food and agriculture:
We need the World Bank, the IMF, all the big foundations, and all the governments to admit
that, for 30 years, we all blew it, including me when I was president. We were wrong to believe
that food was like some other product in international trade, and we all have to go back to a more
responsible and sustainable form of agriculture.
—Former U.S. president Bill Clinton, Speech at United Nations World Food Day, October 16,
Impact on public health
In 2009 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
In 2009, a book by Rick Rowden titled The Deadly Ideas of Neo liberalism: How the IMF has
Undermined Public Health and the Fight Against AIDS, claimed that the IMF‘s monetarist
approach towards prioritising price stability (low inflation) and fiscal restraint (low budget
deficits) was unnecessarily restrictive and has prevented developing countries from being able to
scale up long-term public investment as a percent of GDP in the underlying public health
infrastructure. The book claimed the consequences have been chronically underfunded public
health systems, leading to dilapidated health infrastructure, inadequate numbers of health
personnel, and demoralising working conditions that have fuelled the ―push factors‖ driving the
brain drain of nurses migrating from poor countries to rich ones, all of which has undermined
public health systems and the fight against HIV/AIDS in developing countries.
Impact on environment
IMF policies have been repeatedly criticised for making it difficult for indebted countries to
avoid ecosystem-damaging projects that generate cash flow, in particular oil, coal, and forestdestroying lumber and agriculture projects. Ecuador for example had to defy IMF advice
repeatedly to pursue the protection of its rain forests, though paradoxically this need was cited in
IMF argument to support that country. The IMF acknowledged this paradox in a March 2010
staff position report which proposed the IMF Green Fund, a mechanism to issue special drawing
rights directly to pay for climate harm prevention and potentially other ecological protection as
pursued generally by other environmental finance.
While the response to these moves was generally positive possibly because ecological protection
and energy and infrastructure transformation are more politically neutral than pressures to
change social policy. Some experts voiced concern that the IMF was not representative, and that
the IMF proposals to generate only US$200 billion a year by 2020 with the SDRs as seed funds,
did not go far enough to undo the general incentive to pursue destructive projects inherent in the
world commodity trading and banking systems—criticisms often levelled at the World Trade
Organization and large global banking institutions.
In the context of the May 2010 European banking crisis, some observers also noted that Spain
and California, two troubled economies within Europe and the United States respectively, and
also Germany, the primary and politically most fragile supporter of a euro currency bailout
would benefit from IMF recognition of their leadership in green technology, and directly from
Green Fund–generated demand for their exports, which might also improve their credit standing
with international bankers.
Giving more say to emerging markets produce a shift of 6 percent of quota shares to
dynamic emerging market and developing countries.(BRICS: Brazil, Russia, India, and
Protecting the voice of low-income countries. Without these measures, this group of
countries would have seen its voting shares decline.
Timeline for implementing the reform. The Board of Governors, must ratify the new
agreement by an 85 percent majority before it comes into effect.
Conditionality and Structural Adjustment
The impact of the Washington Consensus has been felt mainly through the IMF‘s increasing use
of loan conditions (‗conditionality‘) to force policy change in developing countries. The use of
loan conditions can be traced to section 1(v) of the Fund‘s Articles of Agreement, which
encourages the IMF to make its funds ―temporarily available . . . under adequate safeguards‖.
But while conditions had, in the 1950s and 1960s, been used to promote global financial stability
(as per the IMF‘s Articles of Agreement) in the late 1970s and 1980s, loan conditions began to
be used as "structural adjustment" tools, and conditionality – structural change in client countries
– became a central focus for the IMF‘s work.
Structural adjustment policies mean across-the-board privatization of public utilities and publicly
owned industries. They mean the slashing of government budgets, leading to cutbacks in
spending on health care and education. They mean focusing resources on growing export crops
for industrial countries rather than supporting family farms and growing food for local
communities. And, as their imposition in country after country in Latin America, Africa, and
Asia has shown, they lead to deeper inequality and environmental destruction. For decades
people in the Third World have protested the way the IMF and World Bank.
In 1996, a new debt relief initiative for the heavily-indebted poor countries—the HIPC
Initiative—was launched by the IMF and the World Bank.1 The HIPC Initiative was intended to
resolve the debt problems of the most heavily-indebted poor countries (originally 41 countries,
mostly in Africa) with total debt nearing $200 billion. Worldwide events in the 1970s and
1980s—particularly the oil price shocks, high interest rates and recessions in industrial countries,
and then weak commodity prices—were major contributors to the debt build-up in the HIPC
"Research shows clearly that the policies prescribed by the IMF have, among other things, not
produced strong or sustainable growth; opened countries, communities and families to new
vulnerabilities; exacerbated inequalities, which puts a brake on growth, stresses political systems
to the breaking point, and engenders new and powerful forms of criminality and social tension.
Bolivia has been a model student of such "reforms", and is now also a showcase for the
contradictions and crisis these policies engender." The IMF "supports the rapid conclusion of
obscure deals made by un-transparent multinationals and unaccountable politicians, deals in
which it is impossible for people to evaluate or have a choice." observes researcher Tom Kruse
It appears some of the debt restructuring for IMF happens through Paris club and London Club.
Paris Club is the name given to the arrangements through which countries reschedule their
official DEBT; that is, money borrowed from other governments rather than BANKS or private
FIRMS. The club is based on Avenue Kléber in Paris. Its members are the 19 founders of the
OECD as well as Russia. Other institutions such as the WORLD BANK attend in an informal
role. Rescheduling requires the consensus agreement of members and must not favour one
CREDITOR nation over another. Private debt rescheduling takes place through the London
Power balances & decision-making
From its beginning, the IMF was dominated by the rich industrialised countries - and particularly
by the USA - which have tightly controlled the Fund‘s agenda, both through the IMF‘s formal
decision-making structure, and through informal influence. Formal decision-making power in the
Fund is held by two bodies: the Board of Governors, and the Executive Board. Everyday
management of the Fund is the responsibility of the ―Managing Director‖ – selected by and chair
of the Executive Board. There is an unwritten agreement that every IMF Managing Director
should come from Europe, and every first Deputy Managing Director is American. This has held
true for the entire life of the Fund. Stiglitz points out that the managing director of the IMF is
chosen ―behind closed doors, and it has never even been viewed as a prerequisite that the head
should have have any experience in the developing world.‖ (Stiglitz 2003, p. 19).
In contrast to democratic institutions, formal power on the IMF‘s boards is distributed according
to the economic power of its members. Voting is determined by ―quotas‖, which are in turn
determined by the size of a country‘s contribution ot the Fund. The USA – as the world‘s largest
economy – holds a significant 17 per cent of the total voting power. The G8 – the group of eight
powerful industrialised nations – controls a vote of 48% of the votes on the Fund‘s board,
leaving only 52 per cent for the other 176 IMF members. In stark comparison to the influence of
the rich countries, the largest African member of the Fund – South Africa – holds just 0.87 per
cent of the total voting power. This political structure has allowed rich countries to effectively
control the agenda of the IMF, and has denied a real voice to the poor countries which are the
recipients of Fund policies.
Public relations problems and contracts
In 2000 the IMF's Managing Director, Michel Camdessus, stated that "We are not seen to be
accountable, and some of our member governments from time to time find it convenient not to
express their public support." At the time PR Week noted that "The McLean, VA-based Wirthlin
Group conducted a global image survey for the IMF‘s external affairs department,
while Edelman's DC outpost presented suggestions to the organization's executive board on ways
to upgrade PR. The results of the survey and the recommendations, however, have not been
revealed to the public." In September 2008, the IMF retained the major PR firm Hill &
Knowlton for one year, to boost the international financial institution's "global outreach." H&K's
press release quoted CEO Paul Taaffe as saying, "The IMF plays a crucial role around the world
working to stabilize financial markets. H&K's regional expertise and global network means the
firm is ideally suited to support the IMF." The contract, for an unspecified dollar amount, is
coordinated out of H&K's Washington DC office. Dave Robinson, who heads the firm's Middle
East & Africa work, "will lead an H&K team across the Middle East, North Africa, and Central
Asia, while Glenn Schloss, regional director for H&K in the Asia Pacific region, will oversee
activity on the IMF program in the Far East." H&K will advise the IMF on "stakeholder outreach
strategy for Asia and the Middle East, and on financial sector issues." The firm will also design
"customized contact programs with key opinion formers, influencers and the wider financial and
COLLABORATING WITH OTHERS
Working with the World Bank
Cooperating on financial stability, banking supervision, and trade (WTO)
Collaborating with the UN
Working closely with the G-20
Working on employment issues (ILO)
Engaging with think tanks, civil society, and the media (CSOs)
The International Monetary Fund (IMF) is the central institution embodying the international
monetary system and promotes balanced expansion of world trade, reduced trade restrictions,
stable exchange rates, minimal trade imbalances, avoidance of currency devaluations.
How It Works/Example:
The IMF formally came into existence in December 1945 with 29 member countries after it was
conceived during negotiations of the Bretton Woods Agreement in 1944. It was originally tasked
with establishing exchange rates after World War II through regulation of rates among the
Between 1944 and 1971, most of the world operated under a fixed exchange-rate system, which
required each country to maintain a reserve balance of other currencies in order to weather
temporary supply and demand problems. Thus, the IMF required each member country
to deposit currency into an interest reserve fund. The IMF then loaned these funds to nations
with balance-of-payment problems. Today, the IMF promotes its objectives through surveillance
and consultation with member countries rather than regulation. It still provides shortterm loans to member countries having balance-of-payment problems, and countries seeking
assistance must meet or exceed certain thresholds related to inflation rates, budget
deficits, money supplies, and political stability.
Mechanics of the IMF
The IMF is run by a board of governors, which makes decisions on major policy issues but
delegates day-to-day decision making to the executive board. All member countries are
represented on the board of governors, which meets once per year. Each member country
appoints a governor and an alternate governor to represent it to the IMF. The governors are
usually the ministers of finance or governors of their central banks.
The IMF's 24-member executive board is chaired by a managing director. The managing
director is selected by the executive board every five years, and three deputy managing directors,
each from a different region of the world, report to the managing director.
The executive board meets three times a week, and the IMF's five largest shareholders (the
United States, Japan, France, Germany, and the United Kingdom) as well as China, Russia, and
Saudi Arabia, each have a seat on the board. The other sixteen directors are elected for twoyear terms by groups of countries. There are several committees within the IMF. The
International Monetary and Financial Committee, which is a committee of the board of
governors, meets twice per year to evaluate policy issues relating to the international monetary
system. The IMF Development Committee, which is composed of members of the boards of
governors of both the IMF and the World Bank, advises and reports to the IMF governors on
matters concerning developing countries. The IMF has a weighted voting system that gives more
votes to countries with larger economies. However, according to the IMF, most decisions are not
made based on formal voting, but by consensus. The IMF is funded by the subscriptions
countries pay upon joining the IMF or when their subscriptions are increased. Members pay 25%
of their subscriptions in Special Drawing Rights (SDRs) or in major currencies. The IMF
can call on the remaining 75% as needed for lending.
The IMF determines a country's subscription amount based on its relative size in the
world economy. The IMF may borrow money to supplement the funds received from
subscriptions. Generally, the IMF may borrow money from several countries that participate in
one of two standing lending agreements with the IMF.
The IMF monitors economic and financial developments and policies in member countries and at
the global level and then gives policy advice to its members based on its observations and
experience. IMF advice generally focuses on macroeconomic, financial-sector regulation, and
structural policies. To do this, the IMF engages in three types of surveillance: country
surveillance, global surveillance, and regional surveillance. During country surveillance, which
occurs annually, a team of economists visits a member country to collect data, examine policies,
and meet with government and bank officials. The team submits its findings to the IMF
executive board, which makes recommendations to the country. The IMF's global surveillance
functions center around the publication of the World Economic Outlook and Global Financial
Stability reports, which are issued twice a year. Regional surveillance usually occurs within a
series of internal IMF discussions about developments in certain regions or within groups of
The IMF also provides technical help and training to the market participants and governments of
member countries. This often comes in the form of advice on banking regulation, tax
administration, and budget formulation as well as managing statistical data and drafting or
reviewing legislation. They also provide training courses for government and central
One of the IMF's single biggest functions is lending money to members in need. If a country is
unable to make payments to other countries without taking "measures destructive of national or
international prosperity," such as implementing trade restrictions or devaluing its currency, it
may borrow money from the IMF. When the IMF lends a country money, it often requires the
borrower to follow a program aimed at meeting certain quantifiable economic goals, which are
described in a letter of intent from the borrowing government to the IMF's managing director.
IMF loans are not provided to fund particular projects or activities, they are provided to promote
a country's overall economic health. The duration, payment terms, and lending conditions vary
on a case-by-case basis. The IMF charges borrowers a market-related interest rate and also
requires service charges and a refundable commitment fee. Low-income countries pay as little as
0.5% interest per year. The IMF also lends money to countries dealing with sudden losses of
financial confidence, such as after natural disasters or wars, in order to prevent the spread of
financial crises stemming from those countries.
There are five main facilities from which the IMF makes loans: IMF Stand-By
Arrangements (for short-term lending), the Extended-Fund Facility, the Poverty Reduction and
Growth Facility, the Supplemental Reserve Facility, and the Exogenous Shocks Facility. When a
country borrows from the IMF, the proceeds are deposited in the country's central bank. There
payment period varies for each loan, but maturities usually extend from six months to up to ten
years. The international community places considerable pressure on a borrower to repay the IMF
so that those funds are available to other countries, and the IMF in turn is diligent about timely
repayment in order to maintain its status as a preferred creditor.
Why It Matters:
The IMF, like the World Bank, is one of the most powerful and controversial legislative bodies
in the world. The IMF's objectives focus on macroeconomic performance and policies, while the
World Bank focuses on long-term economic development and poverty-reduction issues. The IMF
works actively with the World Bank, the World Trade Organization, the United Nations, and
Whether the IMF truly benefits the international economy is the subject of considerable debate.
Much of the criticism centers on the IMF's requirements to adopt certain economic policies in
order to receive IMF loans, which may encourage poor countries to neglect social concerns in
order to comply. Supporters note that the IMF strengthens the economic and financial-integration
effects of globalization and helps low-income countries benefit from globalization through the
development of sustainable economic policies and debt reduction in the poorest countries. They
also state that IMF approval often indicates a country's economic policies are favorable, which
may reassure and motivate investors and other governments who might provide additional
financing to the country in need. This not only attracts capital, it prevents investors from
withdrawing funds from an economy, which could create further distress for that country and
possibly for other countries.
The IMF‘s primary purpose is to safeguard the stability of the international monetary system—
the system of exchange rates and international payments that enables countries (and their
citizens) to buy goods and services from each other.
This is essential for achieving sustainable economic growth and raising living standards.
providing advice to members on adopting policies that can help them prevent or resolve a
financial crisis, achieve macroeconomic stability, accelerate economic growth, and alleviate
poverty; making financing temporarily available to member countries to help them address
balance of payments problems—that is, when they find themselves short of foreign exchange
because their payments to other countries exceed their foreign exchange earnings; and offering
technical assistance and training to countries at their request, to help them build the expertise and
institutions they need to implement sound economic policies.
The future of both Bretton Woods institutions remains uncertain. Both the IMF and World Bank
escaped the efforts of the Republican U.S. Congress in the mid-1990s to sharply curtail and even
eliminate both organizations. These agencies have been less successful in answering the charges
from the left, as the IMF retains its demand for "structural adjustments" and the World Bank still
favors funding for large, project-driven funding. While both the IMF and the World Bank have
instituted some reforms, they have been unable to appease the concerns of outraged
environmentalists, labor unionists, and nationalists and advocates of indigenous peoples in the
Still, as this essay has suggested, these two organizations are really the misguided target for the
legitimate concerns people of all ideological stripes have had about the rapid pace of
globalization in the past half century. It is likely this globalization would have occurred whether
or not there had been a Bretton Woods conference, and it is all but certain it will continue in the
future regardless of the policies pursued by the IMF and World Bank. While it is true that they
have often been too driven by U.S. foreign policy concerns, in the end the influence of both
institutions has been widely overstated. And despite their mistakes during the past half century,
they have rarely been given credit for many of the little things they do well. For example, both
institutions perform economic surveillance over most of the world's economy, a valuable task
that no other international or private organization could perform with such skill. Both agencies
also serve as a store of expert knowledge and wisdom for countries throughout the world that
lack trained specialists. While neither the IMF nor the World Bank has met the lofty goals of
their founders or wielded the nefarious influence charged by their critics, they have and should
continue to play a small but important role in promoting prosperity and economic stability