Since its inception in July 1944, the International Monetary Fund (IMF) has undergone considerable change as chief steward of the world's monetary system. The IMF is officially charged with managing the global regime of exchange rates and international payments that allows nations to do business with one another. The Fund recast itself in a broader, more active role following the 1973 collapse of fixed exchange rates, and has since received both criticism and credit for its efforts to promote financial stability, prevent crises, facilitate trade, and reduce poverty.
In 2010, the IMF catapulted back onto the international stage as the European sovereign debt crisis has unfolded, and once again, the organization's fiscal firefighting prowess is in high demand. Some economists claim the Fund is in the midst of a major transformation, citing its vast expansion of lending capacity, governance reform, and the move away from free market fundamentalism. However, others suggest the IMF must go further in implementing changes that will improve the plight of the world's poor and guarantee the Fund's relevance in a shifting global economy.
A Post-War Financial Order
Forty-four allied nations convened at the Bretton Woods Conference in 1944 to establish a post-war financial order that would facilitate economic cooperation and prevent a rehash of the currency warfare (Foreign Affairs) that helped usher in the Great Depression. The new regime was intended to foster sustainable economic growth, promote higher standards of living, and reduce poverty. The historic accord founded the twin institutions of the World Bank and the IMF, and required signatory countries to peg their currencies to the U.S. dollar. However, the system of fixed exchange rates broke down in the late 1960s and early 1970s due to an overvaluation of the U.S. dollar and President Richard Nixon's decision to suspend the greenback's convertibility into gold.
Unlike the World Bank, which was designed as a lending institution focused on longer-term development and social projects, the IMF was conceived as a watchdog of the monetary and exchange rate policies vital to the shared prosperity of the global community.
The IMF is akin to a credit union that permits its membership access to a common pool of resources--funds that represent the financial commitment or quota contributed by each nation (relative to its size). In theory, members with balance-of-payments trouble seek recourse with the IMF to buy time to rectify their economic policies and restore economic growth. The Fund pursues its mission in three fundamental ways:
1) Surveillance. A formal system of review that monitors the financial and economic policies of member countries to ensure they are living within their means--tracking developments on a national, regional, and global level. In this process, IMF officials consult regularly with member countries and offer macroeconomic and financial policy advice.
2) Technical Assistance. Practical support and training directed mainly at low- and middle-income countries to help manage their economies (e.g., providing advice on tax policy, expenditure management, monetary and exchange rate policy, financial system regulation, privatization, trade liberalization, etc.).
3) Lending. Giving short- to mid-term loans to member nations that are struggling to meet their international obligations. Loans (or bailouts) are provided in return for implementing specific IMF conditions designed to help restore the macroeconomic dynamics conducive to sustainable growth.
The Crisis Management Role
The IMF is often referred to as the world's "financial crisis firefighter" (Economist), called upon by member countries to help fight crippling sovereign debt and prevent contagion from spreading through the global financial system. Historically, much of the Fund's work has been done in developing countries. However, the recent global financial meltdown has required major interventions in advanced European economies such as Iceland, Ireland, Greece, and Portugal.
"We still need an organization that can do multilateral surveillance and act a bit like an adjustment referee--like a traffic cop for the world. We need the cooperation catalyst function of the IMF." --Ralph Bryant, Brookings Institution
A member country (there were 187 members in 2012) typically summons the IMF when it can no longer finance imports or service its debt to creditors--a potential crisis. The Fund will extend the government a short-term loan and help organize a new debt-repayment schedule that the country is able to manage. In exchange, the member agrees to implement a program of IMF reforms designed to rectify its balance of payments and restore foreign exchange reserves in its central bank. The lending conditions are designed not only to guarantee the repayment of loans, but also to ensure the money borrowed will be spent in line with the stated economic objectives. The IMF cannot force its will on member countries; countries accept the Fund's conditioned financial assistance on a voluntary basis.
The IMF and Its Discontents
There have been a number of vocal critics of the IMF over the years. In his 2002 book Globalization and Its Discontents, Nobel prize-winning economist Joseph Stiglitz denounced the Fund as a primary culprit in the failed development policies implemented in some of the world's poorest countries. He argues that many of the economic reforms the IMF required as conditions for its lending--fiscal austerity, high interest rates, trade liberalization, privatization, and open capital markets--have often been counterproductive for target economies and devastating for their local populations.
Stiglitz cites the flawed program of privatization in post-communist Russia--which helped enrich a corrupt oligarchy--and the elimination of food subsidies for the poor in Indonesia--which sparked food riots in 1998 (BBC). Both policies were enacted at the behest of the IMF. "The institution does not really claim expertise in development," Stiglitz writes. "Its original mandate is supporting global economic stability, not reducing poverty in developing countries--yet it does not hesitate to weigh in, and weigh in heavily, on development issues."
The Fund has also been criticized on the basis of overreach or "mission creep." William Easterly makes this case in his 2006 account of the historic failures of Western aid to the undeveloped world, The White Man's Burden. While he acknowledges some IMF successes in firefighting financial crises in countries like Mexico (PDF) in the mid 1990s and the East Asian Crisis of 1997-98, he criticizes many of Fund's interventions in severely impoverished countries, particularly in Africa and Latin America, as overly ambitious and intrusive. In addition, he describes many of the Fund's loan conditions and technical advice as out of touch with ground-level realities.
Yet, the IMF is routinely identified with economic hardship and political ferment because it is only in times of crisis that its services are sought. It is often the only organization equipped for such intervention. Evaluating the Fund's success over the past sixty-plus years is a difficult and often subjective task. As Harvard economist Benjamin M. Friedman wrote in the New York Review of Books in 2002, "We cannot reliably know whether the consequences of the IMF's policies were worse than whatever the alternative would have been."
Some economists characterize the Fund's performance in the Asian Financial Crisis of 1997-98 (Economist) as a success. "The [IMF's] early mistakes were corrected and proper policies were put in place," says CFR's Steven Dunaway, a former deputy director of the IMF's Asia and Pacific department. "The result was that the crisis countries recovered rather quickly, and the economic reforms laid the foundation for sustained strong growth during the 2000s." Others point to the Fund's role in Brazil in 2002 (BBC) as positive--an intervention where an early recovery allowed IMF loans to be repaid ahead of schedule.
The recent global financial meltdown and the European debt crisis have catapulted the IMF back into the limelight after years of declining relevance. Many economists, including those at the IMF itself, claim the Fund's core competencies continue to lie in the surveillance of macroeconomic indicators and crisis prevention. However, in a January 2010 report, the Fund's Independent Evaluation Office said "in the international dimensions of its surveillance and other work, where one would expect the IMF to excel, effectiveness and quality were not rated well." In a February 2011 evaluation on IMF surveillance in the lead up to the financial crisis, the evaluation office writes: "The IMF provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak," adding that IMF "surveillance paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies."
Ralph Bryant at the Brookings Institution stresses the Fund's continued value despite these shortcomings: "We still need an organization that can do multilateral surveillance and act a bit like an adjustment referee--like a traffic cop for the world. We need the cooperation catalyst function of the IMF." The Carnegie Endowment's Uri Dadush says the IMF is in the middle of a "very big transition," stressing three indicators: the massive expansion of the Fund's lending capacity; the moderate increase in the Fund's representation of developing countries; and a shift away from traditional economic approaches, such as fiscal austerity.
Revival and Reform
One decade into the new century, "emerging markets have become the more stable part of the world economy," says CFR's Sebastian Mallaby. "The IMF's main programs are now in Europe, which is a major reversal." This shift in fortunes is epitomized by the IMF's intervention in Greece, where it joined eurozone countries in pledging an unprecedented $163 billion bailout package for Athens in May 2010, followed by a second loan of $178 billion in October 2011. (IMF contributions were roughly $40 billion and $37 billion respectively.)
"If the IMF does not reform its conditionality much more fundamentally, it will increasingly be seen as responsible for punishing the world's poorest citizens." --Oxfam
Two aspects of the Greek intervention signal a more assertive IMF. According to an August 2010 Congressional Research Service report, the Greek bailout marks the first time the IMF has lent to a eurozone country since the common currency was created in 2002. Second, the size of the assistance package relative to Greece's IMF membership contribution (usually limited to 600 percent) is extraordinary: at 3,200 percent, it is the "largest access of IMF quota resources granted to an IMF member country."
The Fund also expanded certain tools for crisis prevention in the wake of the meltdown, announcing in August 2010 the establishment of a "Precautionary Credit Line" for those countries with sound financials facing only moderate vulnerabilities that do not qualify them for other lending. Following its annual meeting in April 2012, the Fund announced roughly $430 billion in new member commitments, nearly doubling the institution's capacity to lend (NYT) should the European debt crisis deteriorate.
Some economists credit former managing director Dominique Strauss-Kahn, who departed the Fund amid scandal in May 2011, with critical reforms and adroit leadership in the Fund's transition. Writing for The Telegraph, longtime IMF critic Stiglitz commended Strauss-Kahn, claiming that he "reestablished the credibility of the institution," and "reasserted the role of economic science, including Keynesian economics." However, others warn that some reforms may be temporary. In an April 2010 report on IMF crisis response (PDF), Eurodad and the Third World Network, two non-governmental organizations focused on development issues, found that despite claims of greater flexibility for low-income countries under IMF lending, "the Fund's macroeconomic policy design shows the same old set of policy priorities, including low fiscal deficits, low inflation, flexible exchange rates, and financial liberalization."
The Fund continues to be a target of criticism for its involvement with impoverished nations despite several initiatives addressed at this constituency. In an effort to help some nations reach the Millennium Development Goals--benchmarks set at the UN to raise basic standards of living for the poorest countries--the IMF announced a program of debt relief for eligible countries in 2005. In 2009, the Fund also announced reforms to its lending conditions to low-income countries that would allow for greater country-specific tailoring and "enhanced focus on poverty and growth." However, Oxfam warned in a June 2011 memorandum (PDF) that "if the IMF does not reform its conditionality much more fundamentally, it will increasingly be seen as responsible for punishing the world's poorest citizens."
Critics have also raised questions with regard to the Fund's governance and transparency. For decades, a long-standing "gentlemen's agreement" between Europe and the United States has guaranteed the helm of the IMF to a European and that of the World Bank to an American--a situation leaving little recourse for ascendant emerging economies. In June 2011, former French finance minister Christine Lagarde was chosen to succeed Strauss-Kahn- a choice that epitomized the tensions over governance. "The IMF cannot maintain its legitimacy unless it allows candidates from the world's most dynamic economies a fair shot at the top job," wrote Mallaby in a May 2011 op-ed in the Washington Post. "Most of the world's growth has come from emerging economies; but it is less well appreciated that this is likely to continue for some time."