The IMF: The World’s Controversial Financial Firefighter

Since its inception in July 1944, the International Monetary Fund (IMF) has undergone considerable change as chief steward of the world’s monetary system. 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, intervening in developing countries from Asia to Latin America. In 2010, it gained renewed relevance as the European sovereign debt crisis unfolded, and, a decade later, it responded to the economic collapse triggered by the coronavirus pandemic.

The fund has received both criticism and credit for its efforts to promote financial stability. Some economists claim that it 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 that 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 changing global economy.

A Postwar Financial Order

Forty-four allied nations convened at the Bretton Woods Conference in 1944 to establish a postwar financial order that would facilitate economic cooperation and prevent a rehash of the currency warfare 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 global markets.

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:

Surveillance. A formal system of review monitors the financial and economic policies of member countries and offers macroeconomic and financial policy advice.

Technical assistance. Practical support and training directed mainly at low- and middle-income countries help manage their economies.

Lending. The fund gives loans to member countries that are struggling to meet their international obligations. Loans, or bailouts, are provided in return for implementing specific IMF conditions designed to put government finances on a sustainable footing and restore growth. Known as “structural adjustment,” these policies have included balancing the budget, removing state subsidies, privatizing state enterprises, liberalizing trade and currency policy, and removing barriers to foreign investment and capital flows.

Since October 2019, the IMF has been led by Managing Director Kristalina Georgieva, the second woman to be selected for the role. Georgieva, a native of Bulgaria, was previously the acting president of the IMF’s twin institution, the World Bank.

The Crisis Management Role

The IMF has been called the world’s “financial crisis firefighter,” relied on by member countries to deal with crippling sovereign debt and prevent contagion from spreading through the global financial system.

A member country—there are 189 members as of 2020—typically summons the IMF when it can no longer finance imports or service its debt to creditors, a sign of potential crisis. The fund will extend the government a loan and help organize a new debt-repayment schedule that the country can manage. In exchange, the member agrees to implement 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.

Historically, much of the fund’s work has been done in developing countries, including interventions in Argentina, Brazil, Indonesia, and Mexico. However, the 2008 global financial crisis and subsequent European debt crisis required major bailouts in advanced eurozone economies, such as Greece, Iceland, Ireland, and Portugal, for the first time.

Greece and the European Crisis

The European sovereign debt crisis, which began in 2010, represented a stark shift in the IMF’s central focus. “The IMF’s main programs are now in Europe, which is a major reversal,” CFR’s Sebastian Mallaby said at the time. Instead of providing loans to emerging markets on the periphery of the global economy, the IMF was concerned with unsustainable debt loads in developed countries. This shift was epitomized by the IMF’s intervention in Greece, where the fund, the European Commission, and the European Central Bank (ECB)—together called the troika—pledged $375 billion in three separate bailouts over eight years.

Two aspects of the Greek intervention signaled a more assertive IMF. First, the Greek bailout [PDF] marked the first time the IMF 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—was extraordinary: at 3,200 percent, it is the largest such package granted to a member country. The contrast with the other struggling eurozone economies is illustrative. During the same period, the IMF agreed to loan [PDF] Portugal some $30 billion and Ireland roughly $25 billion.

The IMF and Its Discontents

The IMF has drawn vocal criticism 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 local populations.

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 failures of Western aid to the undeveloped world, The White Man’s Burden. While he acknowledges some IMF successes in firefighting financial crises in Mexico and East Asian countries in the mid-1990s, he criticizes many of the 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.

In recent years, the IMF’s work in more advanced economies has drawn ire as well. Greece has been the most high-profile example, as troika-imposed austerity measures deepened the country’s economic contraction. In July 2015, popular discontent led to a “no” vote in a referendum on whether to accept the IMF’s loan conditions, which included raising taxes, lowering pensions and other spending, and privatizing industries. The government subsequently ignored the results and accepted the loans. However, the Greek case also saw the IMF soften its stance on austerity, at least compared with the European Commission and ECB. In 2016, senior IMF economists argued that more austerity would be counterproductive, and in 2018 the fund raised the alarm about the unsustainability of Greece’s debt burden, putting it at odds with the rest of the troika.

However, others dismiss the suggestion that the IMF’s approach changed. In 2016, the Guardian’s economics editor, Larry Elliott, wrote that “the IMF’s remedy for Greece and Portugal during the Eurozone crisis has been straight out of the structural adjustment playbook: reduce public spending, cut salaries and benefits, insist that state-owned enterprises return to the private sector, reduce minimum wages, and restrict collective bargaining.”

Measuring Success

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 interventions, and evaluating the fund’s success over the past seventy-plus years is a difficult task. As Harvard economist Benjamin M. Friedman has argued, “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 as a success. They argue that the economic reforms championed by the IMF allowed the countries involved to recover quickly and laid the foundation for sustained growth during the 2000s. Others point to the fund’s role in Brazil in 2002 as positive: an early recovery there after intervention allowed IMF loans to be repaid ahead of schedule.

Meanwhile, for many observers, the verdict on the European bailout programs is still out. Critics point to the deep recessions and years of high unemployment in IMF loan recipient countries—most notably Greece and Spain, which have the highest youth unemployment rates in the European Union (EU), at over 30 percent. Greece’s economy is still 25 percent smaller than it was before the crisis, and its debt load is nearly 180 percent of gross domestic product (GDP). Supporters of the IMF programs counter that the target eurozone countries have all started to grow again and point to major success stories, such as Ireland, which has seen its GDP rise well above pre-crisis levels.

Revival and Reform

Since the European bailouts, the IMF has added to its firefighting arsenal. It has established a flexible credit line and a precautionary and liquidity line to give it more flexibility in lending to members in situations that might not otherwise qualify for assistance. In 2012, the fund announced roughly $430 billion in new member commitments, nearly doubling the institution’s capacity to lend. As of April 2018, its total lending power stands at roughly $1 trillion.

In recent decades, the fund has also developed several initiatives addressed at assuaging the criticisms of developing countries. In 2005, in an effort to help some nations reach the Millennium Development Goals—benchmarks set at the United Nations to raise basic standards of living for the poorest countries—the IMF announced a debt relief program for eligible countries. In 2009, it announced reforms to its lending conditions to low-income countries that would allow for greater country-specific tailoring and an “emphasis on poverty alleviation and growth.”

However, critics have pressed for more fundamental reforms to IMF conditionality, which some aid organizations have likened to “negotiating at the barrel of a gun.” Meanwhile, some indebted nations are turning to other governments for assistance instead. In 2018, for example, Pakistan solicited Chinese, Saudi, and Emirati loans to replenish its foreign exchange reserves, before negotiating with the IMF. The IMF’s latest review of conditionality, completed in 2018, recommended improving transparency and evaluating IMF programs in a timelier manner.

Reforming the fund’s governance is also an area of contention. 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. The situation leaves little recourse for ascendant emerging economies that, despite modest changes in 2015, do not have as large an IMF voting share as the United States and Europe.

In October 2019, Georgieva began a five-year term as managing director. She is the twelfth consecutive European to hold the post, and the first from an emerging economy. The nomination of yet another European fueled fresh criticism about what some view as an outmoded way of selecting leaders. “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 2011.

The COVID-19 Crisis

The IMF has sought to help countries deal with the economic devastation wrought by the COVID-19 pandemic. It doubled the amount of money available through its two lending programs for addressing natural disasters (the Rapid Financing Instrument and the Rapid Credit Facility), among other actions. According to the IMF, more than one hundred countries have requested emergency financing, and the fund has provided more than $100 billion in financial assistance to more than eighty countries. The IMF also provided debt relief to some of its poorest members—giving them grants to temporarily cover their payments—and pushed for wealthy countries, as well as China, to suspend collection on debt owed by low-income countries, which the Group of Twenty (G20) agreed to do. In total, the fund has deployed about one-quarter of its $1 trillion lending capacity.

In August 2021, the IMF began allocating $650 billion worth of Special Drawing Rights (SDR), the largest such allocation in history and more than double the amount the IMF approved in the wake of the 2007–08 financial crisis. SDR function as an internal IMF currency that countries can exchange with each other for hard currency reserves, such as dollars or euros. Many experts had urged governments to support an SDR allocation to increase global reserves during the pandemic. However, because SDR are apportioned based on countries’ IMF quotas, which reflect their shares of the global economy, wealthier countries received the bulk of the allocation despite enjoying faster economic recoveries from the pandemic. International aid groups have argued that rich countries should share their SDR allotments with poorer countries, and the IMF has pledged to help facilitate any voluntary transfers. At their June 2021 meeting, Group of Seven (G7) countries endorsed a plan to reallocate up to $100 billion in SDR to poorer countries.