With the 1944 Bretton Woods Conference (USA) came into existence two economic institutions— The World Bank and the International Monetary Fund. The International Monetary Fund or the IMF is a specialized United Nations agency to ‘secure international cooperation, stabilize currency exchange rates, and expand international liquidity.’

The IMF started with 44 founding members, currently has 190 member-states, and is headquartered in Washington. It has three other offices in Paris, Geneva, and New York. The Director of the IMF is always from Western Europe. The IMF’s board of governors are usually the countries’ Finance Ministers or central bank directors who meet annually to discuss the issues of the IMF. There is also a 24-member executive board that overlooks the organization’s day-to-day actions and meets at least three times a week. 

 

ROLE OF THE IMF

imf piggybank

The IMF was established following the aftermath of the Great Depression of the 1930s with an aim to prevent another major economic crisis like this and build a framework for international cooperation. The IMF helps countries to get out of an emergency crisis and makes sure there is international monetary stability. It helps its member countries rebuild their international reserves, stabilize their currencies, ensure economic growth, etc.

Another significant role of the IMF is to come up with advice—structural adjustment programs—for the borrowing country. Some of the major aspects of the role of the IMF are:

Financing

The IMF does not take money from the market; rather, the member states pool in money voluntarily and in accordance with their economic status. The countries are required to pay their capital subscription, also known as quotas. They give money in their own currencies. The countries that contribute the higher amount get more voting rights.

Lending

Member countries can borrow money from the IMF pool that they have created through the quotas. The IMF also provides emergency loans to countries that experience a potential or actual balance of payment crisis. 

Surveillance

imf surveillance

The IMF also monitors the international monetary system and global economic developments to identify risks and recommend policies for financial growth and stability.

Capacity Development

The IMF provides assistance and training to Governments, Central Banks, and Finance Ministers in areas ranging from ‘taxation through central bank operations to the reporting of macroeconomic data.’

 

IMF- THE CODE

imf the code

The IMF was founded as a voluntary and cooperative institution to work in the spirit of self-enlightened interest. This would require not to adopt drastic policies to avoid the creation of problems for others. The IMF’s Fiscal Transparency Code, simply called ‘The Code,’ is an international standard for the disclosure of information about public finances. The code of conduct made it mandatory for states to share correct information.

Along with ensuring greater international economic stability, it also oversees that all countries follow a code of conduct that they agree to while signing the code of agreement. The code covers four important elements:

  1. The countries should provide timely and reliable information about their financial position and performance.
  2. All nations shall share information on their fiscal policies and monetary policies.
  3. The countries should effectively disclose all risks to public finances.
  4. The governments should also provide a transparent framework for the ownership, contracting, taxation, and utilization of natural resource endowments. 

What If a Country Threatens Not to Give Back the Money To the IMF?

The IMF gives loans within repayments of 3-5 years (maximum ten years). The IMF has very limited resources and runs solely from the funds from countries and the interest of the loans sanctioned. Thus they have to be very strict with their loan repayment policies as more defaulters will lead to more depletion of resources.

The IMF is famously tagged as the world’s ‘financial crisis firefighter’ and relies on its member states to take over the crisis management role. Non-repayment will ultimately affect the whole monetary system of the world. So, the members of the IMF would stop lending any money to the country, put many sanctions on the defaulter state, and pressurize the country to pay. In a recent case, Greece, while promising the IMF to repay its loan said, they would ‘squeeze blood out of a stone’ to repay their debts. 

 

CRITICISMS OF THE IMF

The IMF is argued to be conceived as a new structure of control in the post-World War period and is considered to be a part of neo-colonialism, which helps the already developed world extend its control over developing nations to extract resources. Even the IMF’s own auditor in a 2014 report said that the IMF is still seen as a ‘club for rich countries thus limiting how much other nations can trust its advice as objective.’ 

imf criticism

The Independent Evaluation Office’s report also criticized the working of the executive board and the ‘asymmetric treatment’ specifically pointing to the loans given to countries like Greece, Portugal, and Ireland that were even larger than their country’s economies just because they were a part of the eurozone. ‘The Euro Area programs had created the perception that European member countries had excessive weight in the IMF’s decisions relative to their economic power.’

The Voting System

The voting pattern is not proportionate as all countries do not have an equal say. The countries that contribute more (i.e., the developed nations) have more power. The USA, The UK, Japan, Germany, and France are the biggest contributors, thus virtually having all the control over the decision-making process of the IMF. They will obviously have the upper hand over other nations; thus, the institution will work to their benefit. These developed nations take up to 38.6% of the total vote share among 190 organizations. The USA alone has 17.46% of the vote share.

Structural Adjustment Programs

When a country requests a loan from the IMF, it takes an undertaking that it will follow all the instructions by the IMF and is bound to follow the structural adjustment programs.

For example, 1991 Reforms in India: even though these reforms have helped India grow economically, it has largely benefitted a few sections of society, and economic inequality in India has increased. 

The structural adjustment programs that claim to revive economies have only created more polarization. In Ghana, it is believed that privatization has only helped the elite. In Haiti, even though democracy was restored and the IMF and the World Bank introduced economic reforms, some scholars believe that there was a hidden agenda to ensure that the flow of its natural resources and cement to the United States of America was not disturbed as it would have been possible if Haiti fell into authoritarian and military regimes.

imf economic inequality

All the poorest countries have an abundance of natural resources, while on the contrary, developed nations lack those but still use and exploit most of the resources. For example, in the USA, just 5% of the world population consumes 20% of the resources of the world. Therefore, if the USA is left to itself, it might not survive— it would need a constant flow of resources. To ensure that its consumption is never compromised, it has created world institutions like the IMF, World Bank, etc., to create a new kind of dominance.

It is important for these borrowing countries to bring in economic reforms (privatization, liberalization) because when a closed-protective market is asked to remove barriers, it opens the door for big MNCs. Foreign direct investments benefit these MNCs and investors who put in more money in these nations, and it gives them a getaway to extract resources from these countries and take them back to their mother countries. 

Undergoing structural adjustment programs are not an option but compulsory— every borrowing country has to accept and follow all the recommendations of the IMF.

Fiscal Austerity

The policies of the IMF lead to cutting back on expenditure and cutting down on public spending like health, education, safe drinking water, community food, etc. It is being twisted to suit these developed countries. For example, in March 2019, Ecuador borrowed $4.2 billion from the IMF, provided the government would adhere to certain programs to modernize the economy.

But, the program required the country to maintain a GDP of over 6% and tighten the country’s national budget, which would lead to firing tens of thousands of government employees, raising taxes, and cutting down on public investment, which would directly affect its poor population.

This also highlights the double standards. At one point, developed countries give huge subsidies to their own citizens but force fiscal austerity on borrowing countries. The reason is, fewer subsidies in a country make it more lucrative for MNCs to come and invest.

 

CONCLUSION

Joseph Stiglitz, an American economist, believes that the IMF is a public institution since the money for the IMF comes from the member states. Considering this, the IMF should be accountable to the citizens, but it is accountable to the governments of these developed nations.

Global institutions like the IMF are hurting the very nations that it pledged to protect and help. There is no doubt that the organization is working towards greater economic stabilization and has helped many countries come out of the economic crises. However, its blatant favoritism to developed nations and strict programs and reforms it mandates for borrowing nations make it a suspicious organization, especially in the eyes of the developing nations that view the IMF as an agent of promoting privatization. 

Written by: Aashna

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