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International Monetary Fund

International Monetary Fund

Headquartered in Washington, D.C., the International Monetary Fund (widely known as the IMF) is an international cooperative institution whose main mission is to promote and assist in international monetary stability. With its initial organization coming at the end of World War II, for many years the main goal of the IMF was to oversee a system of stable, fixed exchange rates among the currencies of member nations. Since 1971, the exchange rates of the world's currencies have been allowed to float, with supply and demand market forces determining their value. In 2008, the IMF consisted of 185 member countries, which pay an initial quota subscription to become members. The organization works to achieve and enhance a stable world economy through the promotion of open financial disclosure among member nations, the provision of loans during periods of economic crises, and technical assistance provided through educational and promotional means.

The IMF has come under criticism from some sources for its role in high-profile assistance offered to the Mexican, South Korean, and Russian economies, among others. The member nations, however, continue to support the organization in its efforts to sustain international economic stability and promote international trade.

HISTORY

The events that ultimately led to the creation of the IMF had their origins in the conclusion of World War I. The economic terms of surrender were negotiated at the 1919 peace conference in Paris. As part of the peace treaty, known as the Treaty of Versailles, England and France demanded large amounts of war reparation payments from Austria and Germany to help rebuild their war-torn economies. However, the Austrian and German economies were depleted, too. This forced them to rely on foreign imports for goods and services unable to be produced locally. When a country imports more than it exports, it runs a balance of payments deficit. Together with other factors, the result may be a devaluation of the currency, since foreign sellers often demand to be repaid in their own currencies. The addition of war reparations on top of a large balance of payments deficit exacerbated the economic crisis, resulting in hyperinflation and political instability in Germany.

The great British economist John Maynard Keynes had participated in the peace conference following World War I and foresaw the scenario described above. Indeed, his book The Economic Consequences of the Peace predicted a second world war as an inevitable consequence of the severe penalties and lack of political and economic cooperation following the conclusion of World War I.

THE CREATION OF THE IMF

Keynes was determined to avoid repeating the mistakes made in the Treaty of Versailles. As World War II came to a close in 1944, an international conference was held at the resort community of Bretton Woods, New Hampshire. Forty-four nations were represented at the conference, with the chief negotiators being Keynes from Great Britain and Harry Dexter White from the United States. The result of their deliberations was the creation of the International Monetary Fund. The original goals of the fund were to aid members needing foreign exchange to conduct international trade and to promote a system of fixed exchange rates.

The original plan called for the U.S. dollar to be pegged to gold at a rate of $35 per ounce. Other currencies were set at fixed exchange rates to the dollar, and thus indirectly tied to gold. Countries participating agreed to set a par value for their currency based on this fixed exchange rate, allowing for a 1 percent fluctuation band. Should a country experience problems maintaining its par value, the IMF stood ready to lend foreign exchange to aid the cause. Member nations made an initial deposit into the fund known as a quota subscription. These deposits formed a pool from which the IMF could extend loans to members. As a special provision, if a member nation experienced chronic problems maintaining its par value, it would be allowed a one-time devaluation of its currency of up to 10 percent.

SPECIAL DRAWING RIGHTS

In 1969 the IMF created a new hybrid asset to serve as a reserve currency. The new financial asset was named a special drawing right, or SDR. The value of an SDR is a function of the current value of five different currencies from which it is comprised. They include the U.S. dollar, the Japanese yen, the United Kingdom pound sterling, and the respective euro values of Germany and France. The respective weights of the currencies, which constitute SDRs value, are revised every five years.

Member nations may use SDRs in a variety of ways. These include exchanging SDRs for other monetary assets or for maintaining operations, and exchanging SDRs directly with other members in exchange for foreign currencies to address a balance of payments problem. Since part of the mission of the IMF is to promote and enhance international trade, the board of governors has the option to decide on periodic special allocations of SDRs to augment members' existing reserve accounts.

THE IMF AND THE WORLD BANK

In addition to the IMF, the Bretton Woods Agreement resulted in the formation of the World Bank. Formally known as the International Bank for Reconstruction and Development, the World Bank's primary goal is to promote economic growth among the world's developing nations. It does so by effectively serving an investment-banking role, issuing bonds and notes to raise new investment capital, which it in turn lends to poor nations to finance specific projects. Typical projects include those associated with enhanced transportation routes, electric power development, and increased agricultural production.

As they share the ancestry of the Bretton Woods conference plus related economic roles, confusion between the IMF and the World Bank is common among the general public. They remain, however, two distinct organizations with their own individual goals and agendas aimed at promoting economic health and development among the world's nations.

THE END OF BRETTON WOODS

The system of fixed exchange rates created by the Bretton Woods Agreement and overseen by the IMF lasted from 1946 until 1971. For much of that period, the system worked very well. The U.S. dollar was pegged to gold and most other currencies were pegged to the dollar. During much of this period the United States ran a trade surplus, exporting more goods and services than it imported. Thus, the amount of U.S. dollars held domestically on net increased, causing little strain on the international monetary system.

This scenario changed during the 1960s. As the United States expanded its level of imports and increased industrial output during the Vietnam War, the amount of dollars held overseas expanded greatly. These dollars were deposited in foreign banks, allowing the banks to extend U.S. dollar denominated loans. The supply of U.S. dollars outstanding expanded significantly. At the same time, as more dollars were presented for redemption, the U.S. gold supply was being depleted. By the end of the decade, there were more dollars outstanding than there was gold to back them. In August 1971 the Nixon administration acknowledged the situation by closing the gold window, refusing to allow foreign central banks to exchange U.S. dollars for gold.

The Smithsonian Agreement of that year began the process of ending the Bretton Woods system of fixed foreign exchange rates. The initial agreement called for expanded fluctuation of exchange rates from 1 percent to2.25 percent; subsequent economic activity made these bands unfeasible. Governments then decided to let their

respective currencies float relative to each other, and the world moved to a floating exchange rate system.

THE ROLE OF THE IMF EVOLVES

In 1978, the IMF formally amended its constitution to alter its role in the world economy. It now plays a number of roles in its overall mission of promoting international stability and growth. These roles fall generally under three areas: surveillance, technical assistance, and financial assistance.

In its surveillance function, the IMF serves as a watchdog over member nations' economic policies. In 2007, the IMF dramatically revised its policies on surveil-lance with its Decision on Bilateral Surveillance of Members' Policies. Some important points from the Decision include:

  • Focus on external stability. Country surveillance is focused on exchange rate and monetary, fiscal, and financial strategies, along with assessment of risk and vulnerabilities
  • Definite guidelines are set out for countries about how they run their exchange rate policies
  • Surveillance is deemed a collaborative process that has a multilateral, medium-term perspective.

IMF surveillance is an open process, and currently nearly all member nations publish a Public Information Notice, which creates a transparent oversight environment.

Technical assistance to member nations takes up a large amount of daily operations at the fund. The IMF provides expertise and consultation on matters involving the implementation of both fiscal and monetary policy, trade laws and tariff measures, and programs aimed at strengthening and stabilizing local currency values. The organization has also implemented a regional model for technical assistance, and has six regional technical assistance centers. In addition, it offers training for member countries' officials through a network of seven different regional training institutes. Other forms of technical assistance include placement of experts and resident advisors, online support, and diagnostic studies.

Perhaps the one area that has brought the IMF the most attention and raised its image among the general public has been its role of providing financial assistance to nations experiencing economic crises. This involves providing credits or arranging loans for nations experiencing such problems as severe balance of payments deficits or a sudden devaluation of their currency.

The 1990s saw the IMF make global headlines with several widely publicized financial assistance programs. The first occurred in 1995 with the crisis in Mexico. Faced with a severe devaluation of its currency due to a rapid loss of confidence in its policies, the Mexican government turned to the IMF for what was then a record $17.8 billion financial assistance package. While attempting to move towards a market-oriented economy, Russia required financial assistance several times during the 1990s. Included were large loans in both 1996 and 1998. And, in 1997, an extended crisis throughout much of east Asia resulted in the IMF arranging financial assistance for South Korea, Indonesia, and Thailand.

These financial assistance programs, which have grown successively larger in amount, have met with severe criticism from some sources. The IMF has been labeled a bailout source for poorly run economies, serving as a safety net for policymakers unable or unwilling to make difficult decisions which market discipline demanded. In addition, critics claim that IMF policies encourage poor nations to carry huge amounts of international debt, forcing them to use a large proportion of their annual revenues to make interest payments. The IMF has responded to its critics by actively working with both the public and private sectors to promote better information flow and legislation designed to prevent additional financial crises from taking place. The organization continues to develop systems and procedures designed to limit such crises from spreading to other countries and enveloping entire geographical regions.

The modern International Monetary Fund remains a major player on the global economic stage. The fund continues to grow and expand in its new roles within a world of floating exchange rates and rapid capital flows. The modern IMF wears a number of hats, including overseer and communicator of national policies and legislation, consultant and educator on numerous fiscal and monetary issues, and intermediary and lender for nations whose currencies come under pressure.

Critics continue to denounce the IMF for forcing nations in need to adopt its policy recommendations as a condition of assistance. In addition, the fund raises concerns among those who claim it acts as a safety net to alleviate poor or ineffective domestic monetary and trade policies. The IMF is also frequently charged with favoring bankers and elite classes, obstructing debt reduction for the world's poorest countries, and ignoring human rights violations. Street protesters have it exactly right, for example, when they argue that the economic policies imposed on developing nations by the International Monetary Fund and World Bank have hammered the poor, Eric Pooley wrote in Time. Using loans and the threat of default as levers, the IMF has pushed more than 90 countries to accept its brand of free-market shock therapy: lowering trade barriers, raising interest rates, devaluating currencies, privatizing state-owned industries, eliminating subsidies and cutting health, education, and welfare spending. In a 2007 article in Global Politician, Carol Welch,

coordinator of the U.S. efforts for the United Nations' Millennium Campaign, criticized the dominant role the United States plays in the global economy to impose SAPs [structural adjustment policies] on developing countries, and opening their markets to competition from U.S. economies. In the article, Welch stated that she believes SAPs are based on a narrow economic model that perpetuates poverty, inequality, and environmental degradation.

Such criticisms are not likely to dissipate soon. Nevertheless, the 185 member nations continue to support the IMF in the belief that open communication and coordinated policies will lead to greater stability and promote a climate which fosters growth in international trade and development.

BIBLIOGRAPHY

Cheeseman, Gina-Marie. International Monetary Fund's Financial Assistance Policies: Pros and Cons. Global Politician 7 July 2007. Available from: http://www.globalpolitician.com/23066-imf.

International Monetary Fund. Common Criticisms of the IMF. Available from: http://www.imf.org/external/np/exr/ccrit/eng/cri.htm.

International Monetary Fund. The IMF at a Glance. Available from: http://www.imf.org/external/np/exr/facts/glance.htm.

Pooley, Eric. The IMF: Dr. Death? A Case Study of How the Global Banker's Shock Therapy Helps Economies but Hammers the Poor. Time 24 April 2000.

Robertson, David. International Economics and Confusing Politics. London: Edward Elgar, 2006.

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International Monetary Fund

INTERNATIONAL MONETARY FUND

The International Monetary Fund was established to foster international trade and currency conversion, which it does through consultation and loan activities. When it was created in 1946, the IMF had thirty-nine member countries. By November 1999 membership in the IMF had grown to 182 member countries and by the mid-2000s membership included every major country, the former communist countries, and numerous small countries. The only exception were Cuba and North Korea.

To join the IMF, a country must deposit a sum of money called a quota subscription, the amount of which is based on the wealth of the country's economy. Quotas are reconsidered every five years and can be increased or decreased based on IMF needs and the prosperity of the member country. In 2005, the United States contributed the largest percentage of the annual contributions18 percentbecause it had the largest, richest economy in the world. Voting rights are allocated in proportion to the quota subscription.

HISTORICAL DEVELOPMENT

The Depression in the 1930s devastated international trade and monetary exchange, creating a great loss of confidence on the part of those engaged in international business and finance. Because international traders lost confidence in the paper money used in international trade, there was an intense demand to convert paper money into golda demand beyond what the treasuries of countries could supply. Nations that defined the value of their currency in terms of a given amount of gold were unable to meet the conversion demand and had to abandon the gold standard. Valuing currencies in terms of given amounts of gold, however, had given currencies stable values that made international trade flow smoothly.

The relationship between money and the value of products became confused. Some nations hoarded gold to make their currency more valuable so that their producers could buy raw materials at lower prices. Other countries, desperate for foreign sales of their goods, engaged in competitive devaluations of their currencies. World trade became difficult. Countries restricted the exchange of currency, and even encouraged barter. In the early 1940s Harry Dexter White (18921948) of the United States and John Maynard Keynes (18831946) of the United Kingdom proposed the establishment of a permanent international organization to bring about the cooperation of all nations in order to achieve clear currency valuation and currency convertibility as well as to eliminate practices that undermine the world monetary system.

Finally, at an international meeting in Bretton Woods, New Hampshire, in July 1944, it was decided to create a new international monetary system and a permanent international organization to monitor it. Forty-four countries agreed to cooperate to solve international trade and investment problems, setting the following goals, for the new permanent, international organization:

  • Unrestricted conversion of currencies
  • Establishment of a value for each currency in relation to others
  • Removal of restrictive trade practices

CREATION OF THE INTERNATIONAL MONETARY FUND

In 1946 in Washington, D.C., the international organization to monitor the new international monetary system came into existencethe International Monetary Fund (IMF). The purposes of the IMF are as follows:


To promote international monetary consultation, cooperation, and collaboration

To facilitate the expansion and balanced growth of international trade

To promote exchange stability

To assist in the establishment of a multilateral system of payments

To make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards

To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members

The Bretton Woods agreement created fixed exchange rates between countries based on the value of each country's currency in relation to gold or indirectly in relation to gold by relating their currency to the U.S. dollar. The United States in turn guaranteed that the dollar could be exchanged for gold at a fixed exchange rate. The United States, however, ultimately could not maintain the dollar's promised convertibility, ending it in 1971, in large part because of inflation and a subsequent run on the U.S. gold reserve. The fixed-exchange-rate system collapsed. This led to a managed flexible-exchange-rate system with agreement among major countries that they would try to coordinate exchange rates based on price indexes. How ever, without operational criteria for managing currency relationships, exchange rates have been increasingly determined by volatile international capital movements rather than by trade relationships.

ORGANIZATIONAL STRUCTURE

The organization of the IMF has at its top a board of governors and alternate governors, who are usually the ministers of finance and heads of central banks of each member country. Because of their positions, they are able to speak authoritatively for their countries. The entire board of governors and alternate governors meets once a year in Washington, D.C., to formally determine IMF policies. During the rest of the year, a twenty-four-member executive board, composed of representatives or the total board of governors, meets a number of times each week to supervise the implementation of the policies adopted by the board of governors. The IMF staff is headed by its managing director, who is appointed by the executive board. The managing director chairs meetings of the executive board after appointment. Most staff members work at IMF headquarters in Washington, D.C. A small number of staff members are assigned to offices in Geneva, Paris, and Tokyo and at the United Nations.

SURVEILLANCE AND CONSULTATIONS

At least annually, a team of IMF staff members visits each member country for two weeks. The team of four or five meets with government officials, makes inquiries, engages in discussions, and gathers information about the country's economic policies and their effectiveness. If there are currency exchange restrictions, the consultation includes inquiry as to progress toward the elimination of such restrictions. Statistics are also collected on such matters as exports and imports, tax revenues, and budgetary expenditures. The team reports the results of the visit to the IMF executive board. A summary of the discussion is transmitted to the country's government, and for countries agreeing to the release of the summary, to the public.

FINANCIAL ASSISTANCE

The IMF endeavors to stabilize the international monetary system by temporarily lending resources in the form of foreign currencies and gold to countries experiencing international payment difficulties. There are a number of reasons why a country may need such assistance. One possibility is that the country has a trade deficit, which is often offset by lending, capital investment, and possibly aid from richer countries. However, confidence in the country's economic system and its ability to repay its debts becomes diminished in such a situation. The IMF requires that the borrowing country provide a plan for reform that will ultimately result in resolving the payments problems. Reforms such as tighter fiscal and monetary policies, good government control of expenditures, elimination of corruption, and provision for greater disclosure are required.

The most immediate assistance to a member country with payments difficulty is permission to withdraw 25 percent of the quota subscription that was initially paid in the form of gold or convertible currency. If the country still cannot meet its payments obligations it can, ultimately, borrow up to three times its original quota payment. The borrowing country must produce a plan of reform that will overcome the payments problem.

The IMF has a number of additional lending plans to meet various problems experienced by its members as well as emergency lending programs. There are Stand-By Arrangements disbursed over one to two years for temporary deficits, the Compensatory and Contingency Financing Facility for sudden drops in export earnings, Emergency Assistance for natural disasters, Extended Fund Facility to correct structural problems with maturities of greater length, the Supplemental Reserve Facility to provide loans to countries experiencing short-term payments problems due to a sudden loss of market confidence in the country's currency, and the Systemic Transformation Facility for the former communist countries in Eastern Europe and Russia.

SPECIAL DRAWING RIGHTS (SDRS)

In the 1960s, during an expansion of the world economy while gold and the U.S. dollar were the reserve currencies, it appeared that reserves were insufficient to provide for international trade needs. The IMF was empowered to create a new reserve asset, called the special drawing right (SDR), which it could lend to member countries. The value assigned to the SDR is the average of the world's major currencies. Countries with strong currencies agreed to buy SDRs when needed by a country because of payment problems, and in turn sell other currencies. However, at present SDRs are used mostly for repayment of IMF loans. Creation of SDRs is limited by the IMF constitution to times when there is a long-term global reserve shortage. The board of governors and alternate governors is empowered to make such a determination.

LOANS TO POOR, INDEBTED COUNTRIES

The IMF has created various loan facilities such as the Trust Fund to provide loans to its poorest member countries. In addition, the IMF works cooperatively with the World Bank, other international organizations, individual countries, and private lenders to assist poor, debt-ridden countries. It encourages such countries to restructure their economies to create better economic conditions and better balance of payment conditions.

There have been critics of the IMF's effectiveness. Such critics have noted, for example, instances of massive corruption on the part of recipient governments that resulted in IMF funds being stolen and/or wasted. Also, there have been a number of instances in which IMF efforts have been assessed as unsuccessful. Recommended restrictive fiscal policies have been seen as causing troublesome conditions, such as food shortages and citizen unrest. Nobel-prize-winning economist Robert Mundell, for example, has taken the position that current IMF policy options are insufficient to achieve stable international currency exchange and thereby foster international trade. He recommends that a global currency and world central bank be created to establish a stable international currency.

see also Global Economy; International Investment; International Trade

bibliography

Ethier, Wilfred J. (1998, September). Essays in International Finance, No. 210. "The International Commercial System." Princeton, NJ: International Finance Section, Department of Economics, Princeton University.

Fischer, Stanley, Cooper, Richard, et al. (1998, May). Essays in International Finance, No. 207. "Should the IMF Pursue Capital Account Convertibility?" Princeton, NJ: International Finance Section, Department of Economics, Princeton University.

Gotherstrom, Maria (1998). "Development and Financial Structure of the International Monetary Fund." Economic ReviewSveriges Riksbank, previously Quarterly ReviewSveriges Riksbank (Stockholm) 4, 6074.

International Monetary Fund (2005). "The IMF at a Glance." Retrieved October 26, 2005, from http://www.imf.org/external/np/exr/facts/glance.htm

Kenen, Peter B., ed. (1996, October). Essays in International Finance, No. 200. "From Halifax to Lyons: What Has Been Done About Crisis Management?" Princeton, NJ: International Finance Section, Department of Economics, Princeton University.

The Operations of the Department of the Treasury's Financial Crimes Enforcement Network: Hearing before the Subcommittee on General Oversight and Investigations of the Committee on Banking and Financial Services, U.S. House of Representatives. 1998, 10555. Washington, DC: U.S. Government Printing Office.

"What Is the International Monetary Fund?" (2004). Retrieved October 26, 2005, from http://www.imf.org/external/pubs/ft/exrp/what.htm.

Williamson, John, and Mahar, Mary (1998, November). Essays in International Finance, No. 211. "A Survey of Financial Liberalization." Princeton, NJ: International Finance Section, Department of Economics, Princeton University.

Bernard H. Newman

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International Monetary Fund

International Monetary Fund

BIBLIOGRAPHY

The International Monetary Fund (IMF) originated at a United Nations (UN) conference in Bretton Woods, New Hampshire, in July 1944. The IMF is thus known as a Bretton Woods institution. The forty-five governments represented at that conference decided to build an institution to facilitate economic cooperation. They hoped the existence of such an institution would help countries avoid a recurrence of the disastrous, self-interested economic policies that led to the Great Depression that began in the United States around 1929 and spread throughout the world. The principal architects of the IMF were the British economist John Maynard Keynes (18831946), the author of The General Theory of Employment, Interest, and Money (1936), a work that revolutionized economic theory, and the chief international economist at the U.S. Treasury Department, Harry Dexter White (18921948). The IMF actually came into existence in December 1945 when the first twenty-nine countries signed its Articles of Agreement. The goals of the IMF were to encourage international monetary cooperation, remove foreign-exchange restrictions, stabilize exchange rates, and facilitate a multilateral payments system between member countries.

The IMF acts as an umpire in the international market and takes action to ensure the stability of the worlds financial system. Its main role in its first years was to supervise the newly established fixed exchange-rate system initiated in Bretton Woods. After the collapse of the fixed exchange rate in February 1973 and the adoption of flexible exchange rates, the IMF became more involved with member countries economic policies by providing advice. In the 1980s the IMF had to confront the problem of mounting foreign debt in developing countries. In the 1990s the IMF addressed the transition of former socialist countries to market capitalism, and more recently it had to assist countries facing currency crises.

The main goal of the IMF is to promote a healthy world economy. The organizations responsibilities include: (1) promoting international monetary cooperation; (2) facilitating the expansion and balanced growth of international trade; (3) promoting exchange-rate stability; (4) assisting in the establishment of a multilateral system of payments; (5) fostering economic growth and high levels of employment; and (6) providing temporary financial assistance to countries experiencing balance-of-payments problems. The IMF also strives to reduce poverty in countries around the globe, independently and in collaboration with the World Bank and other international organizations.

The IMF had 184 member countries in 2007. With the exception of North Korea, Cuba, Liechtenstein, Andorra, Monaco, Tuvalu, and Nauru, all UN member states are members of the IMF or are represented by other member states. The IMF is headquartered in Washington, D.C., with an international staff of more than 2,500. As of March 2006, the IMFs total quotas were $308 billion, with loans outstanding of $34 billion to seventy-five countries, of which $6 billion to fifty-six countries was on concessional terms.

The IMF is financed by quota subscriptions, the share of each member in the IMFs total funds. The quota allocated to each IMF member determines that countrys voting power, the amount of gold or international currency or its own currency that the country initially subscribes, and its access to various borrowing facilities. A large quota offers an IMF member prestige and borrowing power because a large initial subscription provides liability to extend credit to countries that need to borrow. National quotas are periodically revised.

The IMF strives to prevent economic crises by encouraging countries to adopt what IMF directors perceive to be appropriate economic policies. The organization meets these objectives primarily through surveillance, technical assistance, and lending. Surveillance is the regular policy advice that the IMF offers once a year to each of its members. The fund conducts an in-depth analysis of each member countrys economic state of affairs. Members usually allow the publication of their IMF evaluation, supplying the information to the public. Technical assistance and training are offered, mostly free of charge, to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is also offered in several economic areas, including fiscal policy, monetary and exchange-rate policies, banking, financial system supervision and regulation, and statistical collection and analysis. Financial assistance is available to help member countries correct balance-of-payments problems. Countries under financial distress are required to develop a policy program supported by IMF financing, and continued financial support is conditional on the effective implementation of the program.

Major controversies surround the role and practices of the IMF in the world economy, especially concerning the conditionality of financial support, which is provided only if recipient countries implement IMF-approved economic reforms. Indeed, in a world of mostly floating exchange rates, in contrast to the fixed exchange rates in existence when the IMF was established, it is even questionable why this institution remains in existence. The IMF has received extensive criticism from people representing the entire political spectrum, including grassroots protestors and activists objecting to IMF policies in countries subjected to structural adjustment. Even the Austrian economist Friedrich Hayek (18991992) was deeply troubled by the global statism practiced by the IMF. IMF policies are implemented under the principle of one-size-fits-all (Stiglitz 2002, p. 141). Jeffrey Sachs, the economic advisor who encouraged transitioning economies to implement shock therapy programs, argued that the International Monetary Funds view, all too often, is based on a misunderstanding of what its own role should be (1994, p. 504).

The principles behind IMF policies are based on what John Williamson (1990) referred to as the Washington Consensus. Washington, for Williamson, encompassed the World Bank and the U.S. Treasury, in addition to the IMF. Williamson identified ten policy instruments for which Washington-based institutions could muster a reasonable degree of consensus, and he summarized the content of the Washington Consensus as macroeconomic prudence, outward orientation, domestic liberalization, and free market policies. The Washington Consensus, as the set of economic policies implemented by the administrations of U.S. president Ronald Reagan (19112004) and British prime minister Margaret Thatcher, has been labeled a neoliberal manifesto. The program involves devaluation of the exchange rate, liberalization of markets where prices are regulated, privatization of public sector enterprises, contraction of public sector expenditure, and the implementation of restrictive monetary policy. There is an obvious hostility to inflation, which is strongly influenced by the effect of inflation on foreign investors (Payer 1974, p. 37). The IMF imposes these economic policies on countries in financial distress that request assistance through conditionality. Countries facing a crisis often have little alternative but to accept the terms stipulated by the IMF in order to receive assistance. Thus IMF financial support of a government program concurrently ensures obedient behavior (Payer 1974, p. 31).

Proponents of the IMFs conditionality policy argue that the fund should not give money away for free. The IMF is a financial institution, and, like any financial institution, when it lends out money it requires borrowers to guarantee the loan that they have signed by accepting IMF-approved policies. Proponents insist that it is reasonable to stipulate that further financial support will only be released after the successful implementation of reforms. At the same time, it is not clear whether the policies enforced by the IMF have been successful. Lance Taylor argues that a fair assessment would say that the outcomes of orthodox packages ranged to moderately successful to disastrous (1988, p. 147). Nevertheless, the success or failure of IMF programs should not be measured by monetary criteria alone; qualitative criteria, such as socioeconomic improvements and social reforms, should also be considered in any evaluation of the IMF (Körner et al. 1986, p. 4).

SEE ALSO World Bank, The

BIBLIOGRAPHY

Dell, Sidney. 1986. The History of the IMF. World Development 14 (9) 12031212.

Keynes, John Maynard. 1936. The General Theory of Employment, Interest, and Money. London: Macmillan.

Körner, Peter, Gero Maass, Thomas Siebold, and Rainer Tetzlaff. 1986. The IMF and the Debt Crisis: A Guide to the Third Worlds Dilemma. Trans. Paul Knight. London: Zed.

Payer, Cheryl. 1974. The Debt Trap: The IMF and the Third World. Harmondsworth, U.K.: Penguin.

Sachs, Jeffrey. 1994. Life in the Economic Emergency Room. In The Political Economy of Policy Reform, ed. John Williamson, 503523. Washington, DC: Institute for International Economics.

Stiglitz, Joseph. 2002. Globalization and its Discontents. New York: Norton.

Taylor, Lance. 1988. Varieties of Stabilization Experience: Towards Sensible Macroeconomics in the Third World. New York: Oxford University Press.

Williamson, John. 1990. What Washington Means by Policy Reform. In Latin American Adjustment: How Much Has Happened? ed. John Williamson, 720. Washington, DC: Institute for International Economics.

Aristidis Bitzenis
John Marangos

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International Monetary Fund

INTERNATIONAL MONETARY FUND

The International Monetary Fund (IMF) is a specialized agency of the united nations that seeks to promote international monetary cooperation and to stimulate international trade. The IMF, which in 2003 had 184 nation-members, has worked to stabilize world currencies and to develop programs of economic adjustment for nations that require economic reform.

The IMF was created in 1944 at the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire. It first began operation in 1947, from its headquarters in Washington, D.C., with a fund of $9 billion in currency, of which the United States contributed almost a third. The creation of the IMF was seen as a way to prevent retaliatory currency devaluations and trade restrictions, which were seen as a major cause of the worldwide depression prior to world war ii.

Membership is open to countries willing to abide by terms established by the board of governors, which is composed of a representative from each member nation. General terms include obligations to avoid manipulating exchange rates, abstain from discriminatory currency practices, and refrain from imposing restrictions on the making of payments and currency transfers necessary to foreign trade.

The voting power of the governors is allocated according to the size of the quota of each member. The term quota refers to the IMF unit of account, which is based on each member's relative position in the world economy. This position is measured by the size of the country's economy, foreign trade, and relative importance in the international monetary system. Once a quota is set by the IMF, the country must deposit with the organization, as a subscription, an amount equal to the size of the quota. Up to three-fourths of a subscription may consist of the currency of the subscribing nation. Each subscription forms part of the reserve available to countries suffering from balance-of-payment problems.

When a member has a balance-of-payment problem, it may apply to the IMF for needed foreign currency from the reserve derived from its quota. The member may use this foreign exchange for up to five years to help solve its problems, and then return the currency to the IMF pool of resources. The IMF offers below-market rates of interest for using these funds. The member country whose currency is used receives most of the interest. A small amount goes to the IMF for operating expenses.

In its early years the IMF directed its major programs toward maintaining fixed exchange

rates linked to the U.S. dollar, which in turn could be converted at a standard rate into gold. Present IMF policy emphasizes an orderly adjustment of currency exchange rates to reflect underlying economic forces. Special attention has been given to the needs of developing countries, in the form of programs to provide long-term assistance to cover foreign exchange demands necessitated by high import prices, declining export earnings, or development programs. In appropriate circumstances the IMF may impose conditions on the use of IMF resources to encourage recipient countries to make needed economic reforms.

Since 1982 the IMF has concentrated on the problems of developing nations. It has gone beyond its own resources, encouraging additional lending from commercial banks. The IMF has also established new programs, using funds from its richer members, to provide money in larger amounts and for longer periods than those granted under the quota-driven lending procedures. It works closely with the world bank on these and other international monetary issues.

Starting in the 1990s, the IMF faced enormous economic challenges propelled by the increasing globalization of the world economy. Among the problems were the need to help a number of countries make the transition from a centrally-planned economic system to a market-oriented one, reducing turbulence in emerging financial markets such as Asia and Latin America, and promoting economic growth in the poorest nations. The IMF responded with a number of initiatives including creation of a loan fund to ensure sufficient funds to deal with major financial crises, a new approach to reducing poverty in low-income countries, and the Supplemental Reserve Facility created in 1997 specifically to help countries deal with large short-term financing needs resulting from a sudden reduction in capital outflows due to loss of market confidence.

Despite these moves, the IMF in the late 1990s and early 2000s faced an increasing volume of world-wide criticism and protest against its fiscal policies. A number of economists and other critics charged that IMF loan programs imposed on governments of developing countries resulted in severe economic pain for the populations of those countries, that IMF policies were poorly designed and often aggravated economic conditions in countries experiencing debt or currency crises, and that the IMF has forced countries to borrow foreign capital in a manner that adversely affects them.

In 2000, the managing director and members of the IMF agreed on several governing principles including the promotion of sustained non-inflationary economic growth, encouraging the stability of the international finance system, focusing on core macroeconomic and financial areas and being an open institution that learns from experience and continually adapts to changing circumstances.

further readings

International Monetary Fund. Available online at <www.imf.org> (accessed July 27, 2003).

Rogoff, Kenneth. 2003. "The IMF Strikes Back." Foreign Policy (January 1).

cross-references

International Law; United Nations; World Bank.

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International Monetary Fund

INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND (IMF), created at the Bretton Woods Conference in 1944, began operations on 1 March 1947.It had its inception on 1 July 1944, when delegates of forty-four nations met at Bretton Woods, New Hampshire, and proposed two associated financial institutions—the IMF, with $8 billion capital, and the International Bank for Reconstruction and Development. A recurrence of the restrictive trade policies, exchange instability, and international lending abuses that had characterized the interwar era was feared. After World War I, nations had sought monetary stability by returning to the gold standard, but in many instances the gold standard took the form of a weak version of the gold exchange standard. Its breakdown contributed to the 1929–1936 economic debacle.

The IMF's original purpose was to support world trade by reestablishing a stable international system. To this end, it was given the mandate to monitor the exchange rate policies of member countries and provide short-term loans in case of balance of payments problems.

Since the IMF and member nations accepted the dollar as equal to gold, the growing number of dollars in their central bank reserves, especially after 1958 and in turn the consequence of chronic U.S. government deficits, stimulated worldwide inflation. The gold exchange standard broke down in 1968–1971, notably after the United States ceased redeeming dollars in gold on 15 August 1971, thereby severely damaging the prestige of the IMF.

With the collapse of fixed exchange rates in 1973, the dominant role of the IMF was to provide financial support for member countries. As of 1993, it had 178 members and had become a major financial intermediary. Its involvement is virtually required before international bankers will agree to refinance or defer loans for Third World countries. The IMF was also instrumental in providing funds for the emerging market economies in eastern Europe following the breakup of the Soviet Union in 1991. The fund also provides information to the public, and technical assistance to governments of developing countries.

The IMF can make loans to member countries through standby arrangements. Depending on the size of the loan, the fund imposes certain conditions. Known as IMF conditionality, these measures often interfere with the sovereignty of member countries with regard to economic policy. IMF conditions can require devaluation of currencies, removal of government subsidies, cuts in social services, control over wages, trade liberalization, and pressure to pursue free-market policies. IMF conditionality has been criticized as being too severe, imposing hardship on debtor countries. Because IMF policies are imposed by an international agency consisting of industrialized countries, they give the appearance of maintaining the dependency of the Third World.

Critics point out that balance-of-payment problems in the Third World are often structural and long term, with the result that short-term stabilization by the IMF may lead to long-run development problems. Access of member countries to the fund's assets is determined by quota. Each member receives a quota based on the size of its economy. The quotas are defined in terms of Special Drawing Rights (SDRs), reserve assets created by the IMF to supplement world reserves. The value of SDRs for member nations requesting loans is determined by an IMF accounting system based on a weighted average of major economic powers' currencies.

BIBLIOGRAPHY

Aufricht, Hans. The International Monetary Fund: Legal Bases, Structure, Functions. New York: F. A. Praeger, 1964.

Horsefield, J. Keith, ed. The International Monetary Fund, 1945–65: Twenty Years of International Monetary Cooperation. Washington, D.C.: International Monetary Fund, 1969.

International Monetary Fund. "Supplement on the IMF." IMF Survey 22 (October 1993): 1–28.

Salda, Anne C. M. The International Monetary Fund. New Brunswick, N.J.: Transaction, 1992.

Marie D.Connolly

Donald L.Kemmerer/a. g.

See alsoBanking ; Banks, Export-Import ; Bretton Woods Conference ; Corporations ; Dumbarton Oaks Conference ; Foreign Aid .

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International Monetary Fund (IMF)

INTERNATIONAL MONETARY FUND (IMF)


The International Monetary Fund (IMF) was a group of 182 countries that joined together to create a cooperative, stable system for buying and selling each others' currencies; monitoring the global flow of money; and fostering international trade and economic growth. To join the IMF, a country had to agree to contribute an amount of money (based on its economic size) to a general pool of funds. The IMF used this pool of money to make loans to member countries that fell behind in their financial obligations with other IMF countries, or that wanted to restructure their economies. Because it had the world's largest economy, the United States contributed the largest amount ($35 billion in 1998) to the IMF and therefore had the largest vote in how the IMF used its funds. The IMF had no power to enforce how its members spent the money loaned to them, but it could threaten to withhold future loans if a member country failed to live up to its obligations.

The IMF was formed in 1944 as the Allied countries began to write the rules that would govern the economic relationships between the nations after World War II (19391945). During the Great Depression (19291939) the sudden collapse in economic confidence around the world led many consumers to try to trade in their paper currency for gold. But many countries did not have enough gold on hand to meet this demand and were forced to break the longstanding connection between their currencies and their gold reserves. With some countries hoarding gold and others letting their currencies "float" unattached to gold, it was hard to determine how much one country's currency was worth compared to another's, and international trade suffered. The IMF rectified this situation by requiring that all member countries permit their currencies to be converted freely into other members' currencies, by establishing a definite value for each currency relative to others, and by eliminating policies that discouraged global investment and trade. The value of all world currencies was fixed in terms of the U.S. dollar, with $35 equaling one ounce of gold.

In 1971 President Richard M. Nixon (19691974) ended this system of defining the value of the dollar against gold, and the values of world currencies have since been defined more loosely. As a result the IMF maintained much closer supervision of its members' economic policies so exchange ratesthe value of one currency relative to anotherdidn't fluctuate wildly. Although the IMF's main functions were to coordinate the economic policies of its members and to provide technical assistance, training, and consultation, it has been mostly known for the massive loans it made to its members. In 1995 for example, the IMF extended credits of $18 billion to Mexico and $6.2 billion to Russia to help them survive economic crises.

See also: Currency, Exchange Rates, Mexican Bail-Out

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International Monetary Fund

INTERNATIONAL MONETARY FUND

An international institution charged with maintaining international monetary stability.

The International Monetary Fund (IMF) is an international organization that provides temporary financial assistance to any of its 184 member countries in order to correct their payment imbalances. The IMF was established during the conference at Bretton Woods, New Hampshire, in 1944 because the Allies wanted to avoid the competitive currency devaluations, exchange controls, and bilateral agreements that the world had witnessed prior to World War II. The IMF's main goal was to promote stable currencies in order to enhance international commerce.

Originally, the IMF's position was that restoring payments equilibrium could be achieved within a year by eliminating excess demand. It was not until 1974 that the IMF established the external fund facility to provide its members with up to three years of financial assistance and also introduced a long-term approach, termed the enhanced structural adjustment facility. In exchange for this financing, the IMF demands that borrowers make fundamental changes in their economies to prevent future balance of payments problems. These changes range from stabilization of the exchange rate and of government deficits to structural adjustment of the economy through privatization of state enterprises and liberalization of trade.

By article IV of its charter, the IMF was given the right to monitor on a yearly basis the exchange rate, monetary and fiscal policies, structural policies, and financial and banking policies of every member. It has been heavily involved in many Middle Eastern countries. It has been involved in Egypt and other North African countries since the 1970s. It became involved in Lebanon during the 1990s and finally in Sudan and Yemen through its Heavily Indebted Poor Countries Initiative (HIPC). One Middle Eastern country, Saudi Arabia, enjoys a permanent voting position on the IMF board of governors.

see also economics.


Bibliography


Spero, Joan. The Politics of International Economic Relations. London: Allen and Unwin, 1978.

Vreeland, James. The IMF and Economic Development. Cambridge, U.K.: Cambridge University Press, 2003.

david waldner
updated by khalil gebara

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International Monetary Fund

International Monetary Fund (IMF), specialized agency of the United Nations, established in 1945. It was planned at the Bretton Woods Conference (1944), and its headquarters are in Washington, D.C. There is close collaboration between it and the International Bank for Reconstruction and Development. Its primary mission is to ensure stability in the international monetary system. The IMF provides policy advice and financing to member countries with economic problems. The organization, using a fund subscribed by the member nations, purchases foreign currencies on application from its members so as to discharge international indebtedness and stabilize exchange rates. The IMF currency reserve units are called Special Drawing Rights (SDRs); from 1974 to 1980 the value of SDRs was based on the currencies of 16 leading trading nations. Since 1980 it has been reevaluated every five years and based on the relative international economic importance of the British pound sterling, the European Union euro (formerly the French franc and German mark), the Japanese yen, and the U.S. dollar. To facilitate international trade and reduce inequities in exchange, the fund has limited power to set the par value of currencies. Members are provided with technical assistance in making monetary transactions.

In 1995 the fund moved to increase disclosure requirements of countries borrowing money and at the same time created an emergency bailout fund for countries in financial crisis. IMF was criticized in 1998 for exacerbating the Asian financial crisis, through the fund's decision to require Asian nations to raise their interest rates to record levels. During the international financial crisis of the early 21st cent., the IMF provided loans and access to credit of more than $100 billion to developing countries that were affected by falling demand for their exports and other financial problems. IMF support and financing was also critical to financial rescue plans for several European Union members in the early 2010s. Changes effective in 2016 raised the status of the four major emerging market nations, Brazil, China, India, and Russia, including them among the IMF's top ten shareholders. The fund is ruled by a board of governors, with one representative from each nation. The board of governors elects an executive board of 24 representatives to direct regular operations; the executive board selects and is chaired by the managing director, who also heads the IMF's staff. There are 189 members in the IMF.

See studies by H. G. Grubel (1970), T. Agmon et al., ed. (1984); R. D. Hormats (1987), T. Ferguson (1988), E. P. McLellan, ed. (2002), D. Vines and C. L. Gilbert, ed. (2004), E. M. Truman, ed. (2006), G. Bird (2003), G. Bird and D. Rowlands, ed. (2 vol., 2007), and E. Conway (2015).

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International Monetary Fund

International Monetary Fund (IMF) Specialized, intergovernmental agency of the United Nations (UN), and administrative body of the international monetary system. Established by the Bretton Woods Conference (1944), its main function is to provide assistance to member states troubled by balance of payments problems and other financial difficulties. The IMF does not actually lend money to member states; rather, it exchanges the member state's currency with its own Special Drawing Rates (SDR) (a ‘basket’ of other currencies) in the hope that this will alleviate balance of payment difficulties. These exchanges are usually conditional upon the recipient country agreeing to pursue prescribed policy reforms. The organization is based in Washington, D.C.

http://www.imf.org

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