International Monetary Fund

What It Means

The International Monetary Fund (IMF) is an organization of nations that helps shape economic policies related to international trade, debt, and the exchange of money among participating countries. With a membership of over 180 nations, the IMF has three principal goals: to evaluate world economic trends, to provide financial assistance to poor countries, and to promote commerce between all nations.

Economic activity does not stop at national borders. Consumers in most nations buy goods and services imported from abroad, and businesses often sell their goods and services beyond the borders of their home countries. A wide variety of other transactions, including purchases made by foreign tourists, loans from an institution in one country to people in other countries, and the business activity of corporations that operate in many countries, occur across borders as well. Transactions with foreign countries have a great impact on individual national economies, so all countries keep track of them.

The record of the financial transactions between people in one country and people in foreign countries is called that country’s balance of payments. For a country’s currency (the form of money used within national borders, such as dollars in the United States) to remain stable, its balance of payments must be in good order. A country’s currency might become devalued (worth less) compared to other currencies if the money leaving its borders outweighs the money coming in. If this situation (called a balance-of-payments deficit) goes too far, that country might experience severe economic problems.

The International Monetary Fund was established in 1944 to help stabilize currencies. Member countries contribute their own currency to the IMF and are therefore entitled to borrow from the fund when they experience difficulties with their balance of payments. These loans help nations stabilize their currencies and, hopefully, their economies. The IMF also provides assistance to countries that need help with their exchange policy (their rules about determining the value of their currency compared to that of other currencies).

When Did It Begin

Anticipating the end of World War II (1939–45), representatives of 44 countries met at Bretton Woods, New Hampshire, in July 1944 to discuss economic recovery and other important postwar financial affairs. The results of this meeting, called the United Nations Monetary and Financial Conference, included the establishment of the organization that became known as the World Bank, as well as the creation of the IMF. These organizations were (and still are) meant to tackle two related aspects of global economic affairs. The World Bank makes loans and provides other assistance to countries in need, with the intent of helping them expand and stabilize their economies. The IMF pursues the same basic goals by helping countries keep their currencies stable.

Initially the IMF promoted stable currencies by regulating exchange rates, or the amount of any currency that can be exchanged for any other currency. The standard that the IMF used for establishing exchange rates was the U.S. dollar. All countries were allowed to declare how many dollars their own currencies were worth, and the exchange rates that any country imposed could only vary within strict limits thereafter. The U.S. dollar itself was expressed in terms of its value in gold and was backed up by the country’s gold reserves (gold had for centuries been used as one of the most universal and reliable standards for monetary value, and the United States was the only member country with enough gold to support the arrangement). This method of currency exchange required that the United States be willing to sell gold at a specific, fixed dollar value that set the standard for the dollar and, by extension, all of the other currencies. In 1971, with its gold reserves shrinking, it decided to stop providing its gold for sale in this way, and countries began establishing their own exchange rates.

More Detailed Information

The IMF is a specialized agency of the United Nations (an organization that promotes peaceful international relations), but in practice it operates independently of its parent organization. More than 180 countries are members of the IMF, and each is represented by a governor. The governors do not have equal voting rights in matters of IMF policy, however. Voting is weighted according to how much money the member government contributes to the IMF. The day-to-day decisions of the IMF are made by an executive board that is dominated by eight of the world’s wealthiest countries: the United States, the United Kingdom, Japan, China, France, Germany, Russia, and Saudi Arabia.

All members of the IMF contribute a quota, or an amount of money calculated according to the country’s wealth. The richer a country is, the larger its required quota. The United States, for example, has contributed roughly 18 percent of the IMF’s pool of quotas. Once a country has contributed its quota, it is entitled to borrow up to that same amount if it needs to correct deficits in its balance of payments (which occur when there is more money leaving the country than coming in). The size of a country’s quota also determines the amount of voting power it has on the board of governors. The United States, the United Kingdom, Japan, Canada, Germany, France, and Italy together control approximately half of the votes on the board of governors.

When a country experiences a deficit in its balance of payments and its currency becomes devalued, it would be likely, without the IMF’s intervention, to engage in defensive behavior that might be harmful to other economies. A country in such a crisis, for instance, might try to reduce its balance-of-payments deficit by restricting the imports of goods from other countries (in an effort to keep its own money inside the country) or by setting the exchange rates for its own currency at levels that could do economic harm to other countries.

The IMF wants to prevent countries from behaving in this way, so it allows members to borrow money from the pool of quotas to restore their balances of payment. Member countries can usually borrow up to 25 percent of their quota amount without being subject to many restrictions. As a country borrows more than this amount, however, it becomes increasingly subject to IMF regulation. This usually means that the IMF will force the country, as a condition of the loan, to save money by taking often-difficult economic steps, such as increasing taxes or cutting funds for domestic programs (health care and education, for instance). The IMF requires countries to take such steps with the goal of helping them correct their balance-of-payments deficits and pave the way for long-term economic health.

The IMF also provides technical assistance to countries experiencing currency and balance-of-payments problems. Most of this assistance is free of charge.

Recent Trends

In the 1970s, having lost its authority to set exchange rates, the IMF began focusing greater attention on the economic needs of the world’s developing countries. A developing country is a nation with basic modes of economic production and a relatively low per capita (in other words, per person) income. Some economists have argued that IMF policies during the 1980s and 1990s helped build strong global economies in a number of Asian nations. Over this period countries such as China, Thailand, South Korea, Indonesia, and numerous others witnessed annual growth rates of approximately 10 percent in their gross domestic products, or GDPs (the value of all goods and services produced in a particular nation over a given time).

Along with the World Bank and the World Trade Organization, whose aim is to reduce global trade barriers (such as fees or limits on the goods and services that can move across borders), the IMF is today one of the leading forces in the trend called globalization. Globalization refers broadly to the increasing mobility of money, labor, equipment, and other economic resources across national borders. The rise of globalization has created greater demand for economic policies oriented toward promoting international trade. The IMF has played an important role in promoting globalization through the introduction of debt relief (in other words, assistance with the repayment of debts) for developing countries. In 1996 the IMF established the Heavily Indebted Poor Countries Initiative (HIPC), a program aimed at offering debt relief to developing countries. By alleviating the financial burdens associated with high levels of debt, the HIPC is designed to help poorer countries build the foundations of solid, stable economies. At the same time, the IMF has provided consulting and educational programs geared toward teaching poor countries to manage their economies more effectively.

The IMF also played a central role in helping Asian economies recover from the financial crisis of 1997, when currency and stock values in dozens of Asian countries fell suddenly and dramatically. To counter the resulting economic instability, the IMF provided large-scale debt relief, while also helping nations devise sounder financial policies to prevent future disasters. While some economists applauded IMF efforts in the wake of the crisis, many opponents of the IMF argued that the economic downturn was the result of IMF policies in the first place; according to these critics, the economic growth in Asia during the 1980s and 1990s was too rapid to be sustained, largely because of IMF failures to create the infrastructures necessary to support these growing economies.

Another criticism of the IMF has to do with the regulations it sometimes imposes on countries that borrow money. While economic conditions are unique in every country, the IMF tends to impose the same kinds of restrictions on all struggling nations. According to critics, this blanket approach is especially hard on the poorest member countries, whose level of suffering increases as a result of IMF regulations, without any corresponding increase in economic growth.