International Monetary Fund (IMF)

The International Monetary Fund (IMF) is a multilateral financial institution that has supervised the global financial system since the end of World War II. Headquartered in Washington, D.C., it acts as a lender of last resort for member governments who face problems in meeting their external financial obligations. The relationship between the IMF and Latin American governments has been a contentious one, as the latter have faced chronic payments difficulties since the 1950s.

The IMF and the World Bank, its sister organization, institutionalized the international cooperation that their architects hoped would prevent a recurrence of the economic instability that had led to political upheaval and, ultimately, world war. Soon after the Japanese attack on Pearl Harbor, Harry Dexter White and his colleagues in the U.S. Treasury Department developed a blueprint for a multilateral fund to stabilize exchange rates and control private capital flows. White and his colleagues believed that foreign lending and speculative movements of capital by Wall Street banks constituted a major cause of the Great Depression. In their view, the establishment of such a fund, anchored by the dollar, would "drive the usurious money lenders from the temple of international finance," as Treasury Secretary Henry Morgenthau put it.

The IMF gave member governments more flexibility over their domestic policies than they had enjoyed under the gold standard, which had collapsed under the weight of World War I and the Great Depression. Its designers intended it to provide liquidity that governments needed to replenish foreign exchange reserves while their policy changes took effect. Governments would not have to engineer sharp recessions to stem outflows of capital that depleted reserves, as the gold standard had required.

Members paid in subscriptions to both the IMF and the World Bank based on the size of their economies. These subscriptions, or quotas, formed the basis of both voting and drawing rights. As the member with the largest economy, the United States enjoyed the largest vote and wielded an effective veto over IMF policy; this power was an acute source of controversy during the Cold War. Members could draw automatically only on the 25 percent of the subscription that they paid in gold. Access to the balance of the quota (and beyond, as credits) required consultation with and surveillance from the IMF. Under procedures formalized in 1952, the IMF divided drawings into units of 25 percent of the quota, known as tranches, and used financial incentives to encourage short-term borrowing (three to five years) of small amounts. The IMF facilitated access to these resources by means of stand-by agreements, whereby governments agreed to change their monetary and fiscal policies to alleviate their balance-of-payments problems.

The IMF and the World Bank lacked the resources to address the reconstruction of postwar Europe and Asia. Instead, U.S. bilateral assistance met these needs, principally through the Marshall Plan. Once it emerged from its institutional dormancy in the 1950s, the IMF operated more conservatively than its designers intended. Indeed, critics routinely charged the IMF with abetting U.S. political hegemony and derailing development programs on behalf of liberal economic orthodoxy.

LATIN AMERICAN DEVELOPMENT STRATEGIES

During the 1930s Latin American countries adopted import substitution industrialization (ISI) as a development strategy. The value of their commodity exports had plummeted, and the United States and Europe had erected barriers to trade. ISI involved state-directed investment in manufacturing and infrastructure at the expense of agriculture. It aimed to reduce the dependence of national income on commodities, whose value relative to manufactured goods many experts expected to fall over time, and trade with industrialized countries. ISI also involved the heavily subsidized redistribution of population and income from rural to urban areas. For two decades Latin Americans enjoyed relatively high growth rates, owing to increased consumption and the U.S. demand for strategic minerals during World War II and the Korean conflict. By the 1950s expanded government bureaucracies, state control of the "commanding heights" of the economy, fiscal deficits, inflation, overvalued exchange rates, and inefficient industry characterized the political economy of many Latin American countries.

The fall of commodity prices at the end of the Korean conflict precipitated balance-of-payments crises across the region. ISI was not autarkical: governments accumulated foreign debt because the strategy required large imports of capital equipment. Now they were unable to sell their manufactured goods overseas and their investment-starved agricultural sectors were too weak to generate the foreign exchange needed for debt service. At the same time, governments sustained imports of capital equipment to maintain the industrial production that provided jobs and growth. By the 1960s almost all the governments of the region were turning to the IMF for financial assistance.

For IMF economists, the solution to balance-of-payments difficulties broadly entailed reducing the role of the state in economic decision making. To access IMF funds, borrowers agreed to balance budgets by cutting spending and subsidies and raising taxes; control inflation by limiting credit and suppressing wages; and remove price distortions by reducing tariffs, removing ceilings, eliminating exchange rate discrimination, and devaluing their currencies. By adopting these changes, the IMF believed, borrowers would alleviate their payments problems and improve the performance of their economies.

IMF austerity programs alleviated balance-of-payments problems, to be sure, but delivered little of the economic growth or stability that they promised. They failed to balance budgets, quell inflation, or reduce state direction of the economy. At the same time, they redistributed income from labor to capital, even as economies overall suffered recession. One reason was that a stand-by agreement was politically risky for the borrower. It represented capitulation to foreign interests and the interference of Washington in a country's domestic affairs. Needing to show that they had driven a hard bargain, governments often won concessions that reduced the effectiveness of the program. Moreover, the IMF favored the political elites and capitalists whose approval of any agreement was required. Thus, for instance, taxes were invariably regressive, imposed on consumption rather than income. The IMF also paid scant attention to structural rigidities that characterized many Latin American societies, such as concentrated land and corporate ownership. With the IMF's seal of approval came foreign loans and direct investments that enabled governments to delay structural reforms. As a result, payments problems recurred and external debts accumulated, culminating in the Latin American debt crisis of the 1980s.

The IMF now became responsible for coordinating the actions of both creditors—mainly U.S. commercial banks—and debtors to prevent a collapse of the international financial system, which widespread defaults might have precipitated. Its lending rose to unprecedented levels in the late 1980s and early 1990s, even though the economic conditions of the borrowers were poor by historical standards. As a result, IMF put greater emphasis on institutional reform as a condition for borrowing, recommending a set of market-oriented policies that the economist John Williamson dubbed the Washington Consensus. Nevertheless, subsequent Latin American growth rates were below their post-World War II averages and poverty remained widespread.

See alsoEconomic Development; Foreign Debt; Foreign Investment.

BIBLIOGRAPHY

James, Harold. International Monetary Cooperation since Bretton Woods. Washington, DC: International Monetary Fund, and New York: Oxford University Press, 1996.

Kofas, Jon V. The Sword of Damocles: U.S. Financial Hegemony in Colombia and Chile, 1950–1970. Westport, CT: Praeger, 2002.

Manzetti, Luigi. The International Monetary Fund and Economic Stabilization: The Argentine Case. New York: Praeger, 1991.

Pastor, Manuel, Jr. The International Monetary Fund and Latin America: Economic Stabilization and Class Conflict. Boulder, CO: Westview, 1987.

Woods, Ngaire. The Globalizers: The IMF, the World Bank and Their Borrowers. Ithaca, NY: Cornell University Press, 2006.

                                          Michael Adamson