A global financial institution with 190 member nations is the International Monetary Fund (IMF). The IMF, which has its main office in Washington, D.C., seeks to promote international monetary cooperation, guarantee financial stability, promote fair trade, encourage high employment and long-term economic growth, and lessen poverty worldwide.
• The International Monetary Fund (IMF) seeks to promote financial stability and global economic growth, promote trade, and lessen poverty throughout the world.
• The Bretton Woods agreement, which aimed to promote global financial cooperation by establishing a system of flexible, convertible currencies with fixed exchange rates, included the creation of the IMF in 1945.
• Loaning money to nations that are undergoing economic hardship is the IMF's main duty in order to avert or lessen financial catastrophes.
• To produce its economic forecasts, the IMF gathers and examines a vast quantity of data on national economies, international commerce, and the global economy.
Background of The IMF:
The Bretton Woods framework agreement's central component, the IMF, was initially imagined in 1944. World Wars I and II devastated Europe's people, property, and economy throughout the first half of the 20th century, while the Great Depression from 1921 to 1941 devastated the economies of both Europe and the United States. The 1944 Bretton Woods system of monetary management established the standards for trade and financial interactions between Canada, and a number of Western European nations such as Australia, and Japan. It also included the United States.
National currencies lost value when nations stepped up their barriers to free trade in an effort to revitalize their flagging economies, while global trade fell off dramatically. The desire for a new international monetary system was sparked by these unilateral, frequently harmful actions. This new system would:
(1) Stabilize currency exchange rates without fully backing currencies with gold instead of fiat money
(2) Lessen the frequency and severity of balance-of-trade deficits and,
(3) eliminate economically damaging protectionist trade policies, such as tariffs, subsidies, import quotas, or other restrictions—all while, as far as is practical, maintaining fiat money.
In July 1944, the UN Monetary and Financial Conference met in Bretton Woods, New Hampshire, United States, in an effort to find a multilaterally accepted solution. Articles of Agreement for a planned International Monetary Fund, which would oversee the new global monetary system, were developed by representatives from 44 different nations. The Bretton Woods monetary system's creators thought that by preserving convertible and flexible currencies at stable exchange rates, it would encourage international trade, financial investment, and economic expansion.
In order to avoid imposing trade restrictions, devaluations, or other deflationary economic policies that might cause their economic problems to spread to other nations, the new system expected countries with temporary, moderate balance-of-payments deficits to finance those deficits by borrowing foreign currencies from the IMF. Deflation, the opposite of inflation, happens when prices are rising during a recession and people decide to save their money rather than spend it on items that will become more affordable later. A major economic problem called deflation can amplify a crisis and transform a recession into a full-blown depression.
Harry Dexter White, an American delegate and senior official in the U.S. Treasury Department, envisioned an IMF that operated much like a typical bank, ensuring that its loans were provided with a reasonable guarantee that the countries receiving them could return their debts on time. The majority of White's idea was included in the Bretton Woods final agreements. John Maynard Keynes, a British economist whose theories would fundamentally alter the theory and practice of macroeconomics as well as government economic policies, on the other hand, envisioned the IMF as a cooperative fund that member states could draw upon to maintain economic activity and employment throughout times of crises. In Keynes's opinion, the IMF should assist nations in acting as the US government did during President Franklin D. Roosevelt's New Deal reaction to the 1930s Great Depression.
The Bretton Woods Articles of Agreement were approved by 29 of the 44 participating nations and came into effect on December 27, 1945. The IMF's board of governors met in Savannah, Georgia, in the United States the next year to enact bylaws and choose the organization's initial executive board of directors. The fund's 12 initial executive directors first convened in Washington, D.C., in May 1946, and the governors decided to place the fund's permanent headquarters there. The next year saw the start of the IMF's genuine financial operations. France was the first nation to borrow money from the IMF on May 8, 1947.
The IMF was created to support a combination of free trade with the freedom for states to improve their welfare provision and to regulate their economies to reduce unemployment, the foundation of embedded liberalism as it existed from the end of World War II to the 1970s. The IMF is one of the major organizations of the international economic system.
The IMF's impact on the world economy grew gradually over the 20th century as it added additional members. This increase was primarily the result of numerous African nations achieving political independence and the Soviet Union's breakup in 1991, which allowed for the acknowledgment of the independence of other governments that had previously been under its sway.
The value of one country's currency relative to another country's currency was the basis on which the IMF based its lending rates when it first started operations. How many U.S. dollars, for instance, are needed to purchase one euro? At the current currency rate of 1.0721 as of June 3, 2022, one euro costs $1.0721. This arrangement was in use until 1971, when the US government stopped allowing the US dollar to be convertible into gold. The "Nixon Shock" modification made then-current U.S. currency fiat money once more, which it has been ever since. Government-produced currency known as "fiat money" is not backed by a tangible good like gold or silver, but rather by the government that created it.
Early in the new millennium, the IMF offered two significant credit packages to Uruguay following its financial crisis in 2002 and Argentina during its great downturn from 1998 to 2002. But by the middle of the 2000s, IMF lending had reached its lowest proportion of global GDP since the 1970s.
The biggest IMF borrowers as of January 2012 were, in descending order, Greece, Portugal, Ireland, Romania, and Ukraine.
Following Ukraine's Revolution of Dignity, the IMF was able to obtain a $18 billion bailout fund for the country's temporary government by the end of March 2014.
Coronavirus Pandemic - Response:
The IMF predicted that while global growth would increase by 3.4% by the end of 2019, the global economy would contract by 4.4% in 2020 as a result of the coronavirus pandemic that would start in November of that year.
The IMF declared in March 2020 that it was prepared to raise $1 trillion to combat the pandemic. Additionally, Iran had already requested $5 billion of the $50 billion fund, which had been announced two weeks earlier. The United Kingdom contributed 183 million dollars ($150 million) to the IMF's disaster relief fund on March 28, 2020. The IMF reported that "more than 80 poor and middle-income countries" had requested bailouts to combat the coronavirus one day earlier.
The IMF declared on April 13, 2020, that it "would offer 25 member nations immediate debt relief through its Catastrophe Containment and Relief Trust programme.
By November 2020, the Fund issued a warning that additional financial assistance would be required as COVID-19 infections started to rise once more and that the economic recovery may be faltering.
IMF managing director Kristalina Georgieva said on April 8, 2021, "Millions of people are benefiting from vaccines, and the global economy is on solid ground. Though the recovery is in motion, too many nations are slipping behind, and the level of economic inequality is rising. Strong policy action is required to offer everyone a fair shot, Georgieva continued, "A shot in the arm to stop the pandemic everywhere, and a shot at a better future for vulnerable people and countries."
How Does It Work?
The 190 nations that make up the IMF's membership are both responsible to and in charge of the organization. The IMF's highest governing body is the Board of Governors. Each member nation has one governor and one alternate governor on the board. The governor, who is typically the finance minister or the governor of the central bank, is chosen by the member nation.
The 24-member Executive Board, which is in charge of the IMF's daily operations, is presided over by the Managing Director, who is also in charge of the organization's employees. The IMF's Managing Director, who also serves as the Executive Board's chair, is supported by four Deputy Managing Directors. Lending, monitoring the state of the economy, and providing member nations with technical support are the IMF's main responsibilities.
The primary role of the IMF, as envisioned in the original Bretton Woods Articles of Agreement drafted in 1944, is to provide loans to member nations experiencing real or anticipated balance of payments concerns, including emergency necessity loans. While addressing the underlying issues, the goal is to assist the borrowing countries in replenishing their foreign exchange reserves, stabilizing their currencies, continuing to pay for imports, and reestablishing the prerequisites for robust economic growth.
The majority of the IMF's funding for lending comes from the capital subscription fees that nations pay to join. Each IMF member nation is given a "quota" based largely on its relative standing in the global economy. Consequently, when nations encounter financial difficulties, they can borrow from this pool. The IMF performs broad evaluations of quotas on a regular basis to see if overall quotas and their distribution among members are adequate. The 14th Review resulted in the most current rise in total quotas, which was approved in January 2016 and raised them to US$ 651 billion. With a current quota of around US$118 billion, the United States is the IMF's largest member.
IMF loans are granted subject to the fulfilment of a set of conditions in return for financial support. While the IMF does not demand collateral from nations in exchange for loans, it does demand that the government applying for aid adjust its policies to address its macroeconomic imbalances. The money might be withheld if the requirements aren't met. A 1952 executive board resolution established the idea of conditionality, which was later adopted into the Articles of Agreement.
The IMF regularly monitors events in the international economy and monetary system as a critical component of assessing future funding levels in order to detect risks and suggest policies for economic growth and financial stability. The Fund can then assess the soundness and efficacy of the economic and financial policies of its 190 member nations. When necessary, the IMF assesses potential threats to the economic stability of its member nations and provides guidance to their governments on potential changes to existing policies.
The IMF offers technical help and training to nations using its broad range of financial knowledge, which ranges from taxation through central bank operations to the reporting of macroeconomic statistics. Cross-cutting concerns including income inequality, gender equality, corruption, and climate change are dealt with by member nations' central banks, finance ministries, revenue administrations, and financial sector supervisory agencies with the support of this training and assistance.
Issues And Criticism:
Many academics worry that political considerations have a bigger impact on IMF decisions than do tried-and-true, well-defined global macroeconomic principles.
The IMF has faced criticism for being dominated by the United States and Europe almost from the beginning. This idea has resulted in what some detractors have referred to as "disenfranchising the world" from the IMF's most important governance. The false sense of universality in the [IMF's] general economic theory, from the perspective of the periphery, is one of the obvious weaknesses of the theory, according to Raal Prebisch, the founding secretary-general of the UN Conference on Trade and Development (UNCTAD).
The United States, as the IMF's most influential member, has a significant impact on decisions made by the Fund regarding specific loan arrangements. The United States has openly opposed losing its "leading role" at the IMF and its "power to define international norms and practices," as stated by U.S. Treasury Secretary Jacob Lew in 2015.
Emerging markets have been underrepresented in the IMF's voting mechanism for the majority of its history. For instance, China's vote share was the sixth-largest even though it was the group's most populous member country. Brazil received less votes than Belgium did, in a similar fashion. At the G20 summit in 2010, reforms to give emerging economies more clout were approved.
However, as 85% of the Fund's voting power was needed for the reforms to take effect and the U.S. had more than 16% of the voting power at the time, the reforms could not be passed unless they were ratified by the United States Congress. At the end of 2015, the United States eventually ratified the voting reforms after years of opposition. The United States maintained its over 16% vote share in the IMF notwithstanding these modifications.
Assistance For Dictatorships:
IMF policymakers have come under fire for supporting nations with military dictatorships that were favorable to American and European corporations since the end of the Cold War. For instance, look at the governments of Nicolae Ceausescu in Romania and Mobutu Sese Seko in Zaire. Zaire obtained a significant IMF loan despite a report from its representative, Erwin Blumenthal, documenting systemic corruption and theft as well as the nation's incapacity to repay any loans. Additionally, detractors assert that the IMF generally supports or is antagonistic to violations of labor and human rights. The globalization opposition movement was sparked in part by the debate.
Economic stability, according to proponents of these IMF programs, is necessary for democracy. However, detractors point out several instances where democratized nations lost their independence after obtaining IMF financing.
General Kaguta Museveni's dictatorship was in charge of Uganda at the time, and despite protests from Ugandans who marched in South Africa, London, and Washington on June 28, 2021, the IMF authorized a US$1 billion loan to the country.
Supply of Food:
The IMF's policies have drawn criticism from a number of civil society organizations because of how they affect access to food, particularly in developing nations. Former US President Bill Clinton criticized the World Bank and IMF for their food and agriculture policies in a speech to the UN on World Food Day in October 2008:
The World Bank, the IMF, all the major foundations, and all the governments must acknowledge that for 30 years, everyone made mistakes, including myself when I was president, said Clinton. We need to return to a more ethical and ecological style of agriculture because we were mistaken to think that food was just another good traded internationally.
For instance, the international think tank Foreign Policy in Focus cited the IMF's agricultural market policy as having a "recurring pattern." "The collapse of government investment in rural areas caused by IMF-World Bank structural adjustment programs, followed by a massive influx of subsidized agricultural imports from the United States and the European Union after the WTO's Agreement on Agriculture pryed open markets, and destabilized peasant producers."
Public Health Effect:
A 2009 study by PLOS Medicine found that the IMF's harsh requirements caused thousands of TB deaths in Eastern Europe. Rick Rowden, a scholar and author, argued that the IMF's preference for maintaining low inflation and small budget deficits has prevented developing countries from increasing long-term investment in public health infrastructure in his 2009 book, The Deadly Ideas of Neoliberalism:
How the IMF has Undermined Public Health and the Fight against AIDS. According to Rowden, the results have been public health systems that are chronically underfunded and a "brain drain" of medical professionals, both of which have harmed public health and the fight against HIV/AIDS in developing nations.While praising some aspects of the "neoliberal agenda," the finance and development division of the IMF published a report in 2016 titled "Neoliberalism: Oversold?" in which it was claimed that the Fund had "oversold" financial deregulation and fiscal austerity measures, which they claim have worsened financial crises and economic inequality globally.
The neoliberal agenda places a strong emphasis on increased competition, which is attained through deregulation and the opening of domestic markets, including the financial markets, to foreign competition, as well as a smaller role for the state, which is attained through privatization and restrictions on governments' ability to run fiscal deficits and amass debt.
Result on The Environment:
IMF policies have come under fire for making it impossible for debt-ridden nations to reject environmentally damaging projects that will bring in the money they need to repay their debts, such as oil, coal, and projects that will destroy forests and support agriculture.
For instance, in order to maintain its rainforests, Ecuador had to ignore repeated IMF suggestions to permit increasing lumbering. In its 2010 report, "Financing the Response to Climate Change," the IMF recognized this dilemma and suggested the development of the IMF Green Finance programme, a mechanism to issue special drawing rights directly to pay for preventing climate harm and possibly other ecological protection.