Politics

Who Is The IMF?

In any discussion of economics these days the International Monetary Fund, or IMF, is likely to be mentioned. This often causes alarm – it’s a powerful organization that isn’t accountable to US taxpayers, and its interventions can have significant effects on the economy. What exactly is it, what does it do and who makes the decisions?

The IMF was originally set up as a result of the 1944 Bretton Woods talks between the Allied nations. The aim was to stabilize exchange rates between nations and reduce economic uncertainty, and at first the preferred method was by tying currencies to bullion values – the Gold Standard. The IMF itself began operating on March 1, 1947; its role in the Bretton Woods system was to give loans, usually of cash, to members that had temporary payment imbalances. Since the collapse of the Gold Standard in 1971 it has adapted its methods, but the main function is still to use lending and capital transfers to keep national economies stable.

Today the IMF has 188 member states, up from an original 29, and operates in six official languages that include English, French, Spanish and Arabic. Its headquarters is in Washington, D.C. – although many people think it’s a United Nations organization it actually isn’t. Instead it’s controlled by a Board of Governors. Each member nation has one governor and one alternate governor, which it appoints itself. The Board of Governors usually meets annually, and is mostly responsible for electing members to the Executive Board.

The Executive Board has most of the real power and is made up of 24 members, appointed from the Board of Governors. Eight countries have their own member on the Executive Board – the USA, the UK, Germany, Japan, France, Russia, China and Saudi Arabia. The other 16 members represent geographical areas, and are chosen from among the countries in the area they’re responsible for. The Executive Board invites new members, suspends existing members if necessary and allocates members’ voting shares.

Because each member state has one governor but very different population sizes and economic power, votes are weighted using a complicated system. For example Poland has 17,621 votes; the USA has 421,961 to reflect its much larger economy. This system makes sense, because nations with larger economies contribute more to the funds the IMF administers so deserve more influence. What’s more controversial is the means of appointing the top officials.

The IMF’s senior figure is the Managing Director, the head of the Executive Board. There’s a tradition that the USA provides the head of the associated World Bank while a European is the IMF Managing Director. That naturally attracts criticism from growing economies like China and Brazil, but it’s also very noticeable that certain European countries have supplied more than their fair share of IMF chiefs. In total there have been eleven Managing Directors – and five of them, including the incumbent Christine Lagarde and her predecessor, were French. Two more were Swedish. Meanwhile Europe’s largest economy, Germany, has only held the position once – and the UK has never held it at all. The result is that despite criticism that the IMF tries to force US-style capitalism on the whole world, in practice it leans heavily towards continental-style social democracy.

The IMF has helped avert many financial crises, but the strict terms it imposes in exchange for loans probably caused plenty more. It’s definitely a valuable tool for stabilizing the world economy but for an advanced nation like the USA it carries risks to, and needs to be closely monitored.

Controversies Surrounding The IMF

IMF stands for the International Monetary Fund, an international organizations that offers both loans and bailout packages, and that has been subjected to extensive debate and controversy over the past years. Initially designed to ensure the stability of the worldwide financial system after World War III, the IMF has become one of the most important financial institutions of its kind, with a great influence over many countries. The policies of the International Monetary Fund has changed, and while many agree with them, others claim that they bring a lot of damage not only to the economy, but also to the surrounding environment. That being said, here is a deeper insight into some of the most important and controversial aspects related to the IMF:

1. Some Say Its Policies Hurt The Surrounding Environment

Many environmentalists and other environmentally-conscious people claim that the International Monetary Fund offers loans that are paving the way for the exploitation of the natural resources, which are depleting at a very fast pace. Apparently, the IMF does not take into account the impact of its lending policies on nature, and environmental aspects are not included in the policy making process. Some people also claim that the struggle to pay back the loans granted by the International Monetary Fund has lead to an unsustainable and damaging liquidation of some of the world’s most valuable natural resources, such as cocoa. The cocoa exports have soared in the Ivory Coast, and this has led to the loss of approximately 70% of the forests found here.

2. Some Critics Consider The Lending Conditions To Be Too Harsh

The lending conditions imposed by the International Monetary Fund are by far the most controversial and most commonly debated topic, and for a good reason given the fact that the IMF primarily lends money to poorer countries and then it applies severe financial restrictions. The problem is not the fact that it helps poor countries re-stabilize their economy as it did after the recession that hit the entire world a few years back, as this is a very good and helpful thing for the countries in question, but the fact that the conditions attached to these loans are very difficult to meet, and often with great sacrifices.

With that in mind, it must be said that in order for a country to repay its loans (usually millions or billions of dollars), its economy must be liberalized and there must be some serious government spending cuts involved, which can take their toll on the country’s economy in the long run. Besides this, the overall social structure of the country can be impacted as well, given the fact that the conditions imposed by the IMF often reflect the finance-related beliefs of Western nations, which may not always be in the best interests of the borrower.

Many people claim that these conditions are often designed to compromise not only the economic sovereignty of the receiving countries, but also their political structure. The fact that the conditions are too intrusive has generated a lot of backlash from other countries, and so did the so-called “structural adjustments” that the receiving countries had to meet in order to be eligible for the loan.

In addition to the government spending cuts imposed by the International Monetary Fund, the IMF also implies strict banking regulations, addressing various government deficits as well as a regulated pension policy. All these changed have caused a severe domestic opposition in most of the receiving countries, over the years.

3. The Policies Are Imposed All At Once, Which Leads To Privatization And An Increased Unemployment Rate

Besides the fact that these policies are severe enough and likely to cause domestic opposition, the IMF did not even impose them in an appropriate sequence, but rather all at once, which leads to a serious of consequences including the privatization of government services in a very rapid manner (for instances, selling utilities companies to private investors).

In turn, given the fact that private owners aim to make a company as efficient and as cost-effective as possible, the chances are that the new owners of such companies (which, as stated above, are often either utilities or water supply companies) are very likely to let go a significant part of the staff, which leads to an increased rate an unemployment. The reduced government salaries and pensions coupled with an increased unemployment rate can destabilize the financial and social structure of a country even more than the financial crisis itself.

In some cases, the borrowing countries do not have a properly developed unemployment management program, neither does it have social safety programs or other plans to support families who have lost one or more primary sources of income. In other words, those people who were fired when the company they worked for was sold will be unable to financially support their families.

This is why privatization must be introduced as part of a larger, more comprehensive and thoroughly designed program that involves creating new jobs designed to replace the lost ones. These programs should include low interest rates for mortgages and other loans, along with other more specific macroeconomic policies.

4. The IMF Accepts Little To No Public Criticism

Those who oppose the policies of IMF claim that the International Monetary Fund was not even open to public criticism when it came out with these severe policies, and in many cases the agreements that took place between the receiving countries and the IMF were often kept secret until the papers were signs and the loan was already taken out. In many times,this led to a severe backlash from the general public in the borrowing countries.

5. The Policies Of The Washington Consensus Are Universally Imposed

Last, but certainly not least, the critics of the International Monetary Fund also claims that the institution imposes the policies of the Washington Consensus on all the borrowing countries, without understanding the distinct and primary financial and social characteristics (and differences) of the borrowing countries, which in turn makes these policies very difficult to carry out and, as mentioned earlier, often very counter-productive for the general economy of the receiving countries.

In order for an international monetary organization such as the IMF to be able to impose generally applicable rules, regulations and policies, it must firstly study and specialize in the economies and the political climate of the borrowing countries, economies that the International Monetary Fund often oversees.

Sources:

http://www.globalexchange.org/resources/wbimf/oppose
http://en.wikipedia.org/wiki/International_Monetary_Fund
http://www.ifitransparencyresource.org/imf-international-monetary-fund.php
http://www.globalization101.org/why-is-the-imf-controversial/
http://www.brettonwoodsproject.org/2005/08/art-320869/

Article first published in http://www.50years.org/

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