International Monetary Fund
International Monetary Fund (IMF) was established with stated objectives to promote international economic cooperation, international trade, employment, and exchange rate stability, including by making resources available to member countries to meet balance of payments needs. Its headquarters are in Washington, D.C.
It was conceived on July 22, 1944 in the Brettonwoods Conference, New Hampshire, United States, originally with 45 members and came into existence on December 27, 1945 when 29 countries signed the agreement, with a goal to stabilize exchange rates and assist the reconstruction of the world’s international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF works to improve the economies of its member countries.
Current members are 187 members of UN and Kosovo. Cuba left it in 1964 and Taiwan was ejected & replaced by China in 1980. The other non-members are North Korea, Andorra, Monaco, Liechtenstein, Nauru, Cook Islands, Niue, Vatican City, and the rest of the states with limited recognition.
Executive Board of IMF
There is a 24-member executive board in IMF, which are the general owners of the IMF and can control major decisions within the organization, but all other member countries are represented on the population, economic scale. Out of the 24 members, 5 are appointed by the five members with the largest quotas and 19 executive directors are elected by the remaining members. All members appoint a governor to the IMF’s board of governors.
On June 28, 2011, Christine Lagarde was named Managing Director of the IMF, replacing Dominique Strauss-Kahn.
The powers of the other countries within the organization are represented on a proportional scale to their population and economic rank in the world.
Please note that all members of the IBRD are also IMF members, and vice versa. A country which wants to become a member will apply and application will be considered first by the IMF’s executive board. After its consideration, the board will submit a report to the board of governors of the IMF with recommendations in the form of a “membership resolution.” These recommendations cover the amount of quota in the IMF, the form of payment of the subscription, and other customary terms and conditions of membership. After the board of governors has adopted the membership Resolution, the applicant state needs to take the legal steps required under its own law to enable it to sign the IMF’s Articles of Agreement and to fulfil the obligations of IMF membership. Any member country can withdraw from the Fund, although that is rare.
A member’s quota in the IMF determines the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of Special Drawing Rights (SDRs).
- A member state cannot unilaterally increase its quota—increases must be approved by the Executive Board of IMF and are linked to formulas that include many variables such as the size of a country in the world economy.
- For example, in 2001, China was prevented from increasing its quota as high as it wished, ensuring it remained at the level of the smallest G7 economy (Canada). However, in September 2005 the IMF’s member countries agreed to the first round of ad-hoc quota increases for four countries, including China.
Under existing arrangements, the industrialized countries (including Mexico) hold more than half of the IMF votes.
- But the financial crisis has tilted control away from heavily indebted mature economies, such as the United States and the United Kingdom, in favour of the fast-growing, cash-rich, so-called BRIC economies of Brazil, Russia, India, and China.
- United States has by far the largest share of votes (approx. 17 percent) amongst IMF members.
In IMF, major decisions require an 85 percent supermajority. The United States has always been the only country able to block a supermajority on its own.
IMF lending Assistance
IMF lends only to Member countries. Member states with balance of payments problems, which often arise from these difficulties, may request loans to help fill gaps between what countries earn and/or are able to borrow from other official lenders and what countries must spend to operate, including to cover the cost of importing basic goods and services. In return, the states are needed to launch so called Structural Adjustment Programs (SAPs), which have often been dubbed the Washington Consensus.
Financial aid is always bound to so-called Conditionalities, including SAPs. The economic performance targets have been established as a precondition for IMF loans and it has been alleged that such conditionalities retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries.
Sometimes IMF favours austerity programmes in the borrowing countries. The austerity programmes include cutting public spending and increasing taxes even when the economy is weak, in order to bring budgets closer to a balance, thus reducing budget deficits.IMF usually asks the countries to lower their corporate tax rate. Thus, IMF is criticized for its more monetarist approach and that the purpose of the fund is no longer valid.
Developed countries have a more dominant role and control over less developed countries (LDCs) primarily due to the Western bias towards a capitalist form of the world economy with professional staff being Western trained and believing in the efficacy of market-oriented policies.
Fund worked on assumption that all payments disequilibria are caused domestically. In the aftermath of the 1973 oil crisis, the then LDCs found themselves with payments deficits due to adverse changes in their terms of trade, with the Fund prescribing stabilisation programmes similar to those suggested for deficits caused by government over-spending. Faced with long-term, externally-generated disequilibria, the Group of 24 argued that LDCs should be allowed more time to adjust their economies and that the policies needed to achieve such adjustment are different from demand-management programmes devised primarily with internally generated disequilibria in mind.
It has been alleged that effects of Fund policies has been anti-developmental. The deflationary effects of IMF programmes quickly led to losses of output and employment in economies where incomes were low and unemployment was high. Moreover, it was sometimes claimed that the burden of the deflationary effects was borne disproportionately by the poor.