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International Monetary Fund - IMF

Page history last edited by Brian D Butler 9 years, 9 months ago



Table of Contents:




My general message regarding the IMF has been the following:

  • regarding governance reform at the IMF;  there are two arguments for changing the % voting rights at the IMF (shifting more % votes to emerging markets - BRICS).  One is that their economies are now bigger in % of world GDP than their % voting at the IMF.  This issue of "fairness" is less persuasive than the second;  that in order for global re-balancing of the world economy to occur, we need to un-do the damage done (to the IMF's reputation) by the Asian Crisis '97-98, and to finally get emerging markets to trust the IMF again. To get them to trust the IMF again, the argument goes, we need to show that they have a stake in how the IMF is run, and to demonstrate that the IMF is not just an instrument of the "west".  As noted recently be the managing director of the IMF, "At risk is the legitimacy of the world's premier international financing institution: If developing nations don't believe they have proportional seats at the table, it could undermine the mission of the IMF. It comes as the IMF's role in helping to manage the global economy is ascending, and a stalemate on the issue thus far has prevented governance reform."
  • On the other hand....(an argument for not taking governance reform too far)...the world needs a "bad guy" (globo-cop), and the IMF is the right institution for the role.   The fear is what might happen if the IMF were to become "toothless" (ie if emerging markets were to be successful in their campaign to limit the use of "conditionalities").  The danger is that if you allow governance reform to be driven by emerging markets desire to change the IMF (remove the conditionalities, or lending practices), that they might in effect render the IMF "toothless".  By making the IMF a "nicer" institution, they may make the global economy less safe (rather then more so).   See our discussion on "moral hazard"  
  • Regarding public opinion about the IMF, as I said, I think its necessary (and a good thing) to have the IMF as the scape-goat for unpopular policies (rather than have internal anger directed at Germany, as in the case of Greece... its better for the health of the EU experiment to have that anger directed outward at the IMF.  This is what I mean by the virtues of having the IMF filling the role of the "bad guy"). 
  • Some public anger is caused by a mixture of ignorance on the part of the general population as to the role of the IMF, mixed with opportunistic politicians that see an external scapegoat as advantageous to their democratic objectives (get reelected!)  In the past, particularly in the 80's,  I think internal politicians in many Latin American countries used the scape goat of the IMF to keep from implementing necessary reforms.  As we discussed in class, it is not natural-tendency thinking for democratically elected officials to balance budgets (raising taxes will get them thrown out of office). Unfortunately, there have been many opportunistic politicians (in LatAM especially) which pry on their populations' ignorance of how the IMF works (and its role) to blame outsiders for internally-caused problems. 
  • On the other hand, as my wiki clearly outlines... there are some serious compliant about the way the IMF has handled some big events (especially the SE Asian Crisis '97-98), which have had global implications. (see also my article on Criticisms of the Washington Consensus)

For further reading, if you can wait a week... there will be a special report on the IMF in the economist

Two other articles you should read:




About the IMF


The IMF (international monetary fund) came into existance after WWII in what was called the Breton Woods agreements that created both the IMF and the World Bank. 





IMF as a "Bank" (not a "fund")

Its interesting that the IMF (international monetary fund) acts more like a bank, but the World Bank acts more like a fund. 


Actually, the IMF acts more like a "credit union"...the 185 member countries put money in on deposit, and they receive interest payments back.   The interest payments are small, because the IMF is seen as a high quality borrower (and there is a social cause behind the mission).  The money borrowed then gets re-loaned out to countries in trouble.


History of IMF Bailouts


see our globotrends page:  History of IMF bailouts







Why does the IMF lend money? 

Why is the US interested in giving money to the IMF / World Bank?  The US didn’t lend to make money; it lent to help avoid systemic trouble – trouble that would rebound back to the US – and to shape, along with other large contributors to the IMF, the policies that emerging economies adopted during their crises.



Why does it add "conditionalities" to its loans? 

Policy conditionality stems from a need to assure the country's ability to repay, but in practice that inevitably meant making judgments about the "right" economic policy to assure payment.




What kinds of problems prompt countries to borrow from the IMF? 

There are a few reasons why a country would turn to the IMF to borrow funds. One reason is due to a balance of payments problem, primarily due to a current account deficit that becomes unstable, or unmanageable. If a country can not find enough financing on affordable terms to meet their international payment, they will often look to the IMF as a temporary loan package to help bridge the gap, and to get them through the crisis. For this reason, the IMF is often referred to as the “lender of last resort” when there needs to be an emergency funding to avert a financial crisis. A country may also request help in the form of management and technical assistance.


The IMF does not make development loans (that is the World Banks role). Instead, the IMFs main function is to help stabilize a balance of payments problem, and to help countries return to growth.


Another reason that a country might turn to the IMF is that they might have only limited access to international capital markets, which might be a result of their own macroeconomic problems.



How do countries borrow from the IMF? 

First of all, a country has to be an existing member of the IMF. Second of all, the country will typically only try to borrow a small portion of what they need to finance their balance of payments, but will do so in order to send a signal to other international investors that their house is in order. How does it work?


The first thing is that a country will have to make guarantees to the IMF that they will make hard policy changes to fix the underlying structural problems that caused the crisis (to fix the imbalance in the current account, they may have to raise taxes, raise interest rates, and other drastic measures). This proposal of what a country will fix is presented to the IMF in a “letter of intent” and will be reviewed by the IMFs executive board. Once the arrangement is agreed upon by the board, they will release part of the funds and then will phase out the rest of the funds in installments over time, and as they see results of the internal “fixes” in the borrowing country. Other documents that a country has to fill out might be the “memoranda of economic and financial policies”, which basically submits a detailed plan outlining all of the structural changes that a country plans to implement in order to receive the funds.



There are 3 types of loans that are authorized by the IMF. 


The first one is called “stand by arrangements” and this accounts for the largest of all IMF loans, granting the country a short term loan to deal with the balance of payments crisis. These are the normal loans that you see written about in the newspapers after or during a crisis in a country. These are loans that have a fixed interest rate (at a premium over the IMF borrowing rate).


The second type of loan is considered a bit longer in term, and is intended to help countries address more structural macroeconomic issues that take longer to address. The final category of IMF loans is considered long term (up to 10 years) and is for “Poverty reduction and growth facility” and normally comes with the lowest interest.


In addition to the normal loan packages, the IMF also has special programs to help countries suffering from balance of payment problems due to natural disasters, military conflicts and other problems.




Currency of the IMF 

The international currency of the IMF is called an SDR (special drawing rights)...


A brief guide to the IMF’s “currency”...see article from the Economist: "SPECIAL Drawing Rights, or SDRs, are often referred to as the IMF’s currency. Although that is useful shorthand, the SDR is not, in fact, a currency, but rather the IMF’s unit of account. The value of an SDR is defined as the value of a fixed amount of yen, dollars, pounds and euros, expressed in dollars at the current exchange rate. The composition of the basket is altered every five years to reflect changes in the importance of different currencies in the world’s trading system....SDRs nevertheless represent a potential claim on other countries’ freely usable currency reserves, for which they can be exchanged voluntarily. Alternatively, countries with strong external finances can buy SDRs from countries which need hard currency"....read more from the Economist...


History:  The SDR was created to try and support Breton Woods system of gold+US dollar...but the collapse of Breton Woods system lessend the need for SDRs..  


Purpose today:  The SDR is no longer much used as a reserve asset, but instead used main function is to serve as theunit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.


Value:  The U.S. dollar-value of the SDR is posted daily on the IMF's website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.


read  more here... http://imf.org/external/np/exr/facts/sdr.htm





Power distribution / sharing


European control:


Europe gets the IMF, USA gets the World Bank.  Will this change?


he IMF has been headed by Europeans since it was created after the end of World War II. In 63 years, four Frenchmen, two Swedes, a Dutchman, a Spaniard, a German and a Belgian have been elected as managing director of the institution originally founded to ensure exchange rate stability.  “The Europeans will fight like a mad dog to keep the job,”


One of the biggest controversies surrounding the IMF (beyond the "conditionalities" attached to the loans) is the manner in which voting rights are distributed.   See IMF site:  Quotas, Governors, & Voting Power


Power is shared among the Board of Governors, Executive Board, Managing Director, etc...but, what is the basis for voting power?...


The overall structure of the IMF appears on the surface to be similar to that of a corporation. The individual member countries are like the shareholders (owners) and they supply the money. In order to make sure that the organization keeps the owners (countries) interests in mind, they set up a Board of Governors to manage the fund and issue reports.


Each member country has one Governor who is typically the central bank governor of that country, or the finance minister. Because these individuals are busy with their day jobs (running central banks of countries), they select an Executive Board to run the day to day operations.


The Executive Board then selects a Managing Director (like a CEO) who is elected for a 5 year term. The Managing Director has to report back to the Executive Board and acts like the chairman of the board in conducting meetings. The Managing Director is free to select Deputy Managing Directors to oversee various areas of operations.


This is where the parallels to a corporation stop.


Because of the geopolitical nature of the IMF, the power of decision is not given exclusively to the Managing Director (as it would be given to a CEO of a company). In the IMF’s case, the ultimate power of decision remains firmly in the hands of the donating countries, in proportion to the respective size of their donations. This system of “quotas” not only determines the amount of money that a country donates, but also the size of their voting rights on the Executive Board.


All decisions at the IMF are subject to a vote. The country with the most voting rights (the largest quotas) has the most say as far as policy goes. While in theory it is possible for one large country to dominate the policy of the IMF, in reality it is very rare to have to resort to a formal vote to set policy. Most policies are set by consensus.


There are 24 executive directors on the board, 8 of which come directly from countries – USA, Japan, Germany, France, UK, China, Russia, and Saudi Arabia. The remaining 16 are elected by groups of countries and serve 2 year terms. In total, there are approximately 3,000 staff members and economists on staff at the IMF, representing approximately 150 countries. In addition to offices in Washington DC, there are also regional offices in Brussels, Paris, Tokyo, New York and Geneva.



Criticisms of the IMF /  arguments in favor of the IMF...


The IMF has been criticized both fairly and also unfairly for their involvement in some of the recent crisis in the past couple of decades.


If a country gets into trouble with their balance of payments, they can call on the IMF to help rescue them from default on their loans (which would cause economic hardship) – the IMF is there to help. But countries that are democracies are often reluctant to make the hard structural reforms that are necessary to fix their own internal balance of payments problems. Raising interest rates and taxes might help the governments books balance, but it would effectively slow down the economy and put people out of work.


For this reason, most governments that are nearing a crisis are unable to implement the necessary structural changes to avert disaster. They then need to call in the IMF for help, but they know that the IMF will not only come with money, but will also demand that they fix the underlying structural problems (that they probably already knew about but were reluctant to change).


The IMF agrees to loan the money, and the countries government then has a scapegoat in the IMF so that they can turn to their population and say; “the IMF is forcing us to make these changes”. Then the population gets really angry at the IMF and forgives their poor government that is being “bullied” by the IMF. In my opinion, a lot of the anger at the IMF comes out of this deliberate manipulation by weak democratically-elected governments (that get themselves into trouble).


The root of much of the criticism comes from the “conditionalities” that the IMF places on their structural adjustment programs. From the IMF’s perspective, these structural reforms are necessary to increase the chances that international lenders will get their money back. You can think of the IMF as the tip of the iceberg in international lending.


They are the most visible part, but behind them there are government and commercial loans that make up up a bulk of the debt package to a developing country. IMF conditionalities and structural adjustment programs are necessary to give international confidence to the capital markets that a country is implementing the necessary structural changes that will ensure that future loans to the country will not be made in vain.


For example, without an IMF agreement, the Paris club in international lending governments will not meet with a debtor nation to reschedule (reduce) the debt payments. Its only after a country has already made a deal with the IMF (and accepted their conditionalities) that the other lenders will agree to meet with the country to reschedule their debt. For this reason, the IMF loans are extremely important in that they send a signal (to the rest of the iceberg of international lenders).


But it is these very same structural adjustment programs (conditionalities) that make the IMF loans so controversial. From a mercantilist or structuralist perspective (of the borrowing countries), these conditionalities are seen as a weapon of the developed western nations to force the developing countries to conform to liberal economic policies (such as privatizations, lowering of trade barriers, deregulation of industries, floating exchange rates, increasing FDI, balancing budgets, removing price controls, and fighting corruption). These liberal goals are often called the “Washington Consensus”.


The mercantilists of the borrowing nations argue that the conditions dictated by the IMF limit their national sovereignty by placing external controls on how they are supposed to run their internal economy.


One of the most controversial conditions of the loans is that borrowing nations must cut back on government spending. These “austerity” measures are often blamed for the cutting of social programs that benefit the poor. For this reason, many blame the IMF for placing the needs of the rich over the needs of the poor. By requiring the borrowing nations must balance their budgets, the IMF is often blamed for the cut backs in social programs in these countries (such as education, public health, and other development projects for the poor).



Criticising the "conditionalities"


Another criticism of the IMF is that they often recommend that a country should raise taxes and cut spending in order to balance their budgets. But economists of Keynesian school of thought argue that this is the exact opposite of what a country in recession needs. Keynes would argue that in order to jump start the economy, they actually need to do the opposite – cut taxes and increase government spending. The IMF is therefore often criticized for making an economic recession into a depression as increased taxes and decreased spending slows the economy and decreases the chances for a quick recovery.


Their recommendation that Latin American countries should practice more conservative fiscal policy.  On the surface this sounds find, but, my problem is as follows: he is recommending this policy at a time of economic "crisis" in Latin America.



But, imagine if the US were to cut back on spending, or were forced to raise taxes each time they ran into economic troubles...it would only drive the economy into further recession. On the other hand, what the US actually does in recession is to increase spending, cut taxes, and lower interest rates...in effort to stimulate growth (keynsian economics)...because, ultimately, it is growth that will get you out of the crisis (not fiscal conservatism).



His policy prescription sounds an awful lot like what the IMF recommnded that Asian countries should do in the immediate aftermath of the Asian Fiancial crisis of 1997. But, that prescription, it is generallly believed today, was a direct cause of the prolongment of the crisis. One of the Asian countries (i forget which one...maybe Indonesia?) rejected the IMF prescription, and actually increased spending, and came out of the crisis much quicker than all of the others (i have to look back in my IPE class notes to remember which country it was :-)




IMF Finances:


see:  http://imf.org/external/fin.htm



Where does the IMF get money to lend?

 The IMF receives its major inputs of funding from the member countries (quotas), but then sustains itself by making loans (investments). In a simplified sense, the IMF gets money from its members at very low interest rates, and then turns around and loans that money out to countries in trouble at higher interest rates (short term loans at higher rates).


The initial money input from member countries is called “quotas”. Each member country has a quota whose size is proportional to that countries share of worldwide GDP. For this reason, the USA has the largest quota today. But the IMF does not get all of that money at once. Instead, it only gets a fraction of the money up front, and has created a mechanism by which they only call on further distributions of the quota money when there is another member country in trouble.


In the good years of 2000-07, many developing nations such as Brazil and Indonesia actively paid off any remaining IMF loans to get “free” from the IMF.



issue: Does the IMF have enough money?



"Asked if the IMF has sufficient resources to cope with the crisis, Strauss-Kahn said that the Fund had enough money for the immediate future. "If the crisis goes on, which is most probable, then down the road—say six months from now—we will need more money."  Before the crisis erupted, the IMF had around $200 billion in available resources and access to a further $50 billion. Since then, Japan has offered to lend the IMF an additional $100 billion. Strauss-Kahn has said that the IMF may need an extra $150 billion to help emerging markets and low-income countries get through the crisis."   read more here..


see globoTrends page on International Monetary Fund - IMF


Profits from Crisis?

In a strange way, the IMF is only profitable when there is a period of economic uncertainty or turmoil. If there is not a crisis, then there is no one taking the loans, and the IMF can not call on the quotas from its members.


In times of economic peacefulness, the IMF needs to find other ways to invest and to raise money. With an annual budget of approximately $900 million dollars (for admin and travel costs), the IMF has recently been looking for other ways to pay for itself.


IMF funding problems 2005-07:


For this reason, the IMF in 2005 began investing some of its money in an investment account, and is considering other options such as selling off some of its gold (the IMF has a massive collection of gold, but is not supposed to use it to pay its operating budget).


There are two other ways in which the IMF can raise money. In an emergency, the IMF can borrow funds from countries such as the US. Also, while most of the loans are funded out of members quotas, there are some loans that are funded by trusts that are used to fund “poverty reduction and growth facility” programs.



IMF as a research / advisory institution


they conduct extensive research, and often know a country is in trouble way before they have to come to the IMF...


example of research:  On Brazil:  http://imf.org/external/np/sta/ir/bra/eng/curbra.htm#I




crisis Watch:


see globotrends page on Crisis watch to follow the IMF during this rescue phase...




Links to resources:


Governance reform 2010






Links from GloboTrends



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