IMF

The International Monetary Fund was the centrepiece of the Bretton Woods agreement of July 1944. It was agreed that primary responsibility for the regulation of monetary relationships among national economies, of private financial flows, and of balance of payments adjustment should rest in the hands of public multilateral institutions and national governments with a view to underpinning a cooperative international economic order. The International Monetary Fund, alongside its sister institution the International Bank for Reconstruction and Development (IBRD or World Bank) was to be the main vehicle for achieving these ends.

The IMF was to oversee the exchange rate mechanism, the international payments system, to act as the main source of liquidity to facilitate trade, and to monitor national economic policies with a view to avoiding policies in one country which would unduly prejudice the others. IMF member states provided the Fund with resources through a system of quotas more or less proportional to the size of respective national economies, and they received votes in the Fund relative to these quota contributions. In this way the power of the richest countries was entrenched, especially the United States, which still commands just under one-fifth of the votes.

As exchange rates were to be fixed (though adjustable if circumstances warranted), countries with balance of payments deficits might experience difficulties defending their par value and also shortages of foreign exchange. In this case, governments could avoid devaluation and shortages of foreign exchange, at least in the short term, by borrowing from the Fund and thus finance the deficit without excessively disrupting the continuity of domestic macroeconomic policy or international monetary stability.

As the system evolved, a number of conventions were established (mostly under American pressure) concerning the working of the system. If borrowing began to exceed a country's original quota, increasingly onerous conditions (conditionality) would be imposed on any further borrowing and would be enforced by Fund officials (backed by the richest members). These conditions concerned the domestic economic policies the debtor country was to follow, theoretically leading to a process of domestic structural adjustment to overcome the underlying causes of the payments deficit and thereby maintaining the fixed exchange rate system, world payments equilibrium, and the cooperative nature of international economic relations on issues such as trade. Over time ‘conditionality’ has become more severely defined, especially as developed countries, as creditors, realized that they were unlikely ever to have to submit to it.

Initially, the Fund was severely underfinanced and could achieve little until most currencies could survive free convertibility with the US dollar. It never played the role foreseen at Bretton Woods, that of main provider of liquidity to the international monetary system. It did help with balance of payments lending, but often Fund resources were overwhelmed by the volume of short-term capital flows, and cooperation among central banks had to substitute in a crisis. 1976 at its Jamaica conference the Articles of Agreement of the IMF were altered to usher in an era of floating exchange rates, in existence de facto since 1973. The IMF, however, became much more prominent in the 1980s when it emerged as the key institution in the management of the Less Developed Country (LDC) debt crisis. Here the development of conditionality came into its own, promoted by the small number of creditor countries holding the majority of IMF votes. The IMF became the designated coordinator of lending to facilitate continued debt repayment, often imposing painful restructuring programmes on indebted countries with a view to maintaining the stability of the international financial system and encouraging additional (if limited) lending from other sources to troubled LDC economies. With the collapse of the Soviet bloc and the economically troubled transition of these countries to liberal market economic structures, the Fund has once again enhanced its role as a coordinator of international lending activity and associated liberal market reforms.

Despite the apparent failure of the IMF to fulfil its Bretton Woods promise, its officials have none the less functioned as catalyst to international monetary and policy cooperation, and have helped galvanize cooperative management of monetary crises over the years. It remains an important symbol of international cooperation, albeit heavily weighted in favour of the interests of the developed market economies. As in the case of the World Trade Organization and trade liberalization, IMF policy is shrouded in controversy. The tremendous growth of global capital flows, associated with the emergence of floating exchange rates and liberalization of financial markets and capital accounts, has been punctuated by frequent and severe financial crisis to which transition and developing economies have been particularly vulnerable. The success of structural adjustment policies in the weaker economies is seldom obvious in the longer run, though short-term stabilization measures have worked rather well if painfully. Countries taking the medicine of conditionality and liberal reform have frequently faced further rounds of crisis and adjustment. A range of scholars claim that global liberalization has been accompanied by growing inequality and that problems of poverty alleviation cannot be addressed in the current policy paradigm. IMF annual meetings have thus become magnets for protest against the policies the IMF and its most powerful government members promote. Recently, particularly since the Asian financial crisis (1997-8) and ongoing volatility the IMF has begun to respond to criticism, taking up proposals for more orderly sovereign debt workouts with greater responsibilities for private investors and creditors.

— Geoffrey R. D. Underhill