CHAPTER 1

INTRODCTION
The first half of the 20th century witnessed political and economic upheaval in the world. Two
world wars, collapse of gold standard, the great depression and the economic and financial
disturbances between the two wars. The world was eagerly looking forward to stability, and
peace. At the end of the second world war, United Nations Organisation (UBO) came into
existence. Representatives of 44 countries met at Bretton woods, New Hampshire U.S.A in
1944 to deliberate various economic and financial issues and to promote economic growth
and financial stability. Lord Keynes was one of the prominent personalities who took active
interest in the Bretton woods conference. As a result of this deliberation the International
Monetary Fund (IMF) was established.
The International Monetary Fund (IMF) is an international organization headquartered
in Washington, D.C., in the United States, of 188 countries working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty around the world. Formed in 1944 at
the Bretton Woods Conference, it came into formal existence in 1945 with 29 member
countries and the goal of reconstructing the international payment system. Countries
contribute funds to a pool through a quota system from which countries with payment
imbalances can borrow. As of 2010, the fund hadSDR476.8 billion, about US$755.7 billion at
then-current exchange rates.
Through this fund, and other activities such as statistics keeping and analysis, surveillance of
its members' economies and the demand for self-correcting policies, the IMF works to
improve the economies of its member countries. The organization's objectives stated in the

Articles of Agreement are to promote international economic cooperation, international trade,

employment, and exchange-rate stability, including by making financial resources available
to member countries to meet balance-of-payments needs.
Since the collapse of the Bretton Woods system in the mid-1970s the International Monetary
Fund (IMF) and the World Bank, have helped the world avoid the horrors of a systemic
collapse. However, when we look at the volatility in financial markets, the growing
imbalances in the global economy, the increasing income inequality both within and between
countries, the facts that nearly half the worlds population lives on less than $2 per day and
about 22% live on less than $1 per day, and that hundreds of millions of people live without
safe sources of running water, shelter, education or health care, it is clear that they are failing
in their mandate to reduce poverty, promote and maintain high levels of employment and real
income, a stable international monetary system, and shorten the duration and lessen the
degree of payments disequilibria. Unfortunately, they are failing us at a time when we badly
need them to be functioning effectively. The increasingly integrated global financial system,
with its apparently endemic volatility and uncertainties and unbalanced allocation of
resources desperately needs some form of effective global governance. In this paper I explore
the reasons for the IMFs failure to adequately carry out its mandate I argue that, while the
suitability of the IMFs policies and the appropriate scope of its activities are certainly open
to debate, an important and often under-emphasized cause of its unsatisfactory performance is
its failure to adapt its structure and operating practices to its changing functions. In fact,
without correcting this latter set of problems it will never be able to effectively perform its
responsibilities.

THE BRETTON WOODS MONETARY SYSTEM

From 1946 to 1971, the main purpose of the IMF was regulatory, ensuring IMF members
compliance with a par value exchange rate system. This was a two-tiered currency regime
using gold and the U.S. dollar. Each IMF member government could choose to define the
value of its currency in terms of gold or the U.S. dollar, which the U.S. government agreed to
support at a fixed gold value of one ounce of gold being equal to $35. Unlike in the classic
gold standard period (1880-1914), monetary policy was not strictly restricted by a countrys
holdings of gold. Member countries were allowed to intervene in the currency market but
were obligated to keep their exchange rates within a 1% band around their declared par value.
When currencies (other than the U.S. dollar) came under pressure from short-term balance
of payments imbalances that normally arose through international trade and finance
exchanges, countries would receive short-term financial support from the IMF. In cases
where the currency peg was considered fundamentally misaligned, a country could devalue
(or revalue) its currency. By providing monetary independence limited by the peg, the
Bretton Woods monetary system combined exchange rate stability, the key benefit of the 19th
century gold standard, with some of the virtues of floating exchange rates, principally
independence to pursue domestic economic policies geared toward full employment.
From 1973 to the Present
A major purpose of the IMF as originally conceived at Bretton Woodsto maintain fixed
exchange rateswas, thus, at an end. Although the IMF had lost its motivating purpose, it
adapted to the end of fixed exchange rates. In 1973, IMF members enacted a comprehensive
rewrite of the IMF Articles.IMF members condoned the floating-rate exchange rate system

that was already in place; officially ended the international monetary role of gold (although
gold remains an international monetary asset); and, nominally, but unsuccessfully, made the
SDR the worlds principal reserve asset. Henceforth, member countries were allowed to
freely determine their currencys exchange rate, and use private capital flows to finance trade
imbalances. The IMF was also given two new mandates, which became the foundation of its
role in the post Bretton Woods international monetary system. The first was for the IMF to
oversee the international monetary system to ensure its effective operation. The second was
to oversee the compliance by member states with their new obligations to collaborate with
the Fund and other members to assure orderly exchange arrangements and to promote a stable
system of exchange rates. Consequently, the IMF transformed itself from being an
international monetary institution focused almost exclusively on issues of foreign exchange
convertibility and stability to being a much broader international financial institution,
assuming a broader array of responsibilities and engaging on a wide range of issues including
financial and capital markets, financial regulation and reform, and sovereign debt resolution.
The IMF also increasingly relied on its lending powers, as floating exchange rates and the
growth of international capital flows led to more frequent, and increasingly severe, financial
crises. Over the past several decades, the IMF has been involved in the oil crisis of the 1970s;
the Latin American debt crisis of the 1980s; the transition to market-oriented economies
following the collapse of communism; currency crises in East Asia, South America, and
Russia; and, mostrecently, the global response to the 2008-2009 global financial crisis and the
2010-2011 European sovereign debt crisis.
The purpose of IMF was to manage the international payment system conceived in the
Bretton Woods Conference to be based in fixed exchange rates. It is to be based on the gold
standard. Under the gold standard, countries having deficits in their external accounts should

bear the whole burden of adjustment. Deficit countries had to contract their economies to
reduce their imports.

OBJECTIVE / AIMS OF IMF:

The original aims of IMF are the following:

To promote international monetary cooperation through a permanent institution which

provides the machinery for consultation and collaboration on international monetary
problems.

To facilitate the expansion and balanced growth of international trade, and to

contribute thereby to the promotion and maintenance of high levels of employment and
real income and to the development of the productive resources of all members as primary
objectives of economic policy.

To promote exchange stability, to maintain orderly exchange arrangements among

members, and to avoid competitive exchange depreciation.

To assist in the establishment of a multilateral system of payments in respect of

current transactions between members and in the elimination of foreign exchange
restrictions which hamper the growth of world trade.

To give confidence to members by making the general resources of the Fund

temporarily available to them under adequate safeguards, thus providing them with
opportunity to correct maladjustments in their balance of payments without resorting to
measures destructive of national or international prosperity.

In accordance with the above, to shorten the duration and lessen the degree of
disequilibrium in the international balances of payments of members.

CHAPTER

HISTORY

SOURCE: http://en.wikipedia.org/wiki/International_Monetary_Fund

IMF "Headquarters 1" in Washington, D.C.

The IMF was originally laid out as a part of the Bretton Woods system exchange
agreement in 1944. During the Great Depression, countries sharply raised
barriers to trade in an attempt to improve their failing economies. This led to the
devaluation of national currencies and a decline in world trade.

SOURCE: http://en.wikipedia.org/wiki/International_Monetary_Fund

The tiny Gold Room within the Mount Washington Hotel where the Bretton Woods
Conference attendees signed the agreements creating the IMF and World Bank
This breakdown in international monetary co-operation created a need for oversight. The
representatives of 45 governments met at the Bretton Woods Conference in the Mount
Washington Hotel in Bretton Woods, New Hampshire, in the United States, to discuss a
framework for postwar international economic coperation and how to rebuild Europe.
There were two views on the role the IMF should assume as a global economic institution.
British economist John Maynard Keynes imagined that the IMF would be a coperative fund
upon which member states could draw to maintain economic activity and employment
through periodic crises. This view suggested an IMF that helped governments and to act as
the U.S. government had during the New Deal in response to World War II. American
delegate Harry Dexter White foresaw an IMF that functioned more like a bank, making sure
that borrowing states could repay their debts on time. Most of White's plan was incorporated
into the final acts adopted at Bretton Woods.

SOURCE: http://en.wikipedia.org/wiki/International_Monetary_Fund

First page of the Articles of Agreement of the International Monetary Fund, 1 March 1946.
Finnish Ministry of Foreign Affairs archives.
The IMF formally came into existence on 27 December 1945, when the first 29
countries ratified its Articles of Agreement. By the end of 1946 the IMF had grown to 39
members. On 1 March 1947, the IMF began its financial operations, and on 8 May France
became the first country to borrow from it.

SOURCE: http://en.wikipedia.org/wiki/International_Monetary_Fund

Plaque Commemorating the Formation of the IMF in July 1944 at the Bretton Woods
Conference.
The IMF was one of the key organisations of the international economic system; its design
allowed the system to balance the rebuilding of international capitalism with the
8

maximisation of national economic sovereignty and human welfare, also known as embedded
liberalism. The IMF's influence in the global economy steadily increased as it accumulated
more members. The increase reflected in particular the attainment of political independence
by many African countries and more recently the 1991 dissolution of the Soviet
Union because most countries in the Soviet sphere of influence did not join the IMF.
The Bretton Woods system prevailed until 1971, when the U.S. government suspended the
convertibility of the US$ (and dollar reserves held by other governments) into gold. This is
known as the Nixon Shock.
Since 2000
In May 2010, the IMF participated, in 3:11 proportion, in the first Greek bailout that totaled
110 billion. This bailout was notable for several reasons: the funds were funneled directly to
the (largely European) private bondholders, which endured nohaircuts, to the chagrin of the
Swiss, Brazilian, Indian, Russian, and Argentinian Directors; the Greek authorities (at the
time, George Papandreou and Giorgos Papakonstantinou) themselves ruled out a haircut of
the private bondholders; the Greek private sector was happy to curtail the 13th and 14th
month civil service pay scheme, because the Greek government was otherwise impotent. A
second bailout package of more than 100 billion was agreed over the course of a few months
from October 2011, during which time Papandreou was forced from office. The socalled Troika, of which the IMF is part, are joint managers of this programme, which was
approved by the Executive Directors of the IMF on 15 March 2012 for SDR23.8 billion, and
which saw private bondholders take a haircut of upwards of 50%. In the interval between
May 2010 and February 2012 the private banks of Holland, France and Germany reduced
exposure to Greek debt from 122 billion to 66 billion.

As of January 2012, the largest borrowers from the IMF in order were Greece, Portugal,
Ireland, Romania,

and Ukraine.

On

25

March

2013,

10

billion

international bailout of Cyprus was agreed by the Troika, at the cost to the Cypriots of its
agreement: to close the country's second-largest bank; to impose a one-time bank deposit
levy on Bank of Cyprus uninsured deposits. No insured deposit of 100k or less were to be
affected under the terms of a novel bail-in scheme.
The topic of sovereign debt restructuring was taken up by the IMF in April 2013 for the first
time since 2005, in a report entitled "Sovereign Debt Restructuring: Recent Developments
and Implications for the Funds Legal and Policy Framework". The paper, which was
discussed by the board on 20 May, summarised the recent experiences in Greece, St Kitts and
Nevis, Belize, and Jamaica. An explanatory interview with Deputy Director Hugh
Bredenkamp was published a few days later, as was a deconstruction by Matina Stevis of
the Wall Street Journal.
In the October 2013 Financial Monitor publication, the IMF suggested that a capital
levy capable of reducing Euro-area government debt ratios to "end-2007 levels" would
require a very high tax rate of about 10%.The Fiscal Affairs department of the IMF, headed
by Dr. Sanjeev Gupta, produced in January 2014 a report entitled "Fiscal Policy and Income
Inequality" which stated that "Some taxes levied on wealth, especially on immovable
property, are also an option for economies seeking more progressive taxation...Property taxes
are equitable and efficient, but underutilized in many economies...There is considerable scope
to exploit this tax more fully, both as a revenue source and as a redistributive instrument." At
the end of March 2014, the IMF secured an $18 billion bailout fund for the provisional
government of the Ukraine in the aftermath of the 2014 Ukrainian revolution. The U.S.
executive board veto was brought up again by IMF junior members in April 2014. The

10

countries were fed up with the failure to ratify a four-year old agreement to restructure the
lender. Singaporean Finance Minister and IMF steering committee chairman Tharman
Shanmugaratnam said it could cause "disruptive change" in the global economy: "We are
more likely over time to see a weakening of multilateralism, the emergence of regionalism,
bilateralism and other ways of dealing with global problems", and that would make the world
a "less safe" place.
Member countries

IMF member states

IMF member states not accepting the obligations of Article VIII, Sections 2, 3, and 4.
SOURCE: http://en.wikipedia.org/wiki/International_Monetary_Fund

Not all member countries of the IMF are sovereign states, and therefore not all "member
countries" of the IMF are members of the United Nations. Amidst "member countries" of the
IMF that are not member states of the UN are non-sovereign areas with special jurisdictions
that

are

officially

under

the

sovereignty

of

full

UN

member

states,

such

as Aruba, Curaao, Hong Kong, and Macau, as well as Kosovo. The corporate members
appoint ex-officio voting members, who are listed below. All members of the IMF are
also International Bank for Reconstruction and Development (IBRD) members and vice
versa. Former members are Cuba (which left in 1964) and the Republic of China, which was
11

ejected from the UN in 1980 after losing the support of then U.S. President Jimmy Carter and
was replaced by the People's Republic of China. However, "Taiwan Province of China" is still
listed in the official IMF indices. Apart from Cuba, the other UN states that do not belong to
the IMF are Andorra, Liechtenstein, Monaco, Nauru, and North Korea.
The former Czechoslovakia was expelled in 1954 for "failing to provide required data" and
was readmitted in 1990, after the Velvet Revolution. Poland withdrew in 1950allegedly
pressured by the Soviet Unionbut returned in 1986.
Qualifications
Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar
period, rules for IMF membership were left relatively loose. Members needed to make
periodic membership payments towards their quota, to refrain from currency restrictions
unless granted IMF permission, to abide by the Code of Conduct in the IMF Articles of
Agreement, and to provide national economic information. However, stricter rules were
imposed on governments that applied to the IMF for funding. The countries that joined the
IMF between 1945 and 1971 agreed to keep their exchange rates secured at rates that could
be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and
only with the IMF's agreement. Some members have a very difficult relationship with the
IMF and even when they are still members they do not allow themselves to be monitored.
Argentina, for example, refuses to participate in an Article IV Consultation with the IMF.

Benefits

Member countries of the IMF have access to information on the economic policies of all
member countries, the opportunity to influence other members economic policies, technical

12

assistance in banking, fiscal affairs, and exchange matters, financial support in times of
payment difficulties, and increased opportunities for trade and investment.
LEADERSHIP
Board of governors
The Board of Governors consists of one governor and one alternate governor for each
member country. Each member country appoints its two governors. The Board normally
meets once a year and is responsible for electing or appointing executive directors to the
Executive Board. While the Board of Governors is officially responsible for approving quota
increases, Special Drawing Right allocations, the admittance of new members, compulsory
withdrawal of members, and amendments to the Articles of Agreement and By-Laws, in
practice it has delegated most of its powers to the IMF's Executive Board.
The Board of Governors is advised by the International Monetary and Financial
Committee and the Development Committee. The International Monetary and Financial
Committee has 24 members and monitors developments in global liquidity and the transfer of
resources to developing countries. The Development Committee has 25 members and advises
on critical development issues and on financial resources required to promote economic
development in developing countries. They also advise on trade and environmental issues.
Executive board
24 Executive Directors make up Executive Board. The Executive Directors represent all 188
member countries in a geographically based roster. Countries with large economies have their
own Executive Director, but most countries are grouped in constituencies representing four or
more countries. Following the 2008 Amendment on Voice and Participation which came into

13

effect in March 2011, eight countries each appoint an Executive Director: the United States,
Japan, Germany, France, the UK, China, the Russian Federation, and Saudi Arabia. The
remaining 16 Directors represent constituencies consisting of 4 to 22 countries. The
Executive Director representing the largest constituency of 22 countries accounts for 1.55%
of the vote. This Board usually meets several times each week. The Board membership and
constituency is scheduled for periodic review every eight years.
Managing directors
The IMF is led by a managing director, who is head of the staff and serves as Chairman of the
Executive Board. The managing director is assisted by a First Deputy managing director and
three other Deputy Managing Directors. Historically the IMF's managing director has been
European and the president of the World Bank has been from the United States. However, this
standard is increasingly being questioned and competition for these two posts may soon open
up to include other qualified candidates from any part of the world. In 2011 the world's
largest developing countries, the BRIC nations, issued a statement declaring that the tradition
of appointing a European as managing director undermined the legitimacy of the IMF and
called for the appointment to be merit-based. Previous managing director Dominique StraussKahn was arrested in connection with charges of sexually assaulting a New York hotel room
attendant and resigned on 18 May. On 28 June 2011 Christine Lagardewas confirmed as
managing director of the IMF for a five-year term starting on 5 July 2011. In 2012, Lagarde
was paid a tax-exempt salary of US$467,940, and this is automatically increased every year
according to inflation. In addition, the director receives an allowance of US$83,760 and
additional expenses for entertainment.
Voting power

14

Voting power in the IMF is based on a quota system. Each member has a number of basic
votes (each member's number of basic votes equals 5.502% of the total votes), plus one
additional vote for each Special Drawing Right (SDR) of 100,000 of a member country's
quota. The Special Drawing Right is the unit of account of the IMF and represents a claim to
currency. It is based on a basket of key international currencies. The basic votes generate a
slight bias in favour of small countries, but the additional votes determined by SDR outweigh
this bias.
EFFECTS OF THE QUOTA SYSTEM
The IMF's quota system was created to raise funds for loans. Each IMF member country is
assigned a quota, or contribution, that reflects the country's relative size in the global
economy. Each member's quota also determines its relative voting power. Thus, financial
contributions from member governments are linked to voting power in the organisation. This
system follows the logic of a shareholder-controlled organisation: wealthy countries have
more say in the making and revision of rules. Since decision making at the IMF reflects each
member's relative economic position in the world, wealthier countries that provide more
money to the IMF have more influence than poorer members that contribute less;
nonetheless, the IMF focuses on redistribution.
Developing countries
Quotas are normally reviewed every five years and can be increased when deemed necessary
by the Board of Governors. Currently, reforming the representation of developing
countries within the IMF has been suggested. These countries' economies represent a large
portion of the global economic system but this is not reflected in the IMF's decision making
process through the nature of the quota system. Joseph Stiglitz argues, "There is a need to

15

provide more effective voice and representation for developing countries, which now
represent a much larger portion of world economic activity since 1944, when the IMF was
created." In 2008, a number of quota reforms were passed including shifting 6% of quota
shares to dynamic emerging markets and developing countries.
United States influence
A second criticism is that the United States' transition to neoliberalism and global capitalism
also led to a change in the identity and functions of international institutions like the IMF.
Because of the high involvement and voting power of the United States, the global economic
ideology could effectively be transformed to match that of the United States. This is
consistent with the IMF's function change during the 1970s after the Nixon Shock ended
the Bretton Woods system. Allies of the United States are said to receive bigger loans with
fewer conditions.
Overcoming borrower/creditor divide
The IMF's membership is divided along income lines: certain countries provide the financial
resources

while

others

use

these

resources.

Both developed

country "creditors"

and developing country "borrowers" are members of the IMF. The developed countries
provide the financial resources but rarely enter into IMF loan agreements; they are the
creditors. Conversely, the developing countries use the lending services but contribute little to
the pool of money available to lend because their quotas are smaller; they are the borrowers.
Thus, tension is created around governance issues because these two groups, creditors and
borrowers, have fundamentally different interests. The criticism is that the system of voting
power distribution through a quota system institutionalises borrower subordination and
creditor dominance. The resulting division of the IMF's membership into borrowers and non-

16

borrowers has increased the controversy around conditionality because the borrowers are
interested in increasing loan access while creditors want to maintain reassurance that the
loans will be repaid.
Uses
A recent source reveals that the average overall use of IMF credit per decade increased, in
real terms, by 21% between the 1970s and 1980s, and increased again by just over 22% from
the 1980s to the 19912005 period. Another study has suggested that since 1950 the continent
of Africa alone has received $300 billion from the IMF, the World Bank, and affiliate
institutions. A study by Bumba Mukherjee found that developing democratic countries benefit
more from IMF programs than developingautocratic countries because policy-making, and
the process of deciding where loaned money is used, is more transparent within a
democracy. One study done by Randall Stone found that although earlier studies found little
impact of IMF programs on balance of payments, more recent studies using more
sophisticated methods and larger samples "usually found IMF programs improved the
balance of payments".
HOW THE IMF PROMOTES GLOBAL ECONOMIC STABILITY
The IMF advises member countries on economic and financial policies that promote
stability, reduce vulnerability to crises, and encourage sustained growth and high
living standards. It also reviews and publishes global economic trends and
developments that affect the health of the international monetary and financial
system and promotes dialogue among member countries on the regional and global
consequences of their policies. In addition to these activities, which constitute
surveillance, the IMF provides technical assistance to help strengthen members

17

institutional capacity and makes resources available to them to facilitate adjustment

in the event of a balance of payments crisis.
WHY IS GLOBAL ECONOMIC STABILITY IMPORTANT
Promoting economic stability is partly a matter of avoiding economic and financial crises,
large swings in economic activity, high inflation, and excessive volatility in exchange rates
and financial markets. Instability can increase uncertainty, discourage investment, impede
economic growth, and hurt living standards. A dynamic market economy necessarily involves
some degree of instability, as well as gradual structural change. The challenge for
policymakers is to minimize instability in their own country and abroad without reducing the
economys ability to improve living standards through rising productivity and employment.
Economic and financial stability is both a national and a multilateral concern. As recent
financial crises have shown, countries have become more interconnected. Problems in one
sector can result in problems in other sectors and spillovers across borders. No country is an
island when it comes to economic and financial stability.
HOW DOES THE IMF HELP
The IMF helps countries to implement sound and appropriate policies through its key
functions of surveillance, technical assistance, and lending.
Surveillance: Every country that joins the IMF accepts the obligation to subject its economic
and financial policies to the scrutiny of the international community. The IMF's mandate is to
oversee the international monetary system and monitor the economic and financial policies of
its 188 member countries. This process, known as surveillance, takes place at the global level
and in individual countries and regions. The IMF considers whether domestic policies
promote countries own stability by examining risks they might pose to domestic and balance

18

of payments stability and advising on needed policy adjustments. It also proposes alternatives
in cases where countries policies promote domestic stability but could affect global stability.
Consulting with member states
The IMF monitors members economies through regularusually annualconsultations
with each member country. During these consultations, IMF staff discusses economic and
financial developments and policies with national policymakers, and often with
representatives of private sector, labor unions, academia, and civil society. The staff assesses
risks and vulnerabilities, and considers the impact of fiscal, monetary, financial, and
exchange rate policies on the members domestic and balance of payments stability and on
global stability. The IMF offers advice on policies to promote each countrys macroeconomic,
financial and balance of payments stability, drawing on experience from across its
membership.
The framework for these consultations is set forth in the IMF Articles of Agreement and,
more recently, in the Integrated Surveillance Decision. These consultations are also informed
by membership-wide initiatives, including:

work to systematically assess countries' vulnerabilities to crises;

the Financial Sector Assessment Program, which assesses countries financial

sectors and helps formulate policy responses to risks and vulnerabilities; and

the Standards and Codes Initiative in which the IMF, along with the World Bank
and other bodies, assesses countries observance of internationally recognized
standards and codes of good practice in a dozen of policy areas.

19

Overseeing the bigger world picture

The IMF also closely monitors global and regional trends.
The IMFs periodic reports, the World Economic Outlook, its regional overviews, the Fiscal
Monitor, and the Global Financial Stability Report, analyze global and regional
macroeconomic and financial developments. The IMFs broad membership makes it uniquely
well suited to facilitate multilateral discussions on issues of common concern to groups of
member countries, and advance a shared understanding on policies to promote stability. In
this context, the Fund has been working with the G-20 to assess the consistency of those
countries policy frameworks with balanced and sustained growth for the global economy.
The Fund has reviewed its surveillance mandate in light of the global crisis. It has introduced
a number of reforms to improve financial sector surveillance within member countries and
across borders, to enhance understanding of interlink ages between macroeconomic and
financial developments (e.g. through Spillover Report), and promote debate on these
matters.
Data: In response to the financial crisis, the IMF is working with members, the Financial
Stability Board, and other organizations to fill data gaps important for global stability.
Technical assistance: The IMF helps countries strengthen their capacity to design and
implement sound economic policies. It provides advice and training on a range of issues
within its mandate, including fiscal, monetary, and exchange rate policies; the regulation and
supervision of financial systems; statistics systems; and legal frameworks.
Lending: Even the best economic policies cannot completely eradicate instability or avert
crises. If a member country does experience financing difficulties, the IMF can provide

20

financial assistance to support policy programs that will correct underlying macroeconomic
problems, limit disruption to the domestic and global economies, and help restore confidence,
stability, and growth. IMF financing instruments can also support crisis prevention.
FUNCTION OF IMF
The IMFs mandate of promoting international monetary stability translates into three main
functions: (1) Surveillance of financial and monetary conditions in its member countries and
in the world economy; (2) Financial assistance to help countries overcome major balance-of
payments problems; and (3) Technical assistance and advisory services to member countries.
Surveillance The IMF provides surveillance of the international monetary system in order to
ensure its effective operation and to oversee the compliance of each member with its
obligations to the Fund. In particular, the Fund shall exercise firm surveillance over the
exchange rate policies of member countries and shall adopt specific principles for the
guidance of all members with respect to those policies. The IMFs general surveillance
recommendations are not binding or enforceable. The effectiveness of IMF surveillance is
dependent on the peer pressure exercised by other IMF member countries, and increasingly
the global financial sector, as most IMF analysis of global economic risks is made now
public. The IMF engages in both bilateral and multilateral surveillance. IMF members agree,
as a condition of membership, that they will collaborate with the Fund and other members to
assure orderly exchange arrangements and to promote a stable system of exchange rates. In
particular, they agree to pursue economic and financial policies that will produce orderly
economic growth with reasonable price stability, to avoid erratic disruptions in the
international monetary system, not to manipulate their exchange rates in order to attain unfair
competitive advantage or shift economic burdens to other countries, and to follow exchange
rate policies compatible with these commitments.

21

Countries are required to provide the IMF with information and to consult with the IMF upon
its request. The IMF staff generally meets annually with each member country for Article IV
consultations regarding the countrys current fiscal and monetary policies, the state of its
economy, its exchange rate situation, and other relevant concerns. The IMFs reports on its
Article IV consultations with each country are presented to the IMF Executive Board, along
with the staffs observations and recommendations about possible improvements in the
countrys economic policies and practices. In pursuit of its multilateral surveillance function,
the IMF publishes numerous reports each year on economic conditions and trends in the
world economy. These include three semiannual publications: (1) the World Economic
Outlook, which provides analysis of the state of the global economy; (2) the Global Financial
Stability Report, which assesses global financial markets; and (3) the Fiscal Monitor, which
surveys and analyzes the state of public finances in member countries.
Financial Assistance
Notwithstanding its macroeconomic surveillance, the IMF is perceived as an institution that
primarily provides temporary financing to troubled economies. The IMFs financial structure
can best be characterized as that of a credit union. IMF member countries deposit hard
currency and some of their own currency, from which they can draw the currencies of other
countries if they face significant problems in managing their balance of payments. As noted
above, supplemental resources are available from the NAB or GAB if quota resources are
insufficient. The IMF is required by its Articles to ensure that countries' use of its resources
will be temporary and that loans will be repaid. Failure of a borrowing country to repay the
IMF reduces the availability of financing for all other IMF members. In order to ensure that it
gets repaid, the IMF imposes conditionality on its loans. Conditionality is also intended to
correct the borrower's current account deficit by bringing about macroeconomic stabilization

22

and economic adjustment. In the past, there have been debates about whether the austerity
conditions that are often the core of IMF conditionality are productive in increasing economic
growth. In 2000, one heavily cited paper found that participating in IMF programs lowers
growth rates during the program, as would be expected. In addition, however, the study found
that once countries leave the program, they grow faster than if they had remained, but not
faster than they would have without participating in the IMF program in the first place. After
heavy criticism of the conditions attached to IMF loans to East Asia in the late 1990s, the
IMF revamped its conditionality guidelines in 2002. Additional reforms, including new IMF
lending instruments based on economic prequalification (ex-ante conditionality) rather than
traditional structural adjustment (ex-post conditionality) also address these concerns.
IMF Loan Programs The IMF has several loan programs. The Stand-By Arrangement
(SBA), which provides the bulk of IMF assistance to middle-income countries, addresses
short-term balance-of-payments problems and typically lasts one to two years. The Extended
Fund Facility (EFF) addresses longer-term balance-of-payments problems requiring
fundamental economic reforms and generally runs for three years or longer. In 2009,
following the financial crisis, the IMF created the Flexible Credit Line (FCL). The FCL
provides a credit line to countries that have strong economic fundamentals and policies, and
that the credit line can be drawn on without new conditionalitys being imposed. Unlike the
SBA and the EFF, the FCL relies on ex-ante conditionality. As of July 2011, Colombia,
Mexico, and Poland have accessed the FCL. In 2010, the IMF introduced the Precautionary
Credit Line, now known as the Precautionary and Liquidity Line (PLL), for countries whose
financial situations would make them ineligible for the FCL. A country can request a PLL for
six months with a limit of five times its quota. The only PLL program approved to date was
for Macedonia in January 2011, although many expected some Eurozone countries to request
access to credit. The IMF provides loans to its poorest member countries on concessional
23

repayment terms. These aim to help countries overcome balance-of-payments problems, but
their conditionality puts less emphasis on cutting spending and more on economic growthenhancing reforms. There are three lending facilities for low-income countries: The
Extended Credit Facility (ECF), which provides flexible medium-term support to low-income
members that have protracted balance of payments problems. The Standby Credit Facility
(SCF), which addresses short-term and precautionary balance of payments needs, similar to
the Stand-By Arrangements in regular Fund lending. The Rapid Credit Facility (RCF),
which provides rapid access at low levels with limited conditionality to meet urgent balanceof-payments needs. In 2010, the Fund created the Post-Catastrophe Debt Relief (PCDR) Trust
Fund to provide debt relief to low-income countries hit by catastrophic natural disasters. To
date, seven countries have received support from the PSI: Cape Verde, Mozambique, Nigeria,
Senegal, Uganda, Tanzania, and Rwanda.
Trends in IMF Lending
Prior to the onset of the 2008 economic crisis, many analysts argued that the IMF was on the
brink of irrelevance, as booming capital flows and commodity prices allowed the remaining
IMF creditors to repay their loans. With developing countries no longer needing IMF lending,
and the advanced economies largely ignoring the IMFs surveillance, the Funds future
looked bleak. At the same time, IMF resources, especially when compared to global capital
flows, had declined over the past few decades. Prior to the crisis, this raised little concern
because demand for IMF resources was low. This view changed quickly in 2008, as the
economic crisis worsened, and the IMFs loan portfolio expanded from below SDR 10 billion
in 2007 to over to SDR 96.4 billion ($144.6 billion) in February 2013.The significant change
in the composition of IMF lending since 1970. Advanced economies accounted for over 75%
of the IMF credit in 1970, during the waning days of the fixed exchange rate regime. By

24

1990, their share of IMF credit had dropped to zero, before increasing in the late 1990s (loans
to Korea and Russia), and then after the recent financial crisis. In 2010, due to several large
European programs, IMF lending to advanced economies accounted for 17% of total lending.
Loans to Latin America began rising in the 1970s, but did not increase sharply until the 1980s
debt crises, peaking in 1990. Loans increased after 2000 because of three large programs
(Argentina, Brazil, and Uruguay), but have since declined, and are now at historically low
levels, along with Asian economies.
Technical Assistance
Access to technical assistance is one benefit of IMF membership, accounting for about 20%
of the IMFs annual operating budget. The IMF provides technical assistance in its core areas
of expertise: macroeconomic policy; tax and revenue policies; expenditure management;
exchange rates; financial sector sustainability; and economic statistics. IMF technical
assistance supports the development of the productive resources of member countries by
helping them to effectively manage their economic policy and financial affairs. The IMF
helps these countries to strengthen their capacity in both human and institutional resources,
and to design appropriate macroeconomic, financial, and structural policies. About 90% of
IMF technical assistance goes to low and lower-middle income countries
Surveillance of the global economy
The IMF is mandated to oversee the international monetary and financial system and monitor
the economic and financial policies of its member countries. This activity is known as
surveillance and facilitates international cooperation. Since the demise of the Bretton Woods
system of fixed exchange rates in the early 1970s, surveillance has evolved largely by way of
changes in procedures rather than through the adoption of new obligations. The

25

responsibilities changed from those of guardian to those of overseer of members policies.

The Fund typically analyses the appropriateness of each member countrys economic and
financial policies for achieving orderly economic growth, and assesses the consequences of
these policies for other countries and for the global economy.

IMF Data Dissemination Systems participants:

IMF member using SDDS
IMF member using GDDS
IMF member, not using any of the DD Systems
non-IMF entity using SDDS
non-IMF entity using GDDS
no interaction with the IMF
SOURCE: http://en.wikipedia.org/wiki/International_Monetary_Fund

26

In 1995 the International Monetary Fund began work on data dissemination standards with
the view of guiding IMF member countries to disseminate their economic and financial data
to the public. The International Monetary and Financial Committee (IMFC) endorsed the
guidelines for the dissemination standards and they were split into two tiers: The General
Data Dissemination System (GDDS) and the Special Data Dissemination Standard (SDDS).
The executive board approved the SDDS and GDDS in 1996 and 1997 respectively, and
subsequent amendments were published in a revised Guide to the General Data
Dissemination System. The system is aimed primarily at statisticians and aims to improve
many aspects of statistical systems in a country. It is also part of the World Bank Millennium
Development Goals and Poverty Reduction Strategic Papers. The primary objective of the
GDDS is to encourage member countries to build a framework to improve data quality and
statistical capacity building in order to evaluate statistical needs, set priorities in improving
the timeliness, transparency, reliability and accessibility of financial and economic data.
Some countries initially used the GDDS, but later upgraded to SDDS.
Some entities that are not themselves IMF members also contribute statistical data to the
systems:

Palestinian Authority GDDS

Hong Kong SDDS

Macau GDDS

EU institutions: The European Central Bank for the Euro zone SDDS Euro stat for
the whole EU SDDS, thus providing data from Cyprus (not using any DD System on its
own) and Malta (using only GDDS on its own)
27

Conditionality of loans

IMF conditionality is a set of policies or conditions that the IMF requires in exchange for
financial resources. The IMF does require collateral from countries for loans but also requires
the government seeking assistance to correct its macroeconomic imbalances in the form of
policy reform. If the conditions are not met, the funds are withheld. Conditionality is perhaps
the most controversial aspect of IMF policies. The concept of conditionality was introduced
in a 1952 Executive Board decision and later incorporated into the Articles of Agreement.
Conditionality is associated with economic theory as well as an enforcement mechanism for
repayment. Stemming primarily from the work of Jacques Polak, the theoretical underpinning
of conditionality was the "monetary approach to the balance of payments".
Structural adjustment
Further information: Structural adjustment
Some of the conditions for structural adjustment can include:

Cutting expenditures, also known as austerity.

Focusing economic output on direct export and resource extraction,

Devaluation of currencies,

Trade liberalisation, or lifting import and export restrictions,

Increasing

the

stability

of

investment

(by

investment with the opening of domestic stock markets),

Balancing budgets and not overspending,

28

supplementing foreign

direct

Removing price controls and state subsidies,

Privatization, or divestiture of all or part of state-owned enterprises,

Enhancing the rights of foreign investors vis-a-vis national laws,

Improving governance and fighting corruption.

These conditions have also been sometimes labelled as the Washington Consensus.
Benefits
These loan conditions ensure that the borrowing country will be able to repay the IMF and
that the country will not attempt to solve their balance-of-payment problems in a way that
would negatively impact the international economy. The incentive problem of moral hazard
when economic agents maximize their own utility to the detriment of others because they
do not bear the full consequences of their actionsis mitigated through conditions rather
than providing collateral; countries in need of IMF loans do not generally possess
internationally valuable collateral anyway. Conditionality also reassures the IMF that the
funds lent to them will be used for the purposes defined by the Articles of Agreement and
provides safeguards that country will be able to rectify its macroeconomic and structural
imbalances. In the judgment of the IMF, the adoption by the member of certain corrective
measures or policies will allow it to repay the IMF, thereby ensuring that the resources will be
available to support other members. As of 2004, borrowing countries have had a very good
track record for repaying credit extended under the IMF's regular lending facilities with full
interest over the duration of the loan. This indicates that IMF lending does not impose a
burden on creditor countries, as lending countries receive market-rate interest on most of their

29

quota subscription, plus any of their own-currency subscriptions that are loaned out by the
IMF, plus all of the reserve assets that they provide the IMF.

CHAPTER 3
CHANGING ROLE OF THE IMF
The founders of the Bretton woods system had largely assumed that private capital flows
would never again resume the prominent role they had in the nineteenth century. But a series
of financial crises during the 1990s, triggered by sharp changes in the direction of flows,
forced both the Fund and national policymakers to revisit these assumptions. The first capital
account crisis erupted in Mexico in 1994. Crises followed in Asia in 1997-98; in Russia in
1998; and elsewhere. It became clear that these crises were fundamentally different from
earlier ones. All were capital account crises, large in scale, and, like most financial crises,
involved enormous upheaval for the countries involved. The sharp reversal of capital flows to
Asia in the latter half of 1997 sparked the crises.

30

WIDER SCOPE AFTER SECOND AMENDMENT

The Second Amendment widened the scope in the following areas :
1. Expansion of scope of consultations: The Second Amendment in 1978 resulted in the
IMF dramatically expanding the scope of its consultations. It required each member country
to try to direct its economic and financial policies toward fostering orderly economic growth.
2. Expansion of range of conditions: It also has resulted in an expansion in the range of
conditions that the IMF attaches to the finance it provides to member states. In fact, in some
cases in the late 1990s IMF financing arrangements contained over 100 conditions covering
such issues as privatization, reform of tax administration, adoption of new laws such as
bankruptcy codes, and budgetary allocations for health and education, in addition to the more
traditional macroeconomic conditions.
3. Different impacts: The Second Amendment had different impacts on different groups of
IMF member states. The IMF lost its significance in the case of industrialized countries, that
knew that they would not need to use or had no intention of using the IMFs services in the
foreseeable future.
NEW INITIATIVES BY THE IMF
In the emerging context, the following initiatives were taken by the fund.
1. The IMF and Financial Integration: The IMF in the 1997 meeting in Hong Kong took
the initiative to pursue convertibility of capital account transactions and dismantling of
capital controls. Integration of global financial markets should allow capital to be allocated to
its most productive use. Developing countries will benefit from integration because they offer
ample opportunities for investment.

31

At the same time, since India and China were relatively immune from the Asian crisis many
argued that the capital account should be kept closed.
According to the Fund, the losses of financial globalization can be minimized, although they
cannot be eliminated in three ways:
a. By correctly sequencing the liberalization process.
b. By having government to adopt only sound economic policies.
c. By strengthening domestic financial systems.
2. Structural Adjustments to Promote Financial Globalisation: Introduction of capital
account convertibility requires some definite conditionalities. The domestic economies
should be prepared to accept and promote the free movement of capital. The reforms for
financial liberalization do not consist just in removing capital and exchange controls.
According to the Fund, stability of capital flows requires enforcing tough standards of
transparency and good governance. Further, to minimize the effects of flow reversals,
markets should be more flexible and responsive to supply and demand. Removing excessive
regulations should help capital flows to be allocated in the best way.
3. The New Conditionalities: Since 1997 the Fund insisted on the need to promote structural
reforms in order to get Funds help. According to Michael Camdessus, Managing Director of
the Fund to recover from todays balance of payments crisis an emerging economy has to go
through a three-tier adjustment process. They are:
a. The first tier is to restore stability: The consist in raising interest rates to convince
international investors to keep their capital in the country and in cutting fiscal deficits.

32

b. The second tier is to improve soundness: This is intended to restore lost confidence,
especially in domestic financial and corporate systems, through fundamental institutional
changes.
c. The third tier is to boost efficiency: This means transforming government from an active
player in the economy into a magistrate, a regulator and guarantor of an economic order that
allows for the free interplay of private agents.

CHAPTER

EXCEPTIONAL ACCESS FRAMEWORK SOVEREIGN DEBT

The Exceptional Access Framework was created in 2003 when John B. Taylor was Under
Secretary of the U.S. Treasury for International Affairs. The new Framework became fully
operational in February 2003 and it was applied in the subsequent decisions on Argentina and
Brazil. Its purpose was to place some sensible rules and limits on the way the IMF makes
loans to support governments with debt problemespecially in emerging marketsand
thereby move away from the bailout mentality of the 1990s. Such a reform was essential for
ending the crisis atmosphere that then existed in emerging markets. The reform was closely
related to, and put in place nearly simultaneously with, the actions of several emerging
33

market countries to place collective action clauses in their bond contracts. In 2010, the
framework was abandoned so the IMF could make loans to Greece in an unsustainable and
political situation.
The topic of sovereign debt restructuring was taken up by IMF staff in April 2013 for the first
time since 2005, in a report entitled "Sovereign Debt Restructuring: Recent Developments
and Implications for the Fund's Legal and Policy Framework". The paper, which was
discussed by the board on 20 May, summarised the recent experiences in Greece, St Kitts and
Nevis, Belize and Jamaica. An explanatory interview with Deputy Director Hugh
Bredenkamp was published a few days later, as was a deconstruction by Matina Stevis of
the Wall Street Journal. The staff was directed to formulate an updated policy, which was
accomplished on 22 May 2014 with a report entitled "The Fund's Lending Framework and
Sovereign Debt: Preliminary Considerations", and taken up by the Executive Board on 13
June. The staff proposed that "in circumstances where a (Sovereign) member has lost market
access and debt is considered sustainable...the IMF would be able to provide Exceptional
Access on the basis of a debt operation that involves an extension of maturities", which was
labelled a "reprofiling operation". These reprofiling operations would "generally be less
costly to the debtor and creditorsand thus to the system overallrelative to either an
upfront debt reduction operation or a bail-out that is followed by debt reduction... (and)
would be envisaged only when both (a) a member has lost market access and (b) debt is
assessed to be sustainable, but not with high probability...Creditors will only agree if they
understand that such an amendment is necessary to avoid a worse outcome: namely, a default
and/or an operation involving debt reduction...Collective action clauses, which now exist in
mostbut not allbonds, would be relied upon to address collective action problems."
IMF of globalization

34

Globalization encompasses three institutions: global financial markets and transnational

companies, national governments linked to each other in economic and military alliances led
by the United States, and rising "global governments" such as

World Trade

Organization (WTO), IMF, and World Bank. Charles Derber argues in his book People
Before Profit, "These interacting institutions create a new global power system where
sovereignty is globalized, taking power and constitutional authority away from nations and
giving it to global markets and international bodies". Titus Alexander argues that this system
institutionalises global inequality between western countries and the Majority World in a
form of global apartheid, in which the IMF is a key pillar.
The establishment of globalised economic institutions has been both a symptom of and a
stimulus for globalization. Globalization has thus been transformative in terms of a
reconceptualising

of state

sovereignty.

Following

U.S.

President Bill

Clinton's

administration's aggressive financial deregulation campaign in the 1990s, globalisation

leaders overturned longstanding restrictions by governments that limited foreign ownership
of their banks, deregulated currency exchange, and eliminated restrictions on how quickly
money could be withdrawn by foreign investors.
CRITICISMS
Overseas Development Institute (ODI) research undertaken in 1980 pointed to five main
criticisms of the IMF which support the analysis that it is a pillar of what activist Titus
Alexander calls global apartheid. Firstly, developed countries were seen to have a more
dominant role and control over less developed countries (LDCs) primarily due to the Western
bias favoring capitalism. Secondly, the Fund worked on the incorrect assumption that all
payments disequilibria were caused domestically. The Group of 24 (G-24), on behalf of LDC
members, and the United Nations Conference on Trade and Development (UNCTAD)
35

complained that the IMF did not distinguish sufficiently between disequilibria with
predominantly external as opposed to internal causes. This criticism was voiced in the
aftermath of the 1973 oil crisis. The third criticism was that IMF policies were antidevelopmental. Fourth, harsh policy conditions are self-defeating when a vicious circle
developed when members refused loans due to harsh conditionality, exacerbating the
economy and eventually taking loans as a drastic medicine.
Lastly is the point that the IMF's policies lack a clear economic rationale. Its policy
foundations were theoretical and unclear due to differing opinions and departmental rivalries
whilst dealing with countries with widely varying economic circumstances.
On the other hand, the IMF could serve as a scapegoat while allowing governments to blame
international bankers. The ODI conceded that the IMF was insensitive to political aspirations
of LDCs, while its policy conditions were inflexible. Argentina, which had been considered
by the IMF to be a model country in its compliance to policy proposals by the Bretton
Woods institutions, experienced a catastrophic economic crisis in 2001, which some believe
to have been caused by IMF-induced budget restrictionswhich undercut the government's
ability to sustain national infrastructure even in crucial areas such as health, education, and
securityand privatisation of strategically vital national resources. Others attribute the crisis
to Argentina's misdesigned fiscal federalism, which caused subnational spending to increase
rapidly. The crisis added to widespread hatred of this institution in Argentina and other South
American countries, with many blaming the IMF for the region's economic problems. The
currentas of early 2006trend toward moderate left-wing governments in the region and a
growing concern with the development of a regional economic policy largely independent of
big business pressures has been ascribed to this crisis. In an interview, the former Romanian
Prime Minister Clin Popescu-Triceanu claimed that "Since 2005, IMF is constantly making

36

mistakes

when

it

appreciates

the

country's

economic

performances".

Former Tanzanian President Julius Nye ere, who claimed that debt-ridden African states were
ceding sovereignty to the IMF and the World Bank, famously asked, "Who elected the IMF to
be the ministry of finance for every country in the world?"
Conditionality

The IMF has been criticised for being "out of touch" with local economic conditions,
cultures, and environments in the countries they are requiring policy reform. The economic
advice the IMF gives might not always take into consideration the difference between what
spending means on paper and how it is felt by citizens. For example, some people believe
that Jeffrey Sachs' work shows that the IMF's "usual prescription is 'budgetary belt tightening
to countries who are much too poor to own belts'". One view is that conditionality
undermines domestic political institutions. The recipient governments are sacrificing policy
autonomy in exchange for funds, which can lead to public resentment of the local leadership
for accepting and enforcing the IMF conditions. Political instability can result from more
leadership turnover as political leaders are replaced in electoral backlashes. IMF conditions
are often criticised for reducing government services, thus increasing unemployment. Another
criticism is that IMF programs are only designed to address poor governance, excessive
government spending, excessive government intervention in markets, and too much state
ownership. This assumes that this narrow range of issues represents the only possible
problems; everything is standardised and differing contexts are ignored. A country may also
be compelled to accept conditions it would not normally accept had they not been in a
financial crisis in need of assistance. In Globalization and Its Discontents, Joseph E. Stiglitz,
former chief economist and senior vice-president at the World Bank, criticizes these
policies. He argues that by converting to a more monetarist approach, the purpose of the fund

37

is no longer valid, as it was designed to provide funds for countries to carry

out Keynesian reflations, and that the IMF "was not participating in a conspiracy, but it was
reflecting the interests and ideology of the Western financial community". International
politics play an important role in IMF decision making. The clout of member states is roughly
proportional to its contribution to IMF finances. The United States has the greatest number of
votes and therefore wields the most influence. Domestic politics often come into play, with
politicians in developing countries using conditionality to gain leverage over the opposition
in order to influence policy.
Reform
The IMF is only one of many international organisations and it is a generalist institution for
macroeconomic issues only; its core areas of concern in developing countries are very
narrow. One proposed reform is a movement towards close partnership with other specialist
agencies such as UNICEF, the Food and Agriculture Organization (FAO), or the United
Nations Development Program (UNDP). Jeffrey Sachs argues in The End of Poverty that the
IMF and the World Bank have "the brightest economists and the lead in advising poor
countries on how to break out of poverty, but the problem is development
economics". Development economics needs the reform, not the IMF. He also notes that IMF
loan conditions should be paired with other reformse.g., trade reform in developed
nations, debt cancellation, and increased financial assistance for investments in basic
infrastructure. IMF loan conditions cannot stand alone and produce change; they need to be
partnered with other reforms or other conditions as applicable. Reforms to give more powers
to emerging economies were agreed by the G20 in 2010; however, as of April 2014, the U.S.
Congress has not agreed to these reforms.
Support of military dictatorships
38

The role of the Bretton Woods institutions has been controversial since the late Cold War, due
to claims that the IMF policy makers supported military dictatorships friendly to American
and European corporations and other anti-communist regimes. Critics also claim that the IMF
is generally apathetic or hostile to human rights, and labour rights. The controversy has
helped spark the Anti-globalization movement. Arguments in favour of the IMF say that
economic stability is a precursor to democracy; however, critics highlight various examples
in which democratised countries fell after receiving IMF loans.
Impact on access to food

A number of civil society organizations have criticised the IMF's policies for their impact on
access to food, particularly in developing countries. In October 2008, former U.S.
president Bill Clinton delivered a speech to the United Nations on World Food Day,
criticizing the World Bank and IMF for their policies on food and agriculture:
We need the World Bank, the IMF, all the big foundations, and all the governments to admit
that, for 30 years, we all blew it, including me when I was president. We were wrong to
believe that food was like some other product in international trade, and we all have to go
back to a more responsible and sustainable form of agriculture. Former U.S. president Bill
Clinton, Speech at United Nations World Food Day, October 16, 2008.
Impact on public health
A 2009 study concluded that the strict conditions resulted in thousands of deaths
in Eastern Europe by tuberculosis as public health care had to be weakened. In
the 21 countries to which the IMF had given loans, tuberculosis deaths rose by
16.6%.In 2009, a book by Rick Rowden titled The Deadly Ideas of Neoliberalism:
How the IMF has Undermined Public Health and the Fight Against AIDS, claimed

39

that the IMFs monetarist approach towards prioritising price stability (low
inflation) and fiscal restraint (low budget deficits) was unnecessarily restrictive
and has prevented developing countries from scaling up long-term investment in
public health infrastructure. The book claimed the consequences have been
chronically underfunded public health systems, leading to demoralising working
conditions that have fuelled a "brain drain" of medical personnel, all of which has
undermined public health and the fight against HIV/AIDS in developing countries.

Impact on environment
IMF policies have been repeatedly criticised for making it difficult for indebted countries to
say no to environmentally harmful projects that nevertheless generate revenues such as oil,
coal, and forest-destroying lumber and agriculture projects. The IMF acknowledged this
paradox in the 2010 report that proposed the IMF Green Fund, a mechanism to issue special
drawing rights directly to pay for climate harm prevention and potentially other ecological
protection as pursued generally by other environmental finance.
Proposed alternatives
In March 2011 the Ministers of Economy and Finance of the African Union proposed to
establish

an African

Monetary

Fund.

At

the 6th

BRICS

summit in

July

2014

the BRICS nations (Brazil, Russia, India, China, and South Africa) announced the BRICS
Contingent Reserve Arrangement (CRA) with an initial size of US$100 billion, a framework
to provide liquidity through currency swaps in response to actual or potential short-term
balance-of-payments pressures.
CHAPTER 5
Conclusion
40

The IMF is suffering from serious structural distortions that have slowly developed since the
Second Amendment to the Articles of Agreement. These problems create a substantial barrier
to the effective functioning by the IMF. They can only be corrected through a broad ranging
reform program that will overhaul the structure and operating principles of the IMF. Without
undertaking this reform program, it is unclear if the IMF will ever be able to effectively make
any useful contributions to solving the complex problems of poverty, inequality and
inadequate governance which plague developing countries today. Unfortunately the problems
that exist in the IMF are only the most extreme version of a problem that exists in all
international organizations. All those organizations that have great economic power in the
developing world -- the World Bank, the regional development banks and the WTO -- share,
although maybe in less extreme forms, the same problems. Those UN specialized agencies
that lack adequate resources, influence and power-- such as UNESCO, FAO, UNICEF, WHO
-- often suffer from the reverse problem. They lack influence and power because they are
deemed to be too sensitive to developing countries. The result is that industrialized countries
lose interest in them. If international organizations are to perform the global governance
functions that were envisaged for them and if they are to play an effective role in dealing with
the complex problems that exist in the developing countries and the extreme inequalities of
power and wealth that exist between developing and developed countries, they will need to
undergo their own reform programs, that will be complimentary to the one this paper
proposes for the IMF.

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41

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42

International

economics

Published

by:

43