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June 22 2009 | Filed Under Economics
The International Monetary Fund (IMF) was founded in 1944 with a primary mission to watch over the monetary system, guarantee exchange rate stability and eliminate restrictions that prevent or slow trade. This came about because many countries were economically devastated by the Great Depression and World War II. Over the years, the IMF has helped countries move through many different challenging economic situations. The organization is also continuing to evolve and adapt to the ever-changing world economy. We'll look at the role the IMF has played, as well as economic issues, the levels of influence some countries have over this organization, and its successes and failures.
Role in Global Economic Issues
For many countries, the IMF has been the organization to turn to during difficult economic times. Over the years this organization has played a key role in helping countries turn around through the use of economic aid. However, this is only one of the many roles that the IMF plays in global economic issues.
How it's Funded
The IMF is funded by a quota system where each country pays based on the size of its economy and its political importance in world trade and finance. When a country joins the organization, it usually pays a quarter of its quota in the form of U.S. dollars, euros, yen or pound sterling. The other three quarters can be paid in its own currency. Generally, these quotas are reviewed every five years. The IMF can use the quotas from the economically-sturdy countries to lend as aid to developing nations.
The IMF is also funded through contribution trust funds where the organization acts as trustee. This comes from the contributions from members as opposed to quotas, and is used to provide low-income countries with low-interest loans and debt relief.
Lending
When a country requests a loan, the IMF will give the country the money needed to rebuild or stabilize its currency, re-establish economic growth and continue buying imports. Several of the types of loans offered include:
Poverty Reduction and Growth Facility (PRGF) loans. These are low-interest loans for low-income countries to reduce poverty and improve growth for these countries.
Exogenous Shocks Facility (ESF) loans. These are loans to low-income countries that provide lending for negative economic events that are outside the control of the government. These could include commodity price changes, natural disasters and wars that can interrupt trade.
Stand By Arrangements (SBA). These are used to help countries with short-term balance of payment issues. (Refresh your understanding of balance of payments with our article: Understanding Capital And Financial Accounts in The Balance Of Payments.)
Extended Fund Facility (EFF). This is used to assist countries with long-term balance of payment issues that require economic reforms.
Supplemental Reserve Facility (SRF). This is provided to meet short-term financing on a large scale, like the loss of investor confidence during the Asian Financial Crisis that caused enormous outflows of money and led to massive IMF financing.
Emergency Assistance loans. These are designed to provide assistance to countries that have had a natural disaster or are emerging from war.
Surveillance
The IMF watches the economics and economic policies of its members. There are two main components of surveillance, country surveillance and multilateral surveillance. Through country surveillance, the IMF visits the country once a year to assess its economic policies and where they are headed. It reports its findings in the Public Information Notice. The second way, multilateral surveillance, is when the IMF surveys global and regional economic trends. It reports these twice a year in the World Economic Outlook and Global Financial Stability Report. These two reports point out problems and potential risks to the world economy and financial markets. The Regional Economic Outlook Report gives more details and analysis.
Technical Assistance
The IMF helps countries to administer their economic and financial affairs. This service is provided to any membership country that asks for assistance, and is typically provided to low- and middle-income countries. Through the use of technical assistance, the IMF can perform useful surveillance and lending to help the country avoid economic pitfalls which creates sustainable economic growth. Technical assistance helps countries strengthen their economic policy, tax policy, monetary policy, exchange rate system and financial system stability.
Levels of Influence
With over 185 members, some members of the IMF may have more influence over its policies and decisions than others. The United States and Europe are the major influences within the IMF.
The United States - The United States has the largest percentage of voting rights in the IMF with a 16.8% share, and contributes the largest quota of any single country. Over the years there have been many complaints that the U.S. uses the IMF as a way to support countries that are strategically important to them, rather than based on economic need. Many members feel that they should have more of a stake in what the organization does when it determines how and in what ways to help out the different countries.
Europe - Many European countries have resisted the efforts for a readjustment in voting rights and influence at the IMF. In the past, a European has generally held the managing director position of this organization. However, as the world continues to change there is greater demand to give more of a voice to new emerging economic countries. There has been talk that Europe could pool its quotas and maintain a strong voice going forward. However, if the countries try to individually maintain the levels they have, their voice of influence could continue to diminish.
Successes and Failures of the IMF
The IMF has had many successes and failures. Below we will highlight examples of a previous success and failure.
Jordan - Jordan had been impacted by its wars with Israel, civil war and a major economic recession. In 1989 the country had a 30-35% unemployment rate and was struggling with its inability to pay its loans. The country agreed to a series of five-year reforms that began with the IMF. The Gulf war and the return of 230,000 Jordanians because of Iraq's invasion of Kuwait put strain on the government, as unemployment continued to increase. In the period from 1993 to 1999, the IMF extended to Jordan three extended fund facility loans. As a result the government undertook massive reforms of privatization, taxes, foreign investment and easier trade policies. By 2000 the country was admitted to the World Trade Organization (WTO), and one year later signed a free trade accord with the United States. Jordan was also able to bring down its overall debt payment and restructure it at a manageable level. Jordan is an example of how the IMF can foster strong, stable economies that are productive members of the global
economy. (For an interesting perspective on the WTO, take a look at The Dark Side Of The WTO.)
Tanzania - In 1985 the IMF came to Tanzania with the aim of turning a broke, indebted socialist state into a strong contributor to the world economy. Since that time the organization has run into nothing but roadblocks. The first steps taken were to lower trade barriers, cut government programs and sell the state-owned industries. By 2000 the once-free healthcare industry started charging patients and the AIDS rate in the country shot up to 8%. The education system that was once free started to charge children to go to school, and school enrollment, which was at 80%, dropped to 66%. As a result, the illiteracy rate of the country shot up by nearly 50%. Also, In the period from 1985 to 2000 the per capita GDP income dropped from $309 to $210. This is an example of how the organization failed to understand that a one-size-fits-all strategy does not apply to all countries.
Conclusion
The IMF does serve a very useful role in the world economy. Through the use of lending, surveillance and technical assistance, it can play a vital role in helping identify potential problems and being able to help countries to contribute to the global economy. However, countries like the United State and Europe have historically dominated the governing body, and the IMF has had successes and failures. While no organization is perfect, the IMF has served the purposes that it was established to do and continues to keep evolving its role in an ever-changing world. (If you're interested in learning about another important international institution, take a look at What Is The World Bank?)
by Chris Seabury