2012-04-10 10:00:21
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