International Monetary Fund

The International Monetary Fund was founded in 1944 at Bretton Woods, New Hampshire as a result of the financial turmoil of the 1930s. The aim was to create an institution that would help rebuild - along with the World Bank - the world economy.  The IMF is neither a world central bank nor a development bank. It acts as a monitor of the world's currencies by helping to maintain an orderly system of payments between all countries. It is also a kind of international credit union. Member countries contribute money to the Fund, which in turn lends money to members who face severe balance of payment problems. Critics of the IMF complain that its short-term loans are accompanied by stringent conditions that often end up doing more harm than good.

In the aftermath of World War II a number of international organizations were created. Besides the United Nations, the important international economic organizations created at the conference held at Bretton Woods were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank. The IBRD-World Bank was established to help finance the reconstruction of war-torn Europe and the development of the poorer countries of the world. The IMF mandate was to regulate an international monetary system based on convertible currencies so as to facilitate global trade while leaving sovereign governments in charge of their own monetary, fiscal, and international investment policies. Significantly, the effort to establish the International Trade Organization (ITO) ended in failure, leaving the “minimalist” General Agreement on Tariffs and Trade (GATT) as its surviving remnant. But all that was more than 50 years ago. The IMF has now become the “point person” for efforts to “liberalize,” or deregulate the international economic system.



The IMF is usually thought of as the “manager” of the international credit system. But one could question whether the newly transformed international credit system has a manger. One could debate whether “manager” would be an accurate label in any case. The IMF would have us believe it is more like a “social worker” for international “credit addicts.” Polite IMF critics would use the word “policeman” rather than “manager” to describe the IMF's role. And angry critics see the IMF as nothing more than an “enforcer” or “rent-a-cop” in the employ of the international creditor syndicate. Here, we are concerned with what the IMF does and with the predictable effects of its policies, so readers can choose their own label when we are done.



The IMF has prescribed the same medicine for troubled third world economies for two decades now: (1) Monetary austerity: Tighten up the money supply to raise internal interest rates to whatever heights needed to stabilize the value of the local currency. (2) Fiscal austerity: Increase tax collections and reduce government spending dramatically. (3) Privatization: Sell off public enterprises to the private sector. And (4) Financial liberalization: Remove restrictions on the inflow and outflow of international capital as well as restrictions on what foreign businesses and banks are allowed to buy, own, and operate. Only when governments sign this “structural adjustment agreement” does the IMF agree to: (5) Lend enough itself to prevent default on international loans that are about to come due and otherwise would be unpayable. And (6) arrange a restructuring of the country's debt among private international lenders that includes a pledge of new loans.



Since the alternative to signing an “IMF conditionality agreement” is no new international loans--even to finance export sales and essential imports--combined with threats of asset seizures abroad by international creditors; since there is no longer a Soviet bloc that might decide to “scab” on an international creditor boycott and embrace a defaulting pariah to her bosom; and since an international lending boycott would bring most third world economies to their knees within months, there have been few troubled countries in the past decade willing to stare down the IMF and say “nyet” to its “devil's deal.” The only countries able to put up any fight at all have been those who could play the “too big to fail” card. In the 1980s when Brazil owed more than 100 billion and Peru owned a little more than 10 billion, the saying in Latin America was: “If I owe you 10 billion dollars I'm in trouble. But if I owe you 100 billion dollars you're in trouble.”




In the Latin American debt crisis of the 1980s the IMF backed down in face of Brazilian threats to default and agreed to a much more lenient program--effectively allowing the Brazilian economy to continue growing. On the other hand when social democratic President Alan Garcia refused in 1985 to dedicate more than 10 percent of the value of Peruvian exports to debt repayment on grounds that paying any more would make economic development impossible, the IMF excommunicated Peru from the international economic community. Peru was denied new loans even to finance exports, and the World Bank shut down not only its development projects, but also its research projects in Peru, in solidarity with IMF policy. The greater the “exposure” of international creditors--and in particular U.S. creditors--the better the deal debtor countries have been able to extract from the IMF and the creditors it represents, because the larger the debt the more negative the consequences of default for the entire club of international creditors as well as for the country that defaults.

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