It would be foolish to assume that the world has entered an “end of crises” stage in its history.
Today, with the Web we should all beware of the challenges facing our existence, but are our World Organisations up to speed.
This series of post examines the biggest and there is none more powerful than this one. The International Monetary Fund (IMF) — yet few know how it works.
It’s the must powerful because the economic and financial linkages which bind us together have brought substantial benefits to people around the world, but they have also had destabilizing effects.
The IMF works actively with the World Bank, the World Trade Organization, the United Nations, and other international bodies that share an interest in international trade.
Because we live in an increasingly globalized world and the expansion of the role of markets and their increasing globalization will continue to transform the international economy.
As the Second World War ends, the job of rebuilding national economies begins.
The International Monetary Fund (IMF) was founded in 1945 on multilateral principles, which stood in sharp contrast to the unilateralism and beggar-thy-neighbour policies of the 1930s.
Also known as the Fund, it was conceived at a United Nations conference convened in Bretton Woods, New Hampshire, United States, in July 1944.
The 44 governments represented at that conference sought to build a framework for economic cooperation that would avoid a repetition of the vicious circle of competitive devaluations that had contributed to the Great Depression of the 1930s.
To Day the IMF’s primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.
Also to serve three related purposes.
First, it would operate as a forum for multilateral economic cooperation, in recognition of the fact that one country’s policies affect other countries. Second, it would help countries to identify and adopt the macroeconomic policies that would help them to achieve and maintain high levels of employment and real income. Third, the Fund would provide temporary financial support, under appropriate safeguards, to help members address balance of payments difficulties without resorting to measures that could damage national or international prosperity.
The primary source of the IMF’s financial resources is its members’ quotas, which broadly reflect members’ relative position in the world economy.
Currently, total quota resources amount to about SDR 238 billion (about $334 billion).
With its near-global membership of 188 countries, the IMF is uniquely placed to help member governments take advantage of the opportunities—and manage the challenges—posed by globalization and economic development more generally.
The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties.
However it has difficulty conforming to the new global power balance.
The US holds 16.7 percent of the voting power in the Fund, which gives it an effective veto over any major changes in its structure and activities. China meanwhile has a 3.8 percent voting share, not far from Italy’s, which has an economy one-fifth the size.
Its Managing Director Christine Lagarde is one of the few woman in the world of power.
- Headquarters: Washington, D.C.
- Executive Board: 24 Directors representing countries or groups of countries
- Staff: Approximately 2,630 from 147 countries
- Total quotas: US$334 billion (as of 9/4/15)
- Additional pledged or committed resources: US $903 billion
- Committed amounts under current lending arrangements (as of 8/27/15): US$164 billion, of which US$145 billion have not been drawn (seetable).
- Biggest borrowers (amount outstanding as of 9/3/15): Portugal, Greece, Ukraine, Ireland
- Biggest precautionary loans (amount agreed as of 9/3/15): Mexico, Poland, Colombia, Morocco
Since the debt crisis of the 1980’s, the IMF has assumed the role of bailing out countries during financial crises (caused in large part by currency speculation in the global casino economy) with emergency loan packages tied to certain conditions, often referred to as structural adjustment policies (SAPs). It now acts like a global loan shark, exerting enormous leverage over the economies of more than 60 countries.
These countries have to follow the IMF’s policies to get loans, international assistance, and even debt relief. Thus, the IMF decides how much debtor countries can spend on education, health care, and environmental protection.
Unlike a democratic system in which each member country would have an equal vote, rich countries dominate decision-making in the IMF because voting power is determined by the amount of money that each country pays into the IMF’s quota system.
It’s a system of one dollar, one vote.
The U.S. is the largest shareholder with a quota of 18 percent. Germany, Japan, France, Great Britain, and the US combined control about 38 percent.
The disproportionate amount of power held by wealthy countries means that the interests of bankers, investors and corporations from industrialized countries are put above the needs of the world’s poor majority.
The IMF is funded with taxpayer money, yet it operates behind a veil of secrecy.
Members of affected communities do not participate in designing loan packages. The IMF works with a select group of central bankers and finance ministers to make polices without input from other government agencies such as health, education and environment departments.
The institution has resisted calls for public scrutiny and independent evaluation.
IMF loans and bailout packages are paving the way for natural resource exploitation on a staggering scale. It does not consider the environmental impacts of lending policies, and environmental ministries and groups are not included in policy making.
The focus on export growth to earn hard currency to pay back loans has led to an unsustainable liquidation of natural resources. For example, the Ivory Coast’s increased reliance on cocoa exports has led to a loss of two-thirds of the country’s forests.
The IMF routinely pushes countries to deregulate financial systems.
The removal of regulations that might limit speculation has greatly increased capital investment in developing country financial markets. More than $1.5 trillion crosses borders every day. Most of this capital is invested short-term, putting countries at the whim of financial speculators. The Mexican 1995 peso crisis was partly a result of these IMF policies.
When the bubble popped, the IMF and US government stepped in to prop up interest and exchange rates, using taxpayer money to bail out Wall Street bankers. Such bailouts encourage investors to continue making risky, speculative bets, thereby increasing the instability of national economies.
During the bailout of Asian countries, the IMF required governments to assume the bad debts of private banks, thus making the public pay the costs and draining yet more resources away from social programs.
Is the IMF Obsolete?. Several years ago, even asking such a question would have seemed absurd.
Yet today, with the narrowing of risk spreads in an era of increasingly interconnected markets and more efficient risk management, is the IMF’s role still relevant? Has the rise of Asia, with its reliance on self-insurance by reserve accumulation since 1998, shown the Fund the door?
So is it time for it to consolidate merging with the World Bank. But that might make for conflicting irrelevant missions.
The IMF has thrived over the years by constantly reinventing itself to meet the evolving needs of global financial governance.
The United States, European Union, Japan, and China can do pretty much as they please—in terms of fiscal stance, interest rates, or exchange rates—either cooperating or not as suits their tastes.
For the big boys, the IMF can be no better than a scholarly scold.
A useful role, to be sure, but not a task that justifies a staff of thousands.
The IMF has lost a clear sense of mission and purpose, and it has lost the support of many members. Members have built reserves and made other arrangements to avoid borrowing from the IMF.
The new world order needs a credible, independent global institution to guide it, and make all the other entities—such as a revamped (and constantly reforming) G8 and G20—effective.
The IMF should be a natural to lead this new world order, but unfortunately there is no sign they are really seizing the moment.
Never in the history of the world has a bureaucracy on its own shut itself down. Could this be the first time? Should it be?
On the one hand, globalization and the rapid growth of emerging markets allow prosperity to be shared more broadly. On the other, many countries remain mired in poverty. There are also moves worldwide toward stronger regionalism in political, monetary and trade relations. Global trends toward democracy, broader participation in decision-making, and a growing prominence of civil society groups within and across borders have highlighted the importance of participatory process and outreach in decision-making.
With its near universal membership, it is the only organization that maintains regular discussions on economic policies with almost all countries. It has the capacity to conduct comprehensive economic policy analysis at the global, regional and country levels. And its members are committed to providing information and engaging in peer review.
The IMF is the only global multilateral institution that brings officials with monetary and financial responsibilities together to monitor international developments and to respond when problems arise.
It was taken for granted that one of the world’s largest international institutions, and certainly one of its most important, would forever be part of the economic and political landscape.
Now, this isn’t the case.
In the USA Congress has refused thus far to approve the Administration’s request for $18 billion to help replenish the IMF’s resources, which have been severely depleted by the various Asian rescue packages the Fund arranged earlier this year.
A shortage of resources is one reason (but certainly not the only one) why the Fund didn’t offer to provide Russia more money during late summer (after arranging a package in July).
Even if the US Congress eventually approves the $18 billion the acrimonius debate over the IMF’s funding and future this time does not augur well for approval of additional funding in the future.
In 2014, the China-led Asian Infrastructure Investment Bank was established as a rival to the IMF and World Bank.
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.
Some experts voiced concern that the IMF was not representative, and that the IMF proposals to generate only US$200 billion a year by 2020 with the SDRs as seed funds, did not go far enough to undo the general incentive to pursue destructive projects inherent in the world commodity trading and banking systems—criticisms often levelled at the World Trade Organisation and large global banking institutions.
The greatest amount currently on loan is to Mexico, and then Greece. But when you look at the loan as a percentage of GDP, Liberia then Iceland are the highest with 8.5% and 7.4% respectively.
The greatest amount to be paid back per member of the population is Iceland ($2,828.67 per person) and Ireland ($2,619.14 per person).
The IMF has made €2.5 billion of profit out of its loans to Greece since 2010. If Greece does repay the IMF in full this will rise to €4.3 billion by 2024.
Out of its lending to all countries in debt crisis between 2010 and 2014 the IMF has made a total profit of €8.4 billion, over a quarter of which is effectively from Greece.
All of this money has been added to the Fund’s reserves, which now total €19 billion. These reserves would be used to meet the costs from a country defaulting on repayments. Greece’s total debt to the IMF is currently €24 billion.
The International Monetary Fund is meant to be the firefighter of the world economy. Recently, though, it is China that has responded to the ringing of alarms. First, it lent Argentina cash to replenish its dwindling foreign-exchange reserves. Next, with the rouble crashing, China offered credit to Russia. Then Venezuela begged for funds to stave off a default. Strategic interests dictate where China points its financial hose: these countries supply it with oil and food.
If a government anywhere goes bust, it now has an alternative to the IMF.
Whether the IMF truly benefits the international economy is the subject of considerable debate. Much of the criticism centers on the IMF’s requirements to adopt certain economic policies in order to receive IMF loans, which may encourage poor countries to neglect social concerns in order to comply.
The IMF’s role grows more controversial. It gets a reputation – as a rich bully – bursting into emerging market economies, telling them how to live their life.
If you don’t pay back the IMF, the lender of the last resort to the world, then no one will lend you money. I mean really, no one. Ultimately they paid the IMF in full. Everyone pays. If you want to play in the international economy, if you want to have credit, if you want to have any kind of normal relationship with the outside world, you need to have a normal relationship with the IMF.
Through its notorious structural adjustment programs (SAPs), it has imposed harsh economic reforms in over 100 countries in the developing and former communist worlds, throwing hundreds of millions of people deeper into poverty.
Its fingers and those of the World Bank are all over the (The Trans-Pacific Partnerhsip and The EU trade and investment deal with the US – the Transatlantic Trade and Investment Partnership – or TTIP.) both of which are quickly becoming the subject of increased interest and criticism. These two trade deals – the former being discussed between the US and Europe, and the latter between the US and Asian nations including Japan and South Korea – stand to change the face of global trade.
This agreement includes Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam to start. Eventually, its advocates hope, it will include every nation on the Pacific rim, including Indonesia, the Philippines, Japan, Mexico, Russia, and China.
The TPP is also a profoundly anti-democratic agreement which signs away our right to govern our own economy. Taken to its logical conclusion, this all ultimately amounts to the idea that the profitability of investments must be the supreme priority of state policy–overriding health, safety, human rights, labor law, fiscal policy, macroeconomic stability, industrial policy, national security, cultural autonomy, the environment, and everything else.
Who would fall for a brazen scheme that strengthens protection under the guise of free trade?
You’ve probably heard the old saying that the definition of insanity is doing the same thing over and over again but expecting a different result.
It is the holy grail, the fundamental principle that underpins much of modern economic thinking.
It may be too late to stop the TPP but we need to think beyond the narrow circle of its signatories.
Just to add to the mind-boggling complexity, ask yourself this: If you own a business and want to trade with Japan, should you access the recently inked Australia Japan deal? Or should you go with the TPP?
The TPP is being driven by America. Like most of these deals, it is politically driven. Fearful of China’s rise, America wants to corral its allies under a trade umbrella. In the process, it also wants to further the interests of American corporations and American workers.
It wants copyright laws and patents tightened and extended. These are agreements that offer protection to corporations and investors, usually justified on the grounds that innovation requires a reward not us the people.
When it comes to economic benefits, both of these Agreements can be and will be downright harmful.