44 - The IMF

In development literature, the policies of the International Monetary Fund [IMF] are routinely castigated. It is the ogre in the story, imposing draconian regulations on sovereign nations in exchange for making loans which only plunge those nations further into debt. But the IMF has historically played an important role in world affairs.

Both the IMF and the World Bank arose out of the economic chaos following the Second World War. The incentive behind the establishment of these institutions was a desire to avoid an international economic crisis similar to the Depression of the 1930s. To determine how to best avoid that possibility, the United Nations Monetary and Financial Conference was held at Bretton Woods in New Hampshire in 1944. Its goal was to develop institutions which would help nations in their reconstruction efforts after the war. The International Bank for Reconstruction and Development (the World Bank) was designed to provide long-term capital to nations requiring assistance, and a second institution, the International Monetary Fund, was intended to provide short term assistance to countries in crisis situations. The IMF, as its name implies, is a fund from which nations could take short-term loans in order to cope with temporary financial difficulties, specifically balance of payments difficulties.

Because the IMF’s sole purpose was to overcome short-term difficulties, it has traditionally insisted that borrowing countries adapt measures which the IMF believes would correct those difficulties. These might include currency devaluation, increased taxes, reduction of government spending in areas such as education and health, and so on. These are the “structural adjustments” which had had such a powerful impact on the lives of individuals living in developing countries.

During the 1970s when many developing countries were seeking to modernize, they were reluctant to draw too heavily from either of these institutions because of the conditions they insisted upon before granting loans. But when the debt crisis emerged in the 1980s, developing nations continued to require manufactured goods which they had to purchase from more developed nations, and they still needed capital to continue the process of industrialization. However the income they received for their exports–still primarily commodity products–were slumping and tariffs placed on their manufactured goods made them prohibitively expensive. Further, the commercial banks, which had previously encouraged them to borrow money, were now reluctant to make further loans. As a result, many developing nations had more money going out of the country than they were bringing in. That is a “balance of payments deficit.”

Since IMF had been designed specifically to assist countries to overcome things such as balance of payments deficits, it became the institution to which countries like the Dominican Republic turned in the 1980s. The IMF formula was to organize the banks which had outstanding loans in the petitioning country; it even arranged for further loans provided that certain conditions–the structural adjustments –were met.

When the IMF was established in 1944, there were 45 member nations; today there are 184. These nations contribute to funds—their “quota” based on their economic strength.