Where do sovereign governments go when they face a fiscal crisis? Since July 1944, their response has often been to seek assistance from the International Monetary Fund (IMF), whose mission is to maintain the stability of the global monetary system.
The IMF monitors the global economy, provides loans to countries that require support in meeting their financial obligations, and offers technical assistance and training to governments to help them come up with effective monetary policies.
It was established at the Bretton Woods conference in the United States, when 44 Allied nations met to discuss post-war regulation of the international financial and monetary system. Along with the IMF, the International Bank for Reconstruction and Development (IBRD) was also established at Bretton Woods, mainly for the purpose of rebuilding Europe which had been ravaged by the second world war. The IBRD is now one of five member institutions of the World Bank Group, which was established upon the ratification of the Bretton Woods agreement in 1945.
Both the IMF – which has 189 member states – and the World Bank are major international lenders. Where they differ is that the IMF, unlike the World Bank, is not strictly a development institution. The World Bank, which seeks to achieve specific development goals, grants project-based loans both to governments and to specific non-governmental organisations. The primary purpose of these loans is to prevent an economic crisis and to lay the foundation for sustainable growth.
The IMF has a fiscal war chest of around US$1 trillion to help member nations facing financial difficulties. These loans are mostly interest-free and always offered at a discount to the rate the government would have to pay on the international bond market. In exchange for the loans, the IMF imposes conditions: economic policy adjustments that aim to rectify underlying weaknesses in the country’s financial system.
These loan conditions have long been a topic of heated debate among the international community and development experts. Historically, the IMF has imposed strict prerequisites for providing loans, often demanding that the government quickly liberalise the economy, and drastically reduce the size of the public sector as well as spending on subsidies. Naturally, the IMF receives its money largely from wealthy nations such as the United States, and lends to troubled countries, such as Greece, Ukraine, Pakistan and Egypt, which are among the biggest borrowers. As a result, the IMF faces the difficult task of balancing its need to protect the capital of its lenders with its desire to ease the burden on borrowers.
Many people have criticised the IMF’s prescription of aggressive, free-market policies as a panacea for all economic ills. They contend that such policies are not compatible with some countries’ social and economic systems, especially when implemented with great haste. In a number of instances, the IMF’s loan requirements have left countries with higher levels of unemployment and lower rates of economic growth, damaging the people’s trust in their government and, more broadly, in international institutions. Many would argue that the capital of the IMF’s lenders would be best protected with easier loan conditions that would ultimately boost economic growth and make debtors more likely to repay their loans.
IMF’s managing director, Christine Lagarde, has disavowed structural adjustment policies, saying they are a thing of the past. Lagarde claims that the IMF no longer imposes such punitive measures on countries that seek its assistance. Although this claim is somewhat disputed, there is no doubt that the IMF’s policies have evolved, on paper at least, to reflect a more nuanced approach towards lending.
The IMF’s core mission has not changed over the past 70 years. However, it has realised that economic growth and stability require changes that may go deeper than the traditional tools of fiscal and monetary policy.
For instance, the IMF usually does not take action on global warming. However, with the sharp increase in global temperatures over the past 50 years, the economic consequences of climate change are increasingly obvious. Warmer climates are disproportionately impacting lower-income countries through reduced agricultural output, lower worker productivity, decreased investment, and worsening public health.
Gender inequality is another area in which the IMF has intervened, particularly under Lagarde, the organisation’s first female leader. Along with the World Bank, the IMF has highlighted the importance of giving equal status to women in the workplace and in society.
Global economic stability is fragile, and it is only with the international cooperation embodied by institutions such as the IMF that we can stride towards sustainable and inclusive global growth.