The Role of International Monetary Fund (IMF)

                Today, the International Monetary Fund (IMF) is known as the organization composed of 189-member states, with a mandate of “working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world” (IMF, 2016).

                It was initially organized during the Bretton Woods Conference in 1994, and later existed formally with 29-member states in 1945. It can be considered as a project spearheaded by the Allied nation in their attempt to regulate the international financial and monetary order after the World War II. At the conclusion of the Breton Woods Conference, agreements were signed and ratified thereafter by member states. One result of the agreements, as mentioned, is the creation of the IMF with the goals of reconstructing the international payment system and promoting stability of exchange rates and capital flows. As provided in the Final Act of the conference, the IMF had the following major features (US Department of State, 1948). First, there is an adjustably pegged foreign exchange market rate system, where exchange rates were pegged to gold but governments can modify them to correct a fundamental equilibrium. Second, member states should make their currencies convertible for any trade-related transactions. Third, member states can change their exchange rates by not more than 10% when it is unfavorable to their balance of payments without objection from the IMF. Lastly, the member state are obligated to subscribe to the IMF’s capital.

                To make sure that these rules are observed by member states, the IMF is vested with three primary functions: oversee fixed exchange rate arrangements between states, assist governments in managing their exchange rates and enable them to prioritize economic growth (e.g. providing capital investments such as infrastructures), and provide short-term capital to aid balance of payments (Jensen, 2004). With floating exchange rates after 1971, its function shifted to the examination of the economic policies of countries with IMF loan agreements and the conduct of researches on what policies ensure economic recovery. Its main concern becomes the promotion and implementation of policies that lessen the frequency of economic crisis on emerging markets, particularly the middle-income state which are more susceptible to huge capital outflows. From overseeing only exchange rates, IMF become more active through its examination of the macroeconomic performance of member states. Furthermore, the IMF sets terms of agreement on lending and loans through the policy of conditionality enforce in the 1950s. States with low GDP or income can loan on concessional terms (i.e.no interest rates for a certain span of time). On the other hand, those with considerable income borrow on non-concessional terms or with interest rates.

                Historically, the IMF role is mediated by its relationship with member states through the inclusion of Structural Adjustment Programs (SAPs) in its condition for granting a loan to a borrowing state. SAPs are implemented with the goal of restructuring the borrowing state’s economy to be market-oriented and free from government intervention. Included in the SAPs are the free market-related policies, currency devaluation, privatization, deregulation and reduction of trade barriers such as tariff. These programs are usually tantamount to the reduction of allocation for education, public health, social safety nets and other public services. States failing to carry out these programs may be subject to intense fiscal disciplinary measures, which sometimes results to blackmailing of poor nations. As for those who contributes financially to the IMF, the member states are each assigned a specific quota depending on their respective share to the world economy. Those which contributes more, such as the US, UK and Germany, are equipped with more voting percentage and, hence, have more influence over which states are to be granted loans and their corresponding SAPs.

                In response to the recent global financial crisis, the IMF has played a constructive role from working in the shadows to being in the center of global events. It has become more active in mobilizing its resources in support of its affected member states. For example, the IMF bailout to Greece is one of the biggest in history. It also helped restored confidence in the organization especially when it offered safety nets to smaller economies. It created a crisis firewall by enhancing its lending capacity, providing risk analysis and policy advise in addressing challenges and spillovers of the crisis and by reforming its governance.

                In the face of politically assertive “publics” of borrowing states, I think the IMF continues to be relevant today as it offers a venue for global monetary cooperation and thereby ensuring financial stability. The emergence of economic crises are unpredictable. This is exemplified by the 2008 global financial crisis but the existence of the IMF helped mitigate the devastating repercussions brought about by such event as elaborated in the podcast. As a consequence, there is a growing consensus that IMF will be instrumental in preventing another major crisis. Nonetheless, I think the IMF must further reform itself so as to effectively address the demands the politically assertive publics, such as the so-called evil nature of the SAPs and the great inequality among its members in influencing the decisions of the organization. It must effectively promote economic restructuring without hugely sacrificing the government’s role of providing the basic social services to its people. Voting shares must be distributed more among its members states so as to eliminate the thought that IMF is an arena for developed nations exploit the developing and/or underdeveloped ones.