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The International Monetary Fund (IMF) was established at the end of World War II as part of the Bretton Woods Conference held during July, 1944. The IMF officially came into existence on December 27, 1945, and commenced financial operations on March 1,1947. The conference was held near the end of the war to address economic problems that had plagued the world during the Great Depression. Specifically, the conference focused on nations’ short-term financial problems and the promotion of free trade. The result of the conference was the establishment of the IMF and the World Bank.[1]
Article I of the Articles of Agreement of the International Monetary Fund states: The purposes of the International Monetary Fund are: (i) To promote international monetary cooperation through a permanent institution, which provides the machinery for consultation and collaboration on international monetary problems. (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. (v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.
IMF lending to poor nations is often a point of controversy. Anti-globalization groups see the IMF as a tool of the rich and powerful to subjugate the world’s poor and oppressed. An anti-globalization web site, The Global Exchange, [2] sees the IMF this way: 1. The IMF is controlled by the U.S., the U.K., Japan, Germany, France, Canada, and Italy. 2. Poor countries, primarily in the southern hemisphere owe large debt amounts and are unable to obtain credit. 3. These countries have only one alternative, and that is to borrow from the IMF. 4. In exchange for such loans, the IMF demands structural reforms that further impoverish the poor of the country, forcing them into sweat shops to manufacture goods for the wealthy nations and to export their precious natural resources out of their own countries to benefit the rich. 5. The government officials who agree to these arrangements are usually the privileged elite of the poor countries, most of who were educated in, and are controlled by, the wealthy nations. 6. The IMF demands an end to government programs, such as government subsidies and price controls which benefit the poor. 7. The IMF forces poor governments to hand over large parts of their economies to private interests, which usually gives control to corporations from the wealthy countries.
Of course the IMF sees all this in a very different light. These different perspectives lay bare the clash between those who believe in the positive power of free markets and those who mistrust markets, preferring government economic control. The following are short responses to the criticisms above.
1. The wealthy nations listed above do actually have more votes in the IMF than the poor nations of the world. However, since the IMF is in large part a lending institution, it does not seem odd that those who must come up with the money have the greatest say over how the money is to be used. The United Stated has the largest percentage of the votes at 17.11%. However, the U.S. funding quota is 17.47%. The poor countries actually receive slightly more voting power than is represented by their funding quotas. [3]
2. It is true that private lenders would be reluctant to lend to poor nations, which already owe large amounts of money and are having difficulty repaying.
3. It may well be correct that the only source of additional loans to such nations is the IMF.
4. The IMF’s goal is to promote free market economics. The countries at issue are already very poor, and the economic systems that they have historically used have been dismal failures. Thus, before the IMF will agree to lend money, it requires that the country implement free market measures to restructure its economy. But, it is no surprise that even with the reforms people work for low wages. Wages are ultimately dependent on productivity. In a poor country with an abundance of unskilled labor, and not much capital, wages must be low because productivity is low. That said, a country must start somewhere, and earning some wages while producing something is an improvement over earning no wages for producing nothing.
5. Since most poor countries lack educational institutions to train their people in finance, banking and economics, it is surprising that many countries’ financial leaders were trained in the West. If so, it would not be surprising to find that such leaders often support free market economics. After all, if they were trained in the West, and have seen first hand how successful free markets can be.
6. Free markets require the use of the price mechanism to efficiently allocate resources. Economic reforms would be undermined if the price mechanism is not allowed to function, because the government controls prices or subsidizes sectors of the market.
7. Government owned or controlled corporations have proven to be notoriously inefficient. Thus, any market reform must include privatization of large portions of the economy. True privatization also requires that businesses and there assets are freely alienable. In addition, access to foreign capital is critical to a developing country. In the long-run, to provide a higher standard of living to its people, a country must increase its capital stock. However, in a desperately poor country, diverting resources away from consumption and to the production of capital may literally mean that some people will starve. Foreign investment allows countries to place more resources into increasing the nation’s capital stock, without reducing consumption.
Promoting the development of poor nations is not an easy task. It is clear that the heavy government control, which has characterized most of these nations’ economies, has been a failure. It is also true that restructuring, by its very nature, involves a lot of pain. However, the development of free market economies is the only hope that the poor countries of the world really have to succeed in the long-run.
[1] Schaffer, R., Earle, B. and Agusti F., International Business Law and It Environment, West Educational Publishing Company, 4th ed., 1999, p. 67. |
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