The International Monetary Fund: A Series of Misfortunate Events

Established in 1945, the International Monetary Fund, IMF, was designed to be a financial savior while the global economy swayed on the brink of permanent disaster after World War 2. Its primary objective was to extend monetary cooperation and maintain financial stability by offering resources to member countries in economic disarray. These funds would come from two sources: loans and quotas based on the state’s economic status. Recently, the IMF funding capacity totaled just over a trillion dollars.

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Bretton Woods System

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Bretton Woods meeting in New Hampshire, USA

The IMF was based on the Bretton Woods system that constituted the first directive to organize world inter-monetary relations. This system obligated countries to fix their exchange rate by tying their currency to gold. Consequently, the IMF now may regulate the differences between the money influx and outflow in member countries and end currency wars. This would also mean that governments would peg their currency to the US dollar while the US agreed to link its currency to gold at a rate of $35 per ounce. Accordingly, indebted European countries increased their reserve of US dollars, which was one of the first landmarks of US hegemony. Many researchers regard this system to be a success due to the virtual absence of banking crises during the system’s operation. However, this system ended abruptly after what was called the “Nixon Shock” where US President Nixon ended the dollar convertibility to gold after a series of negative balance of payments, growing public debt due to wars, and monetary inflation.

The Washington Consensus

Basically, the IMF operates as a lender to the member countries in economic distress and those cannot cover its debt to creditors. That’s smart: if you don’t have the money to pay a loan, take another loan! However, the money isn’t handed over blindly. Other than demanding collateral for loans, the IMF enforces conditionality: a set of macroeconomic structural reforms that mimic laissez-faire principles of the free market. This is to ensure sustainable economic growth and repayment of loans. Known as the Washington consensus, these structural adjustment policies include austerity (slashing governmental expenditure), devaluation of the currency, trade liberalization, removing state subsidies, raising taxes, privatization, and fighting corruption. These conditions are decided based on a thorough investigation of the financial situation in the country and conducting a series of lengthy negotiations between the two parties. After extending the loan, the IMF organizes a strict debt-payment schedule.

Disproportional Representation in IMF

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In some cases, countries bluntly reject IMF loans because of their invasive conditions. During the 1997 Asian financial crisis, instead of relying on the IMF loan, Malaysia orchestrated its series of reforms such as devaluing the local currency, tightening capital control, and increasing state spending. Eventually, the crisis was much less severe than in countries tethered to the IMF. Other countries ask for assistance from allies such as Pakistan in 2018 from China, UAE, and Saudi Arabia. In 2014, the BRICS countries (Brazil, Russia, India, China, and South Africa) launched a game-changer: a new monetary fund called “New Development Bank” with estimated reserves north of $100 million. This comes after the marginalization and disproportional representation of emerging economies within the IMF that gives more power to Western countries. On average, a dollar in GDP in the top EU countries is worth almost 3 times the votes than the same dollar in the BRICS countries. According to a publication by Jakob Vestergaard and Robert H. Wade, the ratio of voting power to GDP in China (0.45) is only one-fifth of that in Belgium (2.14). Dervis and Özer propose a proportional voting system based on GDP, population, and contributions to the global public good. Although this measure is not likely to happen, it would give developing countries a proper seat at the table, especially when loans tend to be greater and more frequent when “the recipient country has a bigger representation in the IMF and is more politically connected to the US and major European countries,” according to Barro and Lee (2005).

Another major issue with the IMF is that the same countries who are in debt are those who offer loans. The United States of America is its largest contributor with $155 billion; however, the USA carries a debt-to-GDP ratio of 106.9%. This shows how these countries are funding the IMF using creditor money, perhaps in a ploy to maintain their financial superiority and worldwide control as an economic superpower. By supporting the IMF which is sometimes the last resort for developing countries, Western countries can enforce favorable free-market policies and keep those states in a spiral of disaster.

IMF Policies in the Long Run

The high-interest rates and increase of unemployment due to IMF conditions have grave repercussions on the local economy in the long-run. Maintaining a budget surplus comes at the expense of cutting down essential services and public sector employment which would thereby cause economic stagnation. Nobel Prize laureate in economy Joseph Stiglitz accuses the fund of enforcing failed development policies that attack the livelihood of local populations. This is where the IMF has failed: a one-size-fits-all economic policy does not work. Currently, most policies the IMF prescribes do not consider the complex political, economic, and cultural systems unique to each country, rendering those policies ineffective and counterproductive. The strict austerity policies enforced come opposite to the economically-populist views of the political parties in governmental opposition. Poverty and unemployment would increase rapidly once subsidies are slashed as per IMF advice. Therefore, the current government loses public approval, damages societal stability, and risks losing re-election. Moreover, in the long run, these policies worsen employment rates and risks losing necessary foreign investment. After a thorough analysis of 57 developing markets, Jorra (2012) shows that IMF bailouts increase the possibility of future credit defaults by 1.5–2%. Moreover, Bordo and Schwartz (2000) concluded that the performance of states decreases dramatically after accepting loans from the IMF due to austerity policies and loan-repayment fiascos. For example, the IMF encouraged debt repayment in Sierra Leone, Guinea, and Liberia instead of expenditure on essential services. Therefore, when the Ebola crisis erupted, those states were defenseless as their health systems are already in crutches.

However, on a more positive note, Morris & Shin (2006) found that the loans may prove effective only when the recipient properly enforces all IMF regulations. This introduces an important concern: enforcement of conditionality. Between 2005 and 2009, only 20% of loans were fully repaid by indebted member states. Even when the macroeconomic programs of the IMF are beneficial, the monetary situation in the recipient state will gradually deteriorate if the IMF doesn’t regularly intervene and oversee the implementation of these reforms. Because of this lack of enforcement, the core effectiveness of IMF policies cannot be calculated. We cannot absolutely conclude if the IMF policies are good or bad.

IMF bailouts’ cases

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Greek Public Chants to Refuse IMF loans

Before the 2008 financial crisis, the IMF mainly gave out loans to emerging markets. However, a sharp shift was observed through the IMF’s 2010 intervention in the Greek government-debt crisis. This was the first time the IMF loaned a eurozone country since the euro was established as a common currency in 2002. Moreover, Greece was given assistance worth an outrageous 3200% relative to its membership contribution, compared to the previous limit of 600%. Despite public fierce disapproval on the increasing taxes and austerity policies, the government accepted the loan. Similarly, in 2018, the Argentinian public credited the IMF for the financial crisis after the $50 billion emergency package was offered. On the other hand, with Lebanon’s economy crashing day by day, the IMF is inclined to offer half of the $10 billion loan requested by the Lebanese government due to the lack of confidence in the promise of necessary reforms.

COVID-19 and the Global Economy

In 2020, the IMF faces one of the largest crises since 2008. 90 countries have asked for assistance after COVID-19 effectively hibernated the global economy due to lockdowns, a decrease in purchasing power, and an increase in health expenditure. Moreover, emerging markets face a sharp plummet in foreign investments and currency reserves. Lending has swelled to $120 billion since this March. The IMF needs to give proper support to economically-fragile countries and not wait for them to crash, especially when most of its resources have not been employed yet. These countries require long-term financing, not short-term gimmicks to offset the virus’s economic repercussions.

Established as the world’s financial firefighter, the IMF might have got something right when we compare it to Ray Bradbury’s Fahrenheit 451 fire department. Sometimes it appears the IMF starts the fire. It has long been a platform of leverage and blackmail by Western countries to promote a free-market economy with zero tariffs. The IMF is responsible for supporting Western hegemony. It represents a tempting line of credit meant to mend financial crises. Instead, it shoves those countries in an endless cycle of debt and loans. While structural reforms are always necessary, sovereignty must not take the back seat. In moments of despair, governments might resort to a deal with the devil. The IMF is ready to embrace them with open arms and a gun to the head.


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18-year-old Lebanese teenager, thinker, writer, Democratic Socialist, vocal on economic policies, food lover, and regular film watcher.

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