At the Bretton Woods Conference in July 1944, 44 allied nations were invited to create a postwar financial order that would encourage economic cooperation with the goal of fostering sustainable financial growth, promoting higher standards of living, and reducing poverty. In order to assure international monetary cooperation by stabilizing currency exchange rates and increasing international liquidity, the International Monetary Fund (IMF), a specialized agency of the United Nations, was established as nations all over the world prepared to rebuild their economies. Due to both the world wars and the great depression, the global economy was crippled. The consequences of this were horrifying, ranging from unemployment, homelessness, and deflation to the collapse of international trade.
Towards the end of the Second World War, Countries began constructing their economies and that’s when the role of the IMF became pivotal in acting as a watchdog supervising the international monetary system. It was created alongside the World Bank as an overlapping finance arm of the United Nations. From the post-world war scenario, we can apprehend that world economies have become largely interdependent on each other through trade and investment. While this benefits the strengthening of the global financial system, it also creates a defect in the economic cycle. When an unforeseeable crisis, like a recession or a natural disaster, destabilizes a country’s economy, it can severely affect dependent countries. At this juncture, the balancing power of the IMF prevents the economies from collapsing. It is one of the several global banks that provide loans to plagued economies to promote a sustainable world economy.1
DISCRIMINATORY NATURE AND LOAN CRITERIA OF THE IMF
In total the IMF has 190 member states, 8 directors represent individual countries such as China, France, Germany, Japan, Russia, Saudi Arabia, the United Kingdom, and the United States, and the other 16 represent the fund’s remaining members, grouped as per world regions. Most of the decisions in the fund are by consensus, and the executive board rarely conducts formal voting.
The IMF operates on a quota system. A quota is given to each new member nation based on the size of their respective economies. The core components of the IMF’s economic and governing organisations are quotas. They set the maximum financial contribution that a member is required to make, and they also affect a member country’s ability to vote at IMF meetings. Quotas also define a member’s share in a general allocation of SDRs as well as the maximum amount of finance the member may request from the IMF under regular access. The higher the economy, the higher the votes. Superpowers like the USA have tremendous control over the fund in part because of this. In addition to quota funds, multilateral and bilateral agreements can be a vital part of the IMF’s crisis relief assistance to member nations.
Accordingly, the organisations must review their quotas every five years in accordance with their Articles of Agreement in order to adjust the allocation of vote shares to the changing economic importance of the member nations. Briefly stated, quota reviews focus on two key issues: first, the extent of the IMF’s financial lending power; and second, the distribution of the increase among members.2
When it comes to decision-making, the board of governors is the IMF’s highest decision-making body and consists of one governor and one alternate governor from each member country, normally the minister of finance or head of the central bank. The IMF executive board, which is responsible for daily operations, is chaired by the IMF’s managing director and consists of 24 executive directors (EDs) representing member countries through constituencies. ED constituencies are divided according to quotas, with some member countries representing only themselves (this is the case for China, France, Germany, Japan, Russia, Saudi Arabia, the UK and the US), while other EDs represent a block of countries or constituencies. For example, sub-Saharan Africa has two EDs representing 46 countries.
Although board discussions are generally not published and thus the positions of individual board members are not disclosed, decision-making on the executive board is usually made through consensus with voting kept to a minimum. Votes on substantive issues need 85 per cent approval, granting the US (with its 16.52 per cent vote share) effective veto power over any serious decisions.3
INTERVENTIONS OF THE IMF IN THE DEVELOPING AND UNDERDEVELOPED NATIONS
The interventionist strategy of the IMF has had a negative net impact on the world’s impoverished and developing countries. In his international bestselling book “Globalization and Its Discontents,” Nobel Prize-winning economist Joseph Stiglitz suggests that the IMF may be one of the causes of the failure of some of the world’s poorest countries. According to him, the IMF places requirements on loans it makes, including higher interest rates, open capital markets, privatization, liberalization, and reduced government spending. Additionally, these circumstances have disturbed both the lives of the locals and their enterprises. In essence, this is a model to help the American form of capitalism spread elsewhere. From the American perspective, this might seem like a very good example of development, but the actual situation is different and it does not bode well for all of the participating nations, thus leading to disastrous results. It is important to remember that each country’s economic trajectory is unique, making it impossible, impractical, and problematic to impose a western model.
If we look back, The IMF’s original directive was to uplift international monetary cooperation, endorse the expansion of trade and economic growth and discourage policies that would harm prosperity. More specifically, this meant regulating international exchange rates and helping economically stricken countries finance their balance of payments. Since the global economy made a transition to a floating exchange rate system in the late 20th century, the IMF’s central mission has shifted slightly. Beyond overseeing exchange rates, the IMF now plays an active role in surveilling, recommending, and enacting policy — particularly in economically unsubstantial states — to catalyze economic recovery and stop the ramifications of financial crises from reaching global levels. Hence, even though developing countries comprise a considerable section of the world’s population, their economic interests are frequently underrepresented.
The IMF’s functioning can also be compared with ‘Neo-Colonialism’ where the rich countries use the organisations to control and influence the economies of developing and underdeveloped countries. The rich countries often see the poor countries simply as a ‘market’ or ‘source of raw materials where their corporates can sell the products and use cheap labour for manufacturing. This is strikingly reminiscent of the period when the British Monarchy severely repressed India as a colony.
I would like to give an example of the case of Ecuador, in March 2019 Ecuador signed a 4.2 billion dollar agreement with the IMF. As usual, the organisations, Put forth certain conditions and the then IMF chief Christine Lagarde termed those as a ‘comprehensive reform program’ to reform the economy. However, this was far to be a reality as one of the conditions proposed by the organization was to reduce Ecuador’s budget by 6% of its GDP. As, a consequence the country had to fire, tens of thousands of public sector employees, Taxes were increased considerably and government spending decreased on many welfare schemes. The result of all this was the moving of the economy of Ecuador into mild recession and then as Covid -19 came, the economy further plunged into a deep recession. Today the country is buried deep in poverty and unemployment. Similar is the case with Ghana as well. There are even debt cancellation offers from the IMF however it involves many stringent conditions which include sanctions.4
ROLE OF IMF IN THE SRI LANKAN CRISIS
Sri Lanka is currently experiencing one of the greatest economic crises the world has witnessed in recent memory. Of the dire status of the country’s current situation, political upheaval, economic mismanagement and a number of poorly executed government stances, including the sudden switch to organic farming in 2021 or the election-related tax cuts in 2019, the repeated use of external credit to address Balance of Payments (BOP) crises, and the collapse of the tourism industry brought on by COVID are to blame. Long lineups at gas stations across the nation, social unrest that forced the president and subsequently the prime minister from office, and the scarcity of essential goods are just a few examples of the terrible economic situation the nation has found itself in. In light of this, whereas nations like India, Bangladesh, Japan, and China have recently given Sri Lanka financial aid and other forms of support, The International Monetary Fund (IMF) recently stated that it will give Sri Lanka a loan of approximately USD 2.9 billion over a four-year term to help the island nation overcome the unheard-of economic turbulence. The nation, however, is eager to get finance guarantees from both public and private sector creditors.
Between the last quarter of the year and the second quarter of 2023, it hopes to achieve agreements in principle with every creditor. This can also be viewed as the start of the economic recovery process.5
NEED FOR REFORM IN THE IMF
The IMF is a global financial institution that urgently needs to reform its structure if it is to thrive. Reforms should aim to reduce poverty in the world’s poorest countries and provide flexible support to low-income countries (LICs). To date, development has not reached much of Africa, the small islands of the Pacific, or parts of Asia. It is time for the Fund to reduce the monopoly of great powers and facilitate the ideas of potential superpowers such as India and Japan.
As a representative body, it should aim to equally represent countries, especially the ones whose issues have been neglected for decades in the matters of trade, security, financial framework conditions and development finance. The IMF needs to be more transparent and speak out about the underrepresented countries. Only then can we expect a more equitable and unprejudiced distribution of resources and development for growth.
In my opinion, the IMF should take particular, significant action to better represent and accommodate the shifting power dynamics among its members as the global economy changes. No doubt, the Fund has been successful in several instances such as that of The Asian Financial Crisis of 1997-1998 as well as the current COVID-19 Crisis wherein the fund provided more than $100 billion in financial assistance to more than eighty countries.
However, it needs certain structural reforms. Developing nations should be granted a legitimate voting share similar to that of the United States and Europe. A global economic organization like the IMF needs to respect the sovereignty of each country by making the voting system truly representative such that powerful countries cannot feed their vested interests through these institutions. Additionally, the post of the managing director should also be given to other dynamic economies of the world apart from Europe to ensure certain legitimacy. Even the conditions for loans granted by the IMF are too stringent and harsh, rather it should be adaptable and more flexible for the countries to accommodate.
Only a serious reexamination of the role of the IMF can lead to a better inclusive world economy.
(Rajika Kanungo is a research Student at the Department of International Relations, Peace & Public Policy (IRP&PP), St. Joseph’s University, Bengaluru, Karnataka)
- Masters, J. (2021, September 8). The IMF: The World’s Controversial Financial Firefighter. Council on Foreign Relations. Retrieved September 12, 2022, from https://www.cfr.org/backgrounder/imf-worlds-controversial-financial-firefighter?amp
- Burgisser, E. (2020, April 7). IMF and World Bank decision-making and governance – Bretton Woods Project. Bretton Woods Project. Retrieved October 5, 2022, from https://www.brettonwoodsproject.org/2020/04/imf-and-world-bank-decision-making-and-governance-2/
- Dreyer, J. S., & Schotter, A. (1980). Power Relationships in the International Monetary Fund: The Consequences of Quota Changes. The Review of Economics and Statistics, 62(1), 97–106. https://doi.org/10.2307/1924277
- IMF Executive Board Approves US$4.2 Billion Extended Fund Facility for Ecuador. (2019, March 11). IMF. Retrieved October 5, 2022, from https://www.imf.org/en/News/Articles/2019/03/11/ecuador-pr1972-imf-executive-board-approves-eff-for-ecuador
- Rosario, J. D., & Jayasinghe, U. (2022, September 23). Sri Lanka aims to have $2.9 billion IMF loan finalised in December | Reuters. Reuters. Retrieved October 5, 2022, from https://www.reuters.com/world/asia-pacific/sri-lanka-aims-have-29-bln-imf-loan-finalised-december-sources-2022-09-23/