How Imf Has Assisted in the Underdevelopment of Third World Countries

Topics: World Bank, International Monetary Fund, Third World Pages: 10 (3665 words) Published: October 7, 2012
According to the The International Monetary Fund (IMF) is an international financial institution (IFI) which monitors the international financial system and provides loans to developing country member-states with balance-of-payments problems. ( History of IMF

The IMF was established in 1945, having first been conceived at the Bretton Woods Conference in New Hampshire, USA in 1944. That conference saw representatives from forty four allied nations gather to craft new rules and institutions to regulate the chaotic global economy – blamed for the Great Depression and for helping cause two World Wars. The outcome was the Bretton Woods Agreement which created two new multilateral institutions: the International Bank for Reconstruction and Development (IBRD), now known as the World Bank, and the International Monetary Fund. ( The creation of the IMF was a ‘compromise’ between the proposals put to the Bretton Woods conference by head negotiators from England and the USA: John Maynard Keynes and Harry Dexter White. Keynes advocated the establishment of a global bank called the International Clearing Union, which would have divided the responsibility for balance-of-payments imbalances between both the debtor and creditor nations. But the United States was at the time not just the most economically powerful nation in the world, but also the world’s largest creditor. As a result, it was White’s proposal for a Fund which favoured creditor nations by placing the world’s debt burden solely on debtor nations which won out in the end, altered only slightly by a few concessions to Keynes. (Bob Davis 2010)

The IMF’s responsibilities:
The IMF's primary purpose is to ensure the stability of the international monetary system the system of exchange rates and international payments that enables countries (and their citizens) to transact with one other. This system is essential for promoting sustainable economic growth, increasing living standards, and reducing poverty. Following the recent global crisis, the Fund has been clarifying and updating its mandate to cover the full range of macroeconomic and financial sector issues that bear on global stability. (Bob Davis 2010) Roles of IMF:

At its establishment, the IMF was to given a number of interconnected roles, set out in Article 1 of its Articles of Agreement. In essence, the IMF’s two main roles were to: •Monitor an international system of fixed exchange rates based on the value of the US dollar which would be pegged to the value of gold, with the goal of ensuring international monetary stability; and •Provide short-term loans to nations in danger of balance-of-payments crises (ie: when there is not enough hard currency to pay for imports). The loans were to be made from a large gold reserve, and from contributions from the Fund’s members, based on the relative size of their economies. (Gerald Chaliad 2000) But in 1971, the US ended fixed US dollar/gold convertibility due to a variety of factors, including inflationary pressure and the cost of fighting the Vietnam War. This move resulted in the collapse of the system of fixed exchange rates which the IMF was established to oversee, and the Fund lost one of its two main roles. This provided the impetus for the change in focus which occured during the 1970s and 1980s. By the 1980s, the IMF had refocused to a large degree on lending to developing countries, both on providing finance and encouraging policies to stimulate growth. 1982 was the last year in which a member of the OECD used an IMF loan facility. (Gerald Chaliad 2000) Accompanying this change in focus was a change in method. Former World Bank Chief Economist Joseph Stiglitz notes that originally, “the IMF was based on a recognition that markets often did not work well, that they could result in massive unemployment and might fail to make needed funds available to countries” (Stiglitz 2003, p. 12). But in the 1970s and 1980s, “the Keynesian orientation...
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