Prepared for the U.S. Congressional International Financial Institution Advisory Commission
* For valuable and timely research assistance we thank Debajyoti Chakrabarty. For helpful comments on an earlier draft we thank Jim Boughton. Table of Contents
2. What does the IMF do?
3. Origins and Original Aims
4. The IMF’s Role in the Post Bretton Woods Era: Externalities and Public Goods? 5. The IMF in Search of a Mission
6. International Politics and the IMF
7. Conclusion: Some Issues in the Case for Reform
1. Average Time Spent in IMF Programs by Class of Borrowers
2. Arrears in the IMF
1. IMF Quotas as a Share of World Imports
2. IMF Charges and Commercial Interest Rates
3. Total Fund Credit Outstanding to Members
4. Low Interest IMF Lending
5. Transactions of the International Monetary Fund, 1955 – 1997 1. Introduction
After 55 years of existence there are strongly conflicting views on the importance and role of the IMF for today’s international economy, and on its effectiveness. On the one hand there are those who see the Fund as having adapted well to the changing world environment with perhaps the need for some reforms to the International Architecture. On the other hand are those who believe that its useful time has passed in the environment of exchange rate flexibility and open capital markets. These radically conflicting views require the need for a balanced perspective on the role and performance of the IMF within the context of its historical evolution. In this paper we describe what the IMF is and what it does. We consider its origins as the guardian of the Bretton Woods adjustable peg exchange rate system and financier of temporary current account deficits for advanced countries, to its present primary roles as development financier and crisis manager for the emerging world. We consider the externalities or market failures that the IMF is believed by many to correct and the public goods that the IMF provides. Critics of the IMF downplay the extent of market failure and the scope of public goods provided. They attach greater importance to market solutions. We consider their views as well. The reincarnation of the Fund occurred against the backdrop of a series of major economic and political shocks: the oil price shocks of the 1970’s, the debt crisis of the 80’s, the collapse of the Soviet empire in the late 1980’s, and the recent emerging market crises in Mexico and East Asia. These events served as a template for the creation of new Fund responsibilities, facilities and enhanced resources. As we document, the expansion of the Fund served different constituencies: the United States, the other advanced countries, the emerging countries and the very poor LDC’s. Most importantly, the evolution of the IMF has reflected the geopolitics of the international economy, which we discuss in Section 6. We conclude by raising some questions that should be considered in the course of a serious evaluation of the IMF’s role at the beginning of a new millennium.
2. What does the IMF do?
Most people think of the IMF as an institution that provides emergency credits to countries that have found themselves in difficulties, either as a consequence of poor economic policies or through external circumstances, such as a sudden drop in commodity prices, or a financial crisis in a neighboring country. In return the country is obliged to impose painful austerity policies, usually involving reductions of budget deficits, through spending cuts or increased revenue (taxation), a rise in interest rates to reduce inflation, and an alteration of the exchange rate (a devaluation).
This view, while not inaccurate, gives only a partial picture of the reality of the Fund's operations, or of...