IR - One Definition A Day: IMF (International Monetary Fund)
The International Monetary Fund (IMF) was established as part of the Bretton Woods system in 1944. Subsequently it became part of the UN structure. In conjunction with the World Bank, the IMF was regarded as one of the central institutions for the managment of post-war economic relations.
The IMF, as the name implies, was intended to supply international liquidity to member states finding themselves in balance of payments difficulties. In addition the Fund was to manage a system of stable (rather than fixed) exchange rates. A particular currency would have a 'par value' which was expressed in terms of dollars. Alteration of that rate would be effected, with the approval of the Fund, if the states' external payments balance was held to be in 'fundemenatal disequilibrium'.
As already stated, in addition to its supervision of the exchange rate regime, the Fund lends money to member states in balance of payments difficulties. It is always assumed that the monetary authorities of the recipient state would take appropriate measures to correct such imbalances and indeed it has become a feature of the IMF lending that so-called 'conditionality' stipulations would be part of the 'rescue package'.
Recognition of the right to lay down such conditions is indicated by the recipient government issuing a 'letter of intent' to the IMF. This whole procedure - of laying down conditions which are then accepted in the letter - is clearly a significant erosion of state sovereignty. Although an accepted and expected feature of the IMF's conduct it is not without controversy. The IMF has a tradition of requiring states in receipt of its loans to make structural adjustments to rectify the disequilibrium. Thus raising taxes and interest rates and cutting public expenditure, including subsidies, are typical IMF-preferred policies.
The linchpin of the original Bretton Woods arrangement was the US dollar. The gold/dollar exchange rate had been fixed at 35 dollars per ounce in 1934 and it was assumed that this exchange rate was, to all intents and purposes fixed and immutable. During the early post-war period of reconstruction the principal concern about the dollar was its shortage.
Although the US balance of payment began to move into deficit during the 1950s it was not regarded as serious. As long as the dollar shortage remained other states in the system were willing to see the US running deficits which were financed by the export of dollars. The IMF system was, in fact, a gold exchange standard with the dollar regarded as being 'as good as gold' for these purposes. The IMF system of stable exchange rates established as a fundamental principle of the system after 1944 began to be seriously questioned towards the end of the 1960s. By 1961 the great emerging problem was the US deficit. By running a deficit the US was funding the system but equally was running the risk that, if confidence collapsed, then a forced devaluation of the dollar would be necessary.
When the collapse of confidence in the dollar eventually came in 1971 it was both spectacular and momentous. Speculative attacks upon the dollar were encouraged by a series of poor trade figures which seemed to suggest that the link between gold and the dollar might have to be suspended or ended altogether. In August 1971 the US President announced that the convertibility of the dollar into gold was temporarily suspended. At the end of a year a joint meeting of the Group of Ten (G10) and the Excutive Directors of the Fund agreed to devalue the dollar 10 per cent against the other currencies in the Group. These decisions effectively brought down the Bretton Woods system of stable exchange rates. Following a second dollar devaluation in February 1973 the system was abandoned and the new era of 'floating' rates replaced it.
Cautious and considered deliberations of these changes were reduced by the first oil shock in 1973-4. Suddenly states were moving massively into credits or debit on their balance of payments. Any chance of structured reform was abandoned and floating continued into the future. The Jamaica Agreement of January 1976 amended the Articles of Agreement of the Fund to legitimize floating. In reality there has been a good deal of 'managment' of the float by the central banking authorities of the principal G10 states since. The Jamaica Agreement also confirmed that for the future the Special Drawing Rights (SDR) would be the principal reserve asset of the Fund.
The debt crisis of the 1980s was a significant issue area in IMF management strategies. The IMF-Mexico resource package of November 1982 extended almost 4 billion dollars of IMF credit lines in return for structural adjustments such as reducing the budget deficit and subsidies from the Mexican government. Further IMF conditionality included a 5 billion dollar credit from commercial banks to match the IMF monies. The Mexican agreement became the model for other IMF-sponsored rescue packages.
These atttempts at debt crisis management proved to be a Faustian bargain for many recipients. Growth rates significantly deteriorated as debt as a proportion of GNP rose. IMF structural adjustment demands were the object of party political atttacks from opposition groups. Eventually a new initiative under the so-called Brady Plan allowed for debts to be re-negotiated to reduce interest payments and, in some cases, to rescind the debt totally. Throughout the IMF has continued to insist upon structural adjustments as condition for debt relief.
French translation by Anh Tho Andres @YourVietnamExpert.com
Vietnamese translation by Cuong Phan
German translation by Han Dang-Klein
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