IMF Part 2: Institution Report

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This institution report will provide an in-depth investigation into the International Monetary Fund (IMF). It seeks to clearly outline the institutional history, purpose, membership, and projects of the IMF, as well as its governance structure and protocols. In the course of this examination, care will be paid to the IMF's complex relationship with the processes of globalization, and how it in turn impacts the institution of the state. In so doing, this will lay the foundation for a successful research design.

The history of the IMF begins with its conception in July 1944 (IMF, 2006). It was during the Bretton Woods meetings that 45 nations agreed to the kind of economic cooperation that would prevent a return to the dangerous protectionist policies of the Great Depression, such as “limiting imports, devaluing ... currencies ... and curtailing their citizens' freedom to buy goods abroad and to hold foreign exchange” (ibid.). Born in December of 1945, the IMF was tasked with ensuring exchange rate stability. The intervening decades have seen it transform itself in response to its growing membership (from an initial 29 member nations to 186 as of the 2009 inclusion of Kosovo) (Kosovo Times, 2009), as well as in response to changing world events, featuring an increased focus on crisis prevention. Initially the IMF made significant loans to industrialized economies, but in recent decades the majority have gone to developing and Newly Industrialized Countries (IMF, 2006).
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The IMF's stated purpose includes 3 main activities – to conduct 'surveillance' of economic and financial policies, in addition to lending currency to help nations while they correcting any balance of payment problems occurring, and to offer technical assistance and training on economic matters (ibid.). Surveillance includes annual monitoring of its member nations (ibid.). During this process a team of IMF economists analyze a nation's policies, discuss them with the local government and national bank, and then prepare a report in consultation with the IMF's Executive Board, before releasing information to the public via its website (ibid.). In addition to these national-based surveillance reports, the IMF also conducts reviews of the global economic and financial systems, published in twice-yearly reports and also discussed informally more frequently (ibid.). In addition to these surveillance activities, the IMF has since 2006 conducted multilateral consultations to bring together groups of nations, and it also conducts regional surveillance, around issues relevant to regions (such as the European Union) (ibid.). In recent years these three levels of surveillance have been increasingly integrated in order to reflect the impact globalization has had on the interconnectedness of economies (Scholte, 2005).

The second purpose of the IMF is to provide financing to member nations who are experiencing balance of payments needs – who, in other words, are unable to finance their debt on the world financial market (IMF, 2006). Though often referred to as loans, technically member nations '”purchase” foreign exchange from the IMF's reserve assets, paying with their own currency' (ibid.). It is important to note that these 'loans' are not a form of development or aid, but are a short-term stabilization investment. Involvement by the IMF in a nation is often enough to signal to the international community that the nation in question is pursuing sound economic and financial policies, thus reassuring investors and helping to secure additional financing at more equitable terms (ibid.). When a nation approaches the IMF in need of financing it is often in crisis, and so the IMF looks at ways to quickly address the specific problems facing the country, which could include having its 'currency under attack in foreign exchange markets and its international reserves depleted, economic activity stagnant or falling, and a large number of firms and households going bankrupt' (ibid.).

When the IMF arranges for a loan to be provided to a member nation, it is generally at 'market-related interest rates' (ibid.), unless the nation is low income, in which case a 'concessional fixed interest rate of 0.5 percent a year' (ibid.) is charged. Since 2000, the IMF has increased its control of how funds are spent – before they are deposited in a nation's central bank, that nation's financial policies and transparency of reporting are examined to ensure they are in line with the IMF's desirable practises (ibid.). 2000 was also the year that the IMF sought to increase penalties against nations who secured loans under false pretexts or on the basis of 'erroneous information' (ibid.).

In addition to its lending arm, the IMF also provides technical training and information, most specifically related to 'central banking, monetary and exchange rate policy, tax policy and administration, and official statistics' (ibid.). This began in the 1960s, but was strengthened following the fall of the Soviet Union and the entrance of former Soviet satellite nations into the world market (ibid.). In light of the recent economic unrest, the IMF has increased its technical assistance related to 'strengthen[ing] the architecture of the international financial system' (ibid.). Further, since the Doha Round of trade negotiations began in 2004, the IMF has increased 'trade-related technical assistance' (ibid.). Most technical assistance the IMF provides goes to low and middle income nations, especially those recovering from civil unrest, including recently to Iraq and Afghanistan (ibid.). More recently, the IMF has been delivering this technical assistance, as well training for civil servants, through regional centres based throughout the world (ibid.). Truly this shows the global reach of the IMF, as well as how it is attempting to implement region-specific solutions and training.

One of the main stated goals of the IMF is to assist poor countries, via concessional loans made at a nominal interest rate, intended both to signify their approval of the nation's economic policy (thus helping them to secure additional funds from other sources), and to help with the often painful transition to policies the IMF supports such as reducing spending to match income (ibid.). In addition, since 2005 the IMF has introduced a new policy tool whereby a nation which does not wish to receive direct financial assistance can request instead that their policies be examined. The IMF's judgement of the nation's policies can then be made public, in order to help secure financing from other sources and to reassure investors (ibid.). While the IMF is theoretically separate from the World Bank, which is geared more toward development (for example, via infrastructure and education investments), it is noteworthy that nations must join the IMF in order to be eligible for World Bank membership (ibid.).

In addition to concessional loans, the IMF also assists poorer nations with debt relief, in an attempt to bring their interest payments down to a level that is affordable based on capital inflows, without the need to sacrifice necessary imports (ibid.). This initiative was unveiled and in 1996 and strengthened in 1999. Further, in 2005, debts owed to the IMF (as well as the World Bank's International Development Association and the African Development Fund) by nations qualifying for debt relief under the Heavily Indebted Poor Countries (HIPC) initiative were cancelled (ibid.). This was a result of pressure emanating from the G-8 (ibid.). Since 1999, the IMF has developed a process wherein member nations wishing to gain access to HIPC debt relief and certain loans must draw up its own poverty-reduction strategies, in concert with civil society (ibid.). While this has been praised both for including civil society and for encouraging nations to set their own plans of action (Baylis, Smith & Owens, 2008), the IMF still encourages steps to increase international trade.

It is important to outline the governance structure of the IMF before moving on to criticisms and analysis. The IMF is primarily governed by its Board of Directors, which is made up of one representative (typically a central bank governor or finance minister) from each member nation, and meets annually. They are in turn advised by the Development Committee, which is a joint venture by the Board of Directors and the World Bank, and which meets twice yearly on key monetary policy issues (IMF, 2006). The Executive Board is responsible for more of the daily workings of the IMF, along with internationally recruited staff, and is responsible for appointing a Managing Director every 5 years. The Managing Director is the chief of staff of the IMF, and reports to the Executive Board (as well as being its chairperson). They are assisted by a First Deputy Managing Director and two Deputy Managing Directors. The Executive Board meets several days a week at the IMF headquarters, and is made up of 24 Executive Directors of the Board, of which 8 are appointed by specific nations – the United States, Japan, Germany, France, and the United Kingdom, which are the 5 largest IMF quota holders, and China, Russia, and Saudi Arabia (ibid.). The remainder of the Board is elected by groups of nations known as constituencies. While the IMF seeks to achieve consensus, when voting it uses a weighted system, wherein more votes are given to nations with a larger IMF quota. In addition to these governing boards, there are also some 2700 staff members spread out both in Washington, D.C., and internationally, and almost half are economists (ibid.).

This paper will now focus on the links between the IMF and the process of globalization. To begin with, it is worth mentioning the global reach of the IMF, with offices linked in real time operating on every populated continent. It has more recently begun to focus on the problems faced in a globalizing world, with a special focus on the integration of economies and trade, especially since a 2004 review of its direction (ibid.). Further, it is clear that the currency used by the IMF, the Special Drawing Right (SDR), is emblematic of the global nature of the institution. Based on a basket of currencies including the US dollar, the Japanese yen, the euro (itself a macro-regional currency) (Scholte, 2005), and pound sterling (IMF, 2006). Combined with the IMF's practise of advising and investigating both individual regions, and the global system as a whole, the SDR is a signifier of how the globalization process enables to IMF to perform its tasks on such a large scale.

However, globalization also has a dark side, and this is no less true in relation to the IMF, which has been heavily criticized in its own right. The globalization of finance and trade have allowed financial crises to spread rapidly through various nations (Baylis et al, 2008), causing the IMF to respond with a more preventative and regional approach. Certainly there have been many vocal critics of global free trade, a position favoured by the IMF. One of the most vocal, Michel Chossudovsky, points specifically to India, and the role of the IMF in phasing out fertilizer subsidies (as a precondition for its involvement there) as an example of how the IMF's free trade preference has been directly responsible for increasing poverty and death (Chossudovsky, 1998). The popular writer Naomi Klein has also offered a scything critique of the IMF, which suggests it takes advantage of the frequent crises produced by a globalized economy to earn profit for the global capitalist class (Klein, 2008). These facets all point to the interrelationship between globalization and the IMF, and suggest more work needs to be done to ensure positive outcomes to the IMF's policies.

The final section of this report will examine the impact that the IMF has on the state. Much criticism has been levelled at the IMF for undermining the role of the state as a self-determining, democratic representative of its people. Much of this comes from Chossudovsky, as quoted by Babbie, who found in a recent study that the policies adopted by nations in order to secure help from the IMF had a tendency to weaken national economies, and undermine democratic governments (2007). He points specifically to the competing interests of multinational corporations (MNCs) and major lending institutions partnered with the IMF as outweighing the interests of individual states in the IMFs decision process (Babbie, 2007). This is echoed by the work of Klein, in her now famous Shock Doctrine, who sees the IMF as a tool used to pry open captive markets and privatize government assets at discount prices, despite the wishes or interests of the state in question, or its citizens (Klein, 2008).

The IMF's new policy encouraged member nations to draft their own plans of poverty reduction, a move seen as a response to these criticisms, and a way of strengthening the role of the state and its sovereignty. However, it is uncertain whether this policy merely provides political cover for the IMF, since member nations are likely to submit applications which heavily feature the types of neoliberal policies favoured by the IMF (Baylis et al, 2008). If this is the case, it is questionable how much agency states really have in the process.

A further impact of the IMF on the role of states is its increasing practise of dealing directly with other NGOs and international institutions. It maintains offices in New York and Geneva which deal specifically with the United Nations and the World trade Organization (IMF, 2006). This type of interaction, though necessary and doubtlessly beneficial, takes place above the heads of individual states, without their direct involvement, and points to a shift in the traditional state-centric model of the globalizing system (Scholte, 2005). Another way in which the IMF is minimizing the importance of states is in its heavily criticized weighted system of votes. This is a major shift away from the Westphalian ideal of equality among states (Baylis et al, 2008), placing emphasis less on state-hood as such, and more on economic power. Yet the case for a declining state can be overstated, as it struggles to assert itself in different ways, and this is illustrated well in the fact that the states making up the G-8 managed to pressure the IMF into cancelling debts owed by impoverished nations (IMF, 2006). While the G-8 is a super-national institution in its own right, it is made up of a relatively small number of powerful states who are extending their power and influence by acting together on the global stage. This shows the continuing, though changed, nature of states in a globalized world, relative to the IMF.

References

Babbie, Earl. (2007). The practice of social research (11th ed.). California: Thomson Wadsworth.

International Monetary Fund (IMF). (2006). What is the IMF? Retrieved March 6, 2010, from http://www.imf.org/external/pubs/ft/exrp/what.htm#do.

Baylis, J., Smith, S., & Owens, P. (2008). The globalization of world politics: An introduction to

international relations (4th ed.). New York: Oxford University Press.

Chossudovsky, M. (1998). Global Poverty in the Late 20th Century, Journal of International Affairs

(52).

Klein, N. (2008). The shock doctrine: The rise of disaster capitalism. Toronto: Random House.

Kosovo Times. (2009). “Republic of Kosovo is now officially a member of the IMF and the World

Bank”. Kosovo Times, June 29. Retrieved March 4, 2010 (http://www.kosovotimes.net/flash-news/676-republic-of-kosovo-is-now-officially-a-member-of-the-imf-and-the-world-bank.html).

Scholte, J. A. (2005). Globalization: A critical introduction (2nd ed.). New York: Palgrave Macmillan.