International Monetary Fund
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International Monetary Fund
The International Monetary Fund (IMF) is a specialized agency of the United Nations that seeks to promote international monetary cooperation and to stimulate international trade. The IMF, which in 2003 had 184 nation-members, has worked to stabilize world currencies and to develop programs of economic adjustment for nations that require economic reform.
The IMF was created in 1944 at the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire. It first began operation in 1947, from its headquarters in Washington, D.C., with a fund of $9 billion in currency, of which the United States contributed almost a third. The creation of the IMF was seen as a way to prevent retaliatory currency devaluations and trade restrictions, which were seen as a major cause of the worldwide depression prior to World War II.
Membership is open to countries willing to abide by terms established by the board of governors, which is composed of a representative from each member nation. General terms include obligations to avoid manipulating exchange rates, abstain from discriminatory currency practices, and refrain from imposing restrictions on the making of payments and currency transfers necessary to foreign trade.
The voting power of the governors is allocated according to the size of the quota of each member. The term quota refers to the IMF unit of account, which is based on each member's relative position in the world economy. This position is measured by the size of the country's economy, foreign trade, and relative importance in the international monetary system. Once a quota is set by the IMF, the country must deposit with the organization, as a subscription, an amount equal to the size of the quota. Up to three-fourths of a subscription may consist of the currency of the subscribing nation. Each subscription forms part of the reserve available to countries suffering from balance-of-payment problems.
When a member has a balance-of-payment problem, it may apply to the IMF for needed foreign currency from the reserve derived from its quota. The member may use this foreign exchange for up to five years to help solve its problems, and then return the currency to the IMF pool of resources. The IMF offers below-market rates of interest for using these funds. The member country whose currency is used receives most of the interest. A small amount goes to the IMF for operating expenses.
In its early years the IMF directed its major programs toward maintaining fixed exchange rates linked to the U.S. dollar, which in turn could be converted at a standard rate into gold. Present IMF policy emphasizes an orderly adjustment of currency exchange rates to reflect underlying economic forces. Special attention has been given to the needs of developing countries, in the form of programs to provide long-term assistance to cover foreign exchange demands necessitated by high import prices, declining export earnings, or development programs. In appropriate circumstances the IMF may impose conditions on the use of IMF resources to encourage recipient countries to make needed economic reforms.
Since 1982 the IMF has concentrated on the problems of developing nations. It has gone beyond its own resources, encouraging additional lending from commercial banks. The IMF has also established new programs, using funds from its richer members, to provide money in larger amounts and for longer periods than those granted under the quota-driven lending procedures. It works closely with the World Bank on these and other international monetary issues.
Starting in the 1990s, the IMF faced enormous economic challenges propelled by the increasing globalization of the world economy. Among the problems were the need to help a number of countries make the transition from a centrally-planned economic system to a market-oriented one, reducing turbulence in emerging financial markets such as Asia and Latin America, and promoting economic growth in the poorest nations. The IMF responded with a number of initiatives including creation of a loan fund to ensure sufficient funds to deal with major financial crises, a new approach to reducing poverty in low-income countries, and the Supplemental Reserve Facility created in 1997 specifically to help countries deal with large short-term financing needs resulting from a sudden reduction in capital outflows due to loss of market confidence.
Despite these moves, the IMF in the late 1990s and early 2000s faced an increasing volume of world-wide criticism and protest against its fiscal policies. A number of economists and other critics charged that IMF loan programs imposed on governments of developing countries resulted in severe economic pain for the populations of those countries, that IMF policies were poorly designed and often aggravated economic conditions in countries experiencing debt or currency crises, and that the IMF has forced countries to borrow foreign capital in a manner that adversely affects them.
In 2000, the managing director and members of the IMF agreed on several governing principles including the promotion of sustained non-inflationary economic growth, encouraging the stability of the international finance system, focusing on core macroeconomic and financial areas and being an open institution that learns from experience and continually adapts to changing circumstances.
International Monetary Fund. Available online at <www.imf.org> (accessed July 27, 2003).
Rogoff, Kenneth. 2003. "The IMF Strikes Back." Foreign Policy (January 1).