Eco-nomics

20 Questions on the IMF

1. What is the IMFs mission and bow has that changed over time?

The International Monetary Fund (IMF) was created in 1944 to maintain the standard of fixed exchange rates that was established at the end of World War IL Since the abandonment of the gold standard in 1971, the IMF has adopted a new core mission, providing loans to economically troubled countries.

Countries with balance of payment difficulties - meaning their earnings from imports and other sources are insufficient to pay off their foreign debt - turn to the IMF for two reasons. First, the IMF provides loans to cover immediate obligations to foreign creditors. Second, private lenders and other public lenders, such as the World Bank, generally will not lend to troubled economies unless they have a loan agreement with the IMF.

Thus the IMF plays a "gatekeeper" role - if you are a poor, indebted country, you can't get access to foreign credit unless you have a deal with the IMF. IMF agreements typically require countries to adopt "structural adjustment" policies as the condition for a loan.

2. What is the current relationship between the IMF and World Bank? How has that changed over time? Do their functions overlap?

The World Bank was also formed in 1944 to help with European post-war reconstruction. It later shifted its focus to assisting development efforts in the Third World. It has traditionally funded major infrastructure projects - roads, hydroelectric dams, coal plants, etc. These have been highly controversial for their effect on the environment, indigenous people, rural communities and women.

Starting in the 1980s, and while continuing to do project lending, the Bank began shifting its loans toward structural adjustment and sectoral adjustment loans. About two thirds of the Bank's lending now goes for structural adjustment and sectoral adjustment. The World Bank's structural adjustment programs are not appreciably different than those of the IMF.

The IMF and World Bank jointly administer a program, now called the Heavily Indebted Poor Country/Poverty Reduction and Growth Fund that provides very modest debt relief to the world's poorest countries on the condition that they undergo years of structural adjustment.

The World Bank respects the IMF's unofficial gatekeeper role, and generally will not make loans to countries that have not received an IMF seal of approval.

3. What is the IMF and World Bank's relationship to the World Trade Organization (WTO)?

The IMF, World Bank and the WTO all share a commitment to "free trade" and binding developing countries into the global economy.

The WTO, which implements agreements governing world trade and administers a binding mechanism to resolve trade disputes between nations, generally operates independently of the IMF and World Bank.

In November 1999, however, the IMF, World Bank and WTO announced a new "coherence agreement" in which they pledged to coordinate future activity. It is unclear what this will mean in practice, but some fear the IMF and World Bank may incorporate the very particularized elements of WTO agreements into their lending conditions.

4. How does the IMF set its policies?

The IMF is governed primarily by an executive board that consists of representatives of the IMF member countries, with a heavier weighting to countries that provide more money to the Fund. The executive board sets broad policy and approves loans. The agency's bureaucracy handles the massive, day-to-day operations and exerts a strong, de faeto influence over policy.

Voting at the IMF is weighted, with bigger contributing countries having proportionally more say. The United States, the largest shareholder at the IMF, maintains veto power over major decisions at the Fund. In practice, the U.S. Treasury Department exercises overwhelming control at the IMF; the New York Times has referred to the Fund as a "proxy for the United States."

5. How open is the IMF to outside scrutiny and participation?

Although "transparency" (openness) is a favorite buzzword in development circles, the IMF is extremely secretive in its operations. In recent years, as criticism of the IMF's secrecy has grown in developing countries, the IMF has made "Policy Framework Papers" - the documents establishing the parameters of structural adjustment programs in specific countries - and some other important materials public. These are all papers that a few years ago the IMF said it could not make public out of respect for the sovereignty of the countries they affected. Meanwhile, other critical documents remain secret.

Although it assumes a dominating role in economies undergoing structural adjustment - with IMF officials often posted in national finance departments - precise IMF demands are typically concealed from the affected populations.

As a general matter, the IMF does not seek public input into the policies it imposes on borrowing countries through structural adjustment.

6. Given that the U.S. taxpayer kicks in a great deal for the IMF, what kind of oversight of thc IMF is provided by Congress or other agencies?

The IMF is generally viewed as following a line set by the U.S. Treasury Department.

Congressional efforts to influence policy at the Fund have generally failed. Congress has directed the U.S. executive director to the IMF to use "voice and vote" to push for certain reforms, but this has had virtually no effect on IMF policy. Almost all decisions at the IMF are reached by consensus, and recorded votes rarely taken; the U.S. Executive Director to the IMF, Karen Lissakers, told a Congressional committee in 1998 that the Fund's executive board had taken votes on approximately a dozen out of 2,000 decisions taken during her tenure.

The only time Congress has affected IMF policy is when it refused to provide requested funds.

7. what is structural adjustment?

Structural adjustment is a policy package in line with what is often called "neoliberalism," a far-reaching version of the "free trade" agenda. In many ways, it is a harsh version of Newt Gingrich's Contract with America.

Key structural adjustment measures include: privatizing governmcnt-owned enterprises and government-provided services, slashing government spending, orienting economies to promote exports, trade and investment liberalization, higher interest rates, eliminating subsidies on consumer items such as foods, fuel and medicines and tax increases.

The basic idea of these policies is to shrink the size and role of government, rely on market forces to distribute resources and services and integrate poor countries into the global economy.

8. How do multinational corporations benefit from IMF policies?

Structural adjustment policies open up developing countries to foreign investors on terms most favorable to multinational corporations. They require countries to remove barriers to foreign investment, and push countries to orient their economies to producing exports - typically produced by or sold to multinationals. State-owned enterprises privatized under structural adjustment are frequently sold to multinationals - often at bargain- basement prices.

IMF-orchestrated bailouts of countries - assistance to countries whose exchanges rates are plummeting - provide money primarily so that developing countries can pay off their foreign creditors (including private banks). Many critics view these bailouts effectively as bailouts of the creditors who don't absorb the cost of risky loans gone bad.

This particular kind of corporate welfare can have especially pernicious effects, since it may encourage excessively risky lending by bankers and others. If they know they have free, de facto insurance from the IMF, they can make very risky loans at high interest rates without fear of paying for failures. 9. What is the IMF's approach to helping countries that are deeply in debt?

The IMF program for helping poor countries that are deeply in debt was, until recently, called the Enhanced Structural Adjustment Facility (ESAF). Last year, under fire for a program poorly run, the Fund changed the name to Poverty Reduction and Growth Facility (PRGF). This program is operated in conjunction with the World Bank's Heavily Indebted Poor Country (HIPC) Initiative.

The purpose of PRGF/HIPC is to provide some debt relief - that is, to cancel part of the debts - for poor countries that have no hope of paying back their foreign debt and for whom debt payments are draining their economy.

However, the debt relief afforded by PRGF/HIPC is very modest. Under the plan, for example, many countries find that while the absolute amount of their debt may decline, the amounts they actually pay are only minimally affected. That is because many poor countries cannot meet their debt payments, and, often with the agreement of their creditors, only pay a portion of what they formally owe.

Compounding the problem, the price of receiving debt relief under the PRGF/HIPC program is implementing a carefully supervised structural adjustment program for three years (previously six years).

10. What would the alternative be?

An alternative would call for immediate debt cancellation of the debts of the poorest countries and, at least, far-reaching debt cancellation for other developing countries. For less poor countries, debt cancellation could focus on "odious" debt debt incurred by dictators, military regimes or for boondoggle projects pushed by foreign interests.

This cancellation would come without any structural adjustment conditions. Many developing country economic justice advocates urge instead conditions related to the establishment of democracy, or a commitment to devote resources to meeting the basic needs of the poorest segments of society.

In the case of the poorest nations, debts could be cancelled by drawing on the existing resources of the IMF and World Bank - that is, without rich countries providing these institutions with any new funding.

Beyond approaches to debt cancellation, many in the developing world are also calling for an alternative approach to economic development. One of the demands arising from grassroots movements is respect for a diversity of national approaches, so there would be no "blueprint" for development to parallel the IMF's cookie-cutter structural adjustment policies. But there is growing agreement about the importance of a number of principles: national food security, land reform, devoting attention to production for local needs, an emphasis on egalitarian wealth distribution, emphasizing smaller enterprises, empowering workers and respecting worker rights, imposing regulations on foreign capital to limit exposure to volatile international capital markets, involving "civil society" in development planning, and preserving a substantial role for government in planning, regulating and carrying out economic activity.

11. What are the economic and social impacts of structural adjustment?

Structural adjustment has been successful at its intended efforts to diminish the scope of government and to integrate developing countries into the global economy.

It has failed by many other measures. By and large, countries undergoing structural adjustment have not experienced economic growth, even in the medium term.

Those developing countries that have experienced the greatest economic successes in recent decades have violated many of the central precepts of structural adjustment. They have protected certain parts of their economy, and they have maintained an active governmental role in economic planning.

An external review of ESAF sponsored by the IMF illustrated the basic failure of structural adjustment. Countries undergoing ESAF-sponsored structural adjustment experienced stagnating growth rates and saw their foreign debt nearly double - dramatic evidence of failure, since reducing foreign debt is one of ESAF's ostensible purposes.

In the two regions with the most structural adjustment experience, per capital income has stagnated (Latin America) or collapsed (Africa, where per capita income dropped more than 20 percent between 1980 and 1997).

The emphasis on exports tends to be socially disruptive, especially in rural areas. Poor subsistence farmers frequently find their economic activity described as nonproductive, and experience land pressures from expanding agribusinesses, timber companies and mines. Pushed off their land, they frequently join the ranks of the urban unemployed, or move onto previously unsettled, and frequently environmentally fragile, lands.

Structural adjustment has generally contributed to rising income and wealth inequality in the developing world, a fact tacitly acknowledged by both recently retired IMF Managing Director Michel Camdessus and World Bank President James Wolfensohn.

12. How did the Asian financial crisis of 1997 start and what was the IMF's response?

The Asian meltdown was caused in large part by South Korea, Thailand, the Philippines, Malaysia and Indonesia's heavy reliance on short-term foreign loans. When it became apparent that private enterprises in those nations would not be able to meet their payment obligations, international currency markets panicked. Currency traders sought to convert their Asian money into dollars, and the Asian currencies plummeted. That made it harder for the Asian countries to pay their loans, and it made imports suddenly very expensive.

There were other underlying causes for the financial crisis, including overinvestment in real estate and other speculative and unnecessary ventures, but almost everyone agrees the currency crash and financial disaster were vastly disproportionatc to the weaknesses in the Asian economics.

The IMF treated the Asian financial crisis like other situations where countries could not meet their balance of payment obligations. The Fund made loan arrangements to enable countries to meet foreign debt payments (largely to private banks in these cases) on the condition that the recipient countries adopt structural adjustment policies.

But the Asian crisis differed from the normal situation of countries with difficulties paying off foreign loans. For example, the Asian governments were generally not running budget deficits. Yet the Fund instructed them to cut spending - a recessionary policy that deepened the economic slowdown.

The Fund failed to manage an orderly roll over of shortterm loans to long-term loans, which was most needed; and it forced governments, including in South Korea and Indonesia to guarantee private debts owed to foreign creditors.

In retrospect, even the IMF would admit that it made things worse in Asia.

Malaysia stood out as a country that refused IMF assistance and advice. Instead of further opening its economy, Malaysia imposed capital controls, in an effort to eliminate speculative trading in its currency. While the IMF mocked this approach when adopted, the Fund later admitted that it succeeded. Malaysia generally suffered less severe economic problems than the other countries embroiled in the Asian financial crisis.

13. Has the 1997-1998 global financial crisis led to a shift in the debate surrounding structural adjustment policies in thc developing world?

The IMF's structural adjustment prescriptions for countries suffering through the Asian financial crisis were roundly denounced, including by many conservative and mainstream economists and opinion makers. The widespread criticism of the Fund undermined its political credibility.

The IMF response has been to make some minor concessions in making its documents more publicly available, limiting its demands that countries liberalize their capital markets (including by allowing unlimited trade in their currency, and permitting foreign investors to invest in domestic stocks and bonds without restriction), and increasing its rhetorical commitment to paying attention to poverty in its structural adjustment programs.

14. What were the consequences of the Asian financial crisis in countries like Thailand and Indonesia? Did IMF policies help those countries?

The financial crisis led to massive human suffering.

In South Korea, a country whose income approaches European levels, unemployment skyrocketed from approximately 3 percent to 10 percent. "IMF suicides" became common among workers who lost their jobs and dignity.

In Indonesia, the worst hit country, poverty rates rose from an official level of 11 percent before the crisis to 40 to 60 percent in varying estimates. GDP declined by 15 percent in one year.

In September 1998, UNICEF reported that more than half the children under two years old in Java, Indonesia's most populous island, were suffering from malnutrition.

At one point, the food shortage became so severe that then-Prcsident B.J. Habibie implored citizens to fast twice a

week. Many had no choice.

IMF policies exacerbated the economic meltdown in countries hit by the Asian financial crisis. Mandated reductions in government spending worsened the Asian nation's recessions and depressions. And the forced elimination of price controls and subsidies for the poor imposed enormous costs of the lowest income stratas. In Indonesia, food and gasoline prices rose 25 to 75 percent overnight or in the course of a few days.

15. What has been the IMFs role in Russia?

Russia in the 1990s has witnessed a peacetime economic contraction of unprecedented scale. Many believe much of the blame for the social and economic catastrophe rests with the IMF, which has had a central role in designing and supervising Russia's economic policy since 1992.

The number of Russians in poverty has risen from 2 million to 60 million since the IMF came to post-Communist Russia, Male life expectancy has dropped sharply from 65 years to 57. Economic output is down by at least 40 percent.

The IMF's "shock therapy" - sudden and intense structural adjustment - helped bring about this disaster.

"In retrospect, it's hard to see what could have been done wrong that wasn't," Mark Weisbrot of the Center for Economic and Policy Research told a Congressional committee in late 1998. "First there was an immediate de-control of prices. Given the monopoly structure of the economy, as well as the large amount of cash savings accumulated by Russian households, inflation soared 520 percent in the first three months. Millions of people saw their savings and pensions reduced to crumbs."

Then the IMF and Russian policymakers compounded their mistakes, Weisbrot explained. "In order to push inflation down, the authorities slammed on the monetary and fiscal brakes, bringing about a depression. Privatization was carried out in a way that enriched a small class of people, while the average person's income fell by about half within four years."

Meanwhile, Russia kept its economy functioning with an influx of foreign funds, lent at astronomically high interest rates because of the strong possibility of default. In 1998, with the Asian crisis still unfolding and with Russian default seemingly near, the IMF agreed to a $23 billion loan package to Russia, seeking to maintain the ruble's overvalued exchange rate. An initial $4.8 billion portion of the loan left the country immediately - some used to pay off foreign lenders, much of it stolen by Russian politicians.

Soon after that fiasco, the ruble collapsed - with none of the horrible consequences predicted.

For the IMF, the prospect of Russia deciding to continue not to repay loans was extremely worrisome. To avert this problem, the Fund continued its loan program, but its loans to Russia don't actually go to Russia; all IMF money disbursed to Russia is held at the IMF - and used to pay off prior IMF loans to Russia.

Does the IMF think it made fundamental mistakes in Russia? No. From the IMF's perspective, the problem has been not enough IMF-style "reform." Here's how former IMF Managing Director Michel Camdessus put it in September 1999: "[Russia's economic] shortcomings represent not so much the failure of reform as the effects of 70 years of central planning and the incomplete implementation of reform policies - itself a result of a lack of domestic political consensus on reform."

16. How do IMF programs affect workers?

As outgoing World Bank economist Joseph Stiglitz says, the IMF views labor as just another commodity. One of the IMF's emphases has been on promoting "labor flexibility" - meaning making it easier for workers to be fired. The Fund has supported regulatory changes throughout the developing world to remove restrictions on government and private employers firing or laying off workers.

The IMF has actively promoted government downsizing, even though in many countries the government is the major employer and there are few prospects for alternative employment.

The IMF has also viewed many worker benefits as too costly (if they arc provided by the government) or too inefficient (if required of private employers). It has urged major scaling back of government pension programs throughout the world. And it has even called for the roll back of minimum wages in countries like Haiti.

Respect for workers' right to organize is not included in the IMF's structural adjustment policy prescriptions.

17. To what extent do IMF and World Bank structural adjustment lending practices incorporate environmental considerations? How do structural adjustment policies impact the environment?

"The IMF claims to defer to the World Bank on environmental matters, but promotes export-led development that has major environmental impacts without asking the World Bank for any formal assessment of the environmental implications of its approach," explains Friends of the Earth in a recent report, "IMF: Selling the Environment ment Short."

"The World Bank has failed to provide environmental guidance to the IMF, and is even delinquent in assessing the environmental impacts of its own structural adjustment loans," Friends of the Earth concludes. "A recent internal World Bank study found that fewer than 20 percent of World Bank adjustment loans included any environmental assessment."

But the failure to consider environmental implications does not mean there aren't any. Here is how Friends of the Earth summarizes the effects of structural adjustment on the environment:

"The IMF's economic policies affect the environment in various ways. One major goal of structural adjustment programs (SAPs) and stabilization programs is to generate foreign exchange through a positive trade balance. To meet the IMF's ambitious targets for currency reserves and trade balance, countries must quickly generate foreign exchange, often turning to their natural resource base. Countries often over-exploit their resources through unsustainable forestry, mining and agricultural practices that generate pollution and environmental destruction, and ultimately threaten future exchange earnings."

"[E]xports of natural resources have increased at astonishing ishing rates in many countries under IMF adjustment programs, with no consideration of the environmental sustainability of this approach. Furthermore, the IMF's policies often promote price-sensitive raw resource exports, rather than finished products. Finished products would capture more added value, employ more people in different enterprises, help diversify the economy and disseminate more know-how."

"Structural adjustment and stabilization also aim to generate positive government budget balances. In the effort to rapidly trim budget deficits, governments are forced to make choices, and inevitably, the environment loses. Decreased spending weakens government ability to enforce environmental laws and diminishes efforts to promote conservation. In addition, governments are told to increase private investment and to reduce the role of the state in favor of private sector development. Budget priorities are often directed toward business promotion, creating a further strain on cashstrapped environmental enforcement agencies. ... Governments may also relax environmental regulation to meet SAP [structural adjustment program] objectives of increasing foreign investment, as occurred in the case of the Philippines."

As one example of how IMF-mandated budget cuts can hurt the environment, Friends of the Earth points to the Brazilian Amazon forest: "Because of IMF budget restrictions, as of July 1999, funding for the enforcement of environmental regulations and supervision programs was reduced by over 50 percent. ... The Brazilian Institute for the Environment and Renewable Natural Resources, responsible for implementing Brazil's environmental and conservation protection programs, had expenditures that totaled only 16.28 percent of its budget."

18. what is the Meltzer Commission and what did it say?

The Meltzer Commission, formally known as the International Financial Advisory Commission to the U.S. Congress, was created by the 1998 U.S. legislation that allocated an additional $18 billion to the IMF. The Commission was charged with reviewing the operations of the IMF and World Bank, and making recommendations for changes in the international financial institutions.

The Commission, which included both Republican and Democratic appointees, unanimously agreed on two points: the debts of the 41 most indebted and impoverished countries should be cancelled; and the IMF should get out of the business of long-term development lending.

Commission members split over how severely the IMF's functions should be limited (with most Democratic members aiming to preserve a broader role for the IMF) and over proposed changes in the World Bank. Eight of the eleven Commission members supported a proposal to change the World Bank to the World Development Agency, to eliminate the Bank's lending function and replace Bank loans with grants, and generally to shrink the size of the Bank.

19. Given the international nature of markets, does structural adjustment indirectly affect the U.S. economy even if the United States is not directly forced to structure our economy in response to IMF guidelines? How?

Politically, structural adjustment and trickle-down economics (broadly, the set of policies often described as "neoliberal") in richer countries like the United States reinforce one another. Just as structural adjustment carries the U.S. system of privatized, fee-for-service health care to the Third World, those seeking to privatize the U.S. social security system point to Chile's social security system as a model.

More concretely, structural adjustment forces developing countries to orient their economies to produce exports. The primary target for those exports is the United States, and secondarily other rich countries. The IMF and World Bank economic programs do not support regional trade.

The IMF model of unregulated global economic integration places countries in competition with each other to produce goods with the lowest possible wage bill. That puts downward pressure on wages in all countries, including in richer countries like the United States (particularly in markets like steel and textiles that are produced in both rich and poor countries).

20. what should Congress do to reform/abolish the IMF/World Bank? What could the IMF do to promote sustainable development?

Were the IMF actually concerned about sustainable development, there are various policy measures it could promote. Friends of the Earth has called on the IMF to emphasize ecological taxes rather than value-added taxes, among other measures.

Some organizations, including some members of the Jubilee 2000 coalition in the United States, have called on the IMF to pay more attention to poverty and the effect of its lending on poverty. They place hope in the IMF's newly stated commitment to address poverty in its lending practices, and hope that the renaming of the Economic Structural Adjustment Facility - now the Poverty Reduction and Growth Facility - will signal more than just a name change.

Others, however, believe the IMF is irredeemable. (This is the Multinational Monitor editorial position.) They believe the emphasis should not be on pushing the IMF to adopt better policies, but on finding ways to shrink the IMF's influence and power, so it has less say over developing country policies.

This group is loathe to support more funding for the IMF, even funding that is supposed to be allocated for debt relief Instead, they say, the IMF should draw on its existing resources to enact immediate debt cancellation for the poorest countries. And, if the Fund is to continue at all, they call on IMF lending to be delinked from structural adjustment conditions.

There is growing support for the idea of limiting the IMF's reach. Even U.S. Treasury Secretary Lawrence Summers has urged that the Fund be restructured so that it cease engaging in long-term development lending - the sort of lending done to the poorest countries, invariably with structural adjustment conditions attached. The Meltzer Commission echoed this position, as has the head of the German central bank.


Back to Top

Back to Eco-nomics Directory

Home