Photo courtesy of Matteo Paciotti via Flickr.

The IMF Is Turning 70. Here’s Why Many Question Its Relevance

Photo courtesy of Matteo Paciotti via Flickr.

The International Monetary Fund is turning 70 this year – here’s what the world-spanning, often-controversial organization does, and how it will stay relevant.

Founded in 1944 at the Bretton Woods conference of the Allied nations, the IMF was a key part in shaping the global post-WWII economy.

Its stated purpose was to promote global financial cooperation, eliminate barriers for trade and foreign exchange, and to assist nations who were having problems repaying debt.

To do so, the namesake fund was created, establishing a pool of money drawn from quota payments from members. Nations who are unable to pay foreign debts – seen most recently in the $18 billion bailout for Ukraine –  can take out loans from the fund.

Loans from the IMF come with a catch, however: recipients have to enter a “lending arrangement” with the organization, in which they agree to adopt certain economic policies.

For instance, troubled economies like Ukraine and Greece have been asked to adopt austerity measures, such as cuts in public spending and increased taxes.

Countries asking for loans are also frequently asked to reform its financial sectors and adopt free market policies.

Controversy

And that’s the crux of controversy surrounding the IMF: the accusation of systemic bias towards countries not from the wealthy West.

Pretty much every country in the world, 188 out of the 193 countries recognized by the UN, is part of the IMF:

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Image of IMF member states courtesy of Alinor via Wikipedia. Countries in light green have not accepted certain obligations regarding foreign exchange convertibility but are still members.

However, the leaders have since the beginning been exclusively recruited from the U.S. and Western Europe.

The countries that take out loans – and thus have conditions imposed on them – on the other hand, are clustered in Eastern Europe, Central America, and Africa:
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Map courtesy of the IMF website.

This has led critics to call the IMF a tool for spreading a pro-Western global apartheid (pdf), in which a rich elite on top makes the rule for the rest of the world.

The IMF-imposed policies themselves, which are intended to shore up troubled economies, have also been criticized for exacerbating rather than helping economic crises.

In fact, despite having one of the largest economic research departments in the world, the IMF failed to foresee and prevent both the Asian and Latin American financial crises in the late ‘90s, and the global financial crisis of 2007-2008, critics say, despite its mission for global stability.

What’s next for the IMF?

To stay relevant in an increasingly globalized and multipolar world, it will likely have to accept leadership and expertise from other parts of the world – as critics, often including the BRICS nations, have demanded for years.

But merely changing the leadership won’t fix every problem, former IMF Managing Director Rodrigo Rato wrote in 2005.

“The fund’s legitimacy as a global organisation rests on fair representation for all members,” he wrote, adding that the organization’s legitimacy is at stake in emerging regions such as Asia and Africa.

Reforms of the voting rights system, which is based on a formula that accounts for GDP, economic openness and variability, have slowly been instituted since 2008, although the U.S. refused to approve the latest round.

Another suggested measure for the IMF has been to promote the Special Drawing Rights, its measure of accounting for foreign reserves in different currencies, as a global currency of its own.

This would reduce systemic risk in the face of shifts in key currencies, such as a shift away from the dollar.

Others argue that the change will have to be ideological – instead of imposing one-size-fits-all cures on troubled economies, the IMF can stay relevant by ditching its free capital-orthodoxy, and embrace tailor-made solutions for individual economies.

It may even develop a focus on income inequality, as it already has taken steps towards.

And as the world economy continues its tepid – by the IMFs admission – economic recovery, global financial stability will hopefully increase – allowing the septuagenarian time to consider reform.

Ole Skaar