This is the start of a new series called "WHAT IS...?" in which I'll explain some term, event, institution in simple terms. We will begin with the International Monetary Fund (IMF).What is the IMF?
The International Monetary Fund is a global organisation founded in 1944 at Bretton Woods. It aims was to help stabilise exchange rates and provide loans to countries in need. Nearly all members of the United Nations are members of the IMF with a few exceptions such as Cuba, Liechtenstein and Andorra.
What does it do?
It has three central activities:
1. It monitors national, regional and global economic and financial developments. It advises members countries on their economics policies. This is termed their 'surveillance role'. A list of IMF reports on member countries can be viewed here.
2. It lends members strong currencies to help them design programmes to redress any Balance of Payments problems.
3. It offers technical assistance - such as training for government and Central Bank officials.
Where does it get its money?
The IMF is financed by member countries who contribute funds on joining. They can also increase this throughout their membership. The IMF can also ask its member countries for more money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion in 2007, sourced from contributions from its 183 members. This initial amount depends on the size of the countries economy, e.g. the US deposited the largest amount with the IMF. The US currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The UK has 4% of IMF Voting rights. Loans are also available to developing countries to 'deal with poverty reduction.'
Is there any criticism of the IMF?
There are many critics of the IMF. Most of the criticism centres on the following:
1. Conditions of Loans -
On giving loans to countries, the IMF make the loan conditional on the implementation of certain economic policies. These policies tend to involve:
- Reducing government borrowing - Higher taxes and lower spending
- Higher interest rates to stabilise the currency.
- Allow failing firms to go bankrupt.
- Structural adjustment. Privatisation, deregulation, reducing corruption and bureaucracy.
The problem is that these policies of structural adjustment and macro economic intervention often make the situation worse.
2. Lack of Transparency and involvement -
The IMF have been criticised for imposing policy with little or no consultation with affected countries.
3. Exchange Rate Reforms -
When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls over flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with and insisting on blanket reforms.
4. Free Market Criticisms of IMF -
Some criticise the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse - it is better to allow currencies to reach their market level.
5. Moral Hazard Criticism -
There is a criticism that bailing out countries with large debt only creates 'moral hazard', i.e. the possibility of getting bailed only encourages those in debt to borrow more.
Will the Irish Government ask the IMF for help?
It is quite likely, I believe. Over the New Year there was much speculation (reported by RTÉ amongst others) that Taoiseach Brian Cowen had been talking about IMF intervention with the social partners - Cowen immediately dened this. In January 2009 the IMF said it did not think Ireland needed such financing. However, Ireland will be looking for IMF assistance later in 2009 or 2010, in my view.
2. Lack of Transparency and involvement -
The IMF have been criticised for imposing policy with little or no consultation with affected countries.
3. Exchange Rate Reforms -
When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls over flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with and insisting on blanket reforms.
4. Free Market Criticisms of IMF -
Some criticise the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse - it is better to allow currencies to reach their market level.
5. Moral Hazard Criticism -
There is a criticism that bailing out countries with large debt only creates 'moral hazard', i.e. the possibility of getting bailed only encourages those in debt to borrow more.
Will the Irish Government ask the IMF for help?
It is quite likely, I believe. Over the New Year there was much speculation (reported by RTÉ amongst others) that Taoiseach Brian Cowen had been talking about IMF intervention with the social partners - Cowen immediately dened this. In January 2009 the IMF said it did not think Ireland needed such financing. However, Ireland will be looking for IMF assistance later in 2009 or 2010, in my view.
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