What am IMF? (Guest post)

The International Monetary Fund is a collective of 189 countries with a broad agenda of creating sustainable economic growth, increasing employment levels and reducing poverty through fiscal and financial stability, monetary cooperation and international trade. It is headed up by Christine Lagarde who assumed the position after her predecessor Dominique Strauss-Kahn resigned in controversial circumstances.

Against the backdrop of the conclusion of the Second World War, 44 allied nations came together at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire to discuss and shape the monetary order of a post war world. As a result of this, the IMF was brought into being when the 29 countries signator joined together to create the fund.

 Thirty-Fifth Meeting of the IMFC

Thirty-Fifth Meeting of the IMFC

One of the most important things to keep in mind when reflecting on the foundation of the IMF is the reasoning and thought processes of the leaders and economists who wanted such a global monetary union established. The most deadly event in human history was just winding down with an approximated 68 million people killed worldwide.

What gave rise to this war was a domestic economic issue in Germany caused by the sanctions and reparations following World War One. Under the Weimar Republic, Germany had become economically isolated. The country was struck by economic crises;recessions, hyperinflation, massive unemployment and poverty. All these factors combined to give rise to the Nazi Party and Adolf Hitler. To prevent such tyrants from abusing economic disadvantage to erode and destroy democracy, there needed to be a different way of achieving financial and fiscal stability. Previously, countries had used up their domestic resources and foreign currency reserves to protect the value of the domestic currency and avoid competitive devaluations. The foundation of the IMF was the apparent remedy to this, in the form of conditional lending from the fund. The IMF and its constituent countries aim to be a financial support network to effectively ‘bail out’ struggling nations.

 Photo by  Adam Fagen

Photo by Adam Fagen

The internal structure of the IMF is relatively simple, but still comes under some sharp criticism. Every country that subscribes to the fund gets given an equal number of basic votes and is assigned a quota based on the size of their economy. This system allows for smaller nations to have a greater say at the table. However there is another means of securing added voting power within the fund called a Special Drawing Right. A certain amount of Special Drawing Rights are allocated to new countries based on their quota.

To put it simply the SDR is a commodity that can be exchanged with other members of the fund as a means of releasing money. The more Special Drawing Rights a country has, the more their vote is worth. For any change to be made in how these votes are shared, an 85% majority is required for this to pass. This is where the main criticism of the internal structures of the IMF arises: The USA currently has 16.7% of the vote share, effectively guaranteeing them a veto on any changes going forward. Furthermore the top 20 countries with the highest vote share have approximately 70% of all votes.

Some say that the IMF has become an agent bent on reinforcing the current economic order of the world. It is criticised for imposing conditionality on loans that focus on fiscal conservatism and austerity, rather than using the monies provided by the IMF for investment and increased public spending.. This is either a good or a bad thing, depending on your own views on economics and politics. One thing is apparent however, the IMF will continue to pursue an agenda similar to that of the countries that hold the most power within the fund.

David Healion is a graduate of International Relations from Dublin City University. He was personal assistant to former Minister of State for Rural Economic Development, Ann Phelan TD until May 2016. He has recently finished up in his role as Executive Director for External Relations with Anti Corruption International. David is based in Berlin and has keen interest in current affairs, politics and international economics.