Established following World War II to help with post-war recovery, the International Monetary Fund (IMF) serves as a lender to modern governments and an overseer of international financial markets. It has no shortage of both supporters and critics.
Key Takeaways
- The International Monetary Fund (IMF) is an international organization that represents 190 member countries.
- It seeks to promote economic growth and financial stability and plays a key role in helping turn around struggling economies.
- Monetary support includes financial loans, but the organization also provides technical assistance.
- Critics of the IMF maintain that it intervenes either too much or too little and that its policies can create moral hazard.
International Monetary Fund: An Overview
In its infancy, the IMF was only responsible for supervising pegged exchange rates, part of the Bretton Woods dollar-gold reserve currency scheme.
The IMF grew in scope and influence in subsequent decades, particularly after the collapse of the Bretton Woods system in the 1970s.Now the IMF provides loans to help member nations fixperceived balance of paymentsproblems and fight off crises. The most notable example was the bailout of the Greek government in 2011.
As of 2021, the IMF has 190member nations. Each member nation publicly accepts and supports the goal of global economic stability and, in theory, a subjugation of some sovereign authority to support that goal.The IMF is funded mainly through what are called "quota contributions" from its members. Each IMF member nation is assigned an annual quota amount, based on the size of its economy when it joins the IMF.The IMF also has substantial gold holdings that it can sell andis authorized to borrow up to an amount approximately equal to its annual quota contributions.
IMF supporters claim it is a necessary lender of last resort for areas in crisis andit can impose necessary or difficult reforms on backward economies. Critics counterthe IMF supersedes national autonomy, exacerbates economic problems more often than not, and serves as a tool forthe wealthiest nations only.
Economists also frequently criticize the IMF for creating a moral hazard on national scales.
Advantages of the International Monetary Fund
The IMF assists member nations in several different capacities.
Provides Loans to Member Nations
Its most important function is its ability to provide loans to member nations in need of a bailout. The IMF can attach conditions to these loans, including prescribed economic policies, towhich borrowing governments must comply.
Fills Deficit Gaps
If a country has a balance of payments deficit, the IMF can step in to fill the gap.
Technical Support and Assistance
It serves as a council and adviser to countries attempting a new economic policy. It also publishes papers on new economic topics.
Skeptics maintain that a country in a financial crisis might ask the IMF for a bailout, but it's unclear whether the country is in crisis because it made poor policy decisions knowing that IMF aid would serve as a backstop.
Disadvantages of the International Monetary Fund
Despite its lofty status and commendable objectives, the IMF is attempting to pull off a nearly impossible economic feat: perfectly timing and sizing economic intervention on an international scale. The IMF suffers from some criticism.
Too Much or Too Little Intervention
The IMF has been criticized for not doing much and for overreaching. It has been criticized for being too slow or too eager to assist failing national policies. Since the United States, Japan, and Great Britain feature prominently in IMF policies, it has been accused of being a tool for free-market countries only. Simultaneously, free-market supporters criticize the IMF for being too interventionist.
Creates Moral Hazard
Some member nations, such as Italy and Greece, have been accused of pursuing unsustainable budgets because they believed the world community, led by the IMF, would come to their rescue. This is no different than the moral hazard created by government bailouts of major banks.
