International Financial Institutions


To what extent does globalization lead to sustainable prosperity for all people?

A major premise behind globalization is that we allow the market to decide what and how much is produced. Governments should not interfere with the decisions of consumers. This freedom is essential to the functioning of the market. Competition makes it strong and provides incentives to businesses and attractive products and prices to consumers. The worst thing that could happen is for the government to interfere and decide what should be produced and at what cost.

Results of the Bretton Woods Conference

Members of the Bretton Wood Conference were concerned about another worldwide depression such as the one that occurred in the 1930s. So, they proposed the establishment of two organizations that became very important to development and fiscal growth both in the developed world and the developing world. These were the International Monetary Fund (the IMF), and the International Bank for Reconstruction and Development, now part of a larger institution called the World Bank. The General Agreement on Tariffs and Trade (GATT), a set of international rules, also was proposed. These organizations are sometimes referred to as international financial institutions (IFIs).


Headquarters of the International Monetary Fund
Source: imf.org

International Monetary Fund

The International Monetary Fund (IMF) was created to protect the world from another depression such as the on experienced in the 1930s. It provides short-term loans to countries temporarily short of funds. A country turns to the International Monetary Fund (IMF) if it has trouble paying its loans because it is spending more than it earns. That is called a deficit. The International Monetary Fund (IMF) will lend money to the country in financial trouble, but it also imposes conditions.

In order to be granted money from the International Monetary Fund, the country usually must commit to what is called a Structural Adjustment Program, more recently called a Poverty Reduction Program. The rationale is that poor countries have not managed their money well, and, therefore, they are in debt. They need to make major changes to the way they manage their affairs. These changes or conditions are supposed to promote economic growth by creating new income and paying off their debts. If countries do not agree to make these changes, they will not get a new loan. Examples of these conditions follow.

The country must agree to

  • open its borders to trade

  • cut its public spending even if this means cutting salaries to doctors or requiring elementary age children to pay tuition to attend school

  • increase taxes

  • sell its state-owned property to private citizens or corporations

  • pay interest on the loan

Nations, like individuals, love their sovereignty. They do not want to be told how to run their country or distribute resources. As a result, they must be in desperate situations to give up part of their sovereignty to the International Monetary Fund to borrow money. On the other hand, the consequences of financial instability and possible collapse are a worse possibility. Many nations have been agreeable to these conditions because they want the money, and they believe that if they meet the conditions set out by the International Monetary Fund, they will no longer run a deficit with more money leaving the country than is coming in. Then, they can return to a more stable condition. They believe the International Monetary Fund (IMF) will prevent them from bankruptcy.

In reality, many criticisms are directed at the International Monetary Fund and the World Bank and at the real effects of these loans on poor nations.