4.4.3 International Monetary Fund

Who makes international economic decisions?


The
International Monetary Fund (IMF)
an international lending institution established with the World Bank in 1944 at Bretton Woods to help nations overcome the economic problems caused by World War II

More recently, the IMF has become more involved with its member countries to provide advice, debt restructuring, and short-term loans. It has had an important role in helping developing countries deal with their debt issues, often through the use of conditionalities in which the loan or debt restructuring will occur only if the country agrees to implement certain reforms of their economic systems.
International Monetary Fund and the
World Bank
an institution created with the International Monetary Fund at Bretton Woods in 1944

The World Bank has three main branches:

International Bank for Reconstruction and Development (IBRD)
International Development Agency (IDA)
International Finance Corporation (IFC)

The purpose of the World Bank is to promote economic development in the world's poorer countries through advice and long-term lending.
World Bank have different yet complementary functions.

  • The IMF provides short-term loans to countries that are temporarily short of funds.

  • The IMF was designed to protect the world from another depression such as that of the 1930s. The World Bank grants long-term loans for larger projects.

  • The headquarters of the International Monetary Fund are in Washington, D.C. The present managing director of the IMF is a European โ€” Christine Lagarde from France.

  • The World Bank was designed to provide loans for large and expensive development projects.

  • The World Bank president is Jim Yong Kim, a US citizen.

We all have
deficit
the result of more money being spent than is earned

In terms of national budgets, deficits involve governments spending more money than is incoming; that is, expenditures exceed revenue. This is possible only through borrowing.

In personal terms, a deficit is the consequence of spending a greater amount than one's income. This is possible through using savings or borrowing such as from family, friends, banks, or credit cards รขย€ย“ which debts must someday be paid, of course!
deficits from time to time when we have more bills than money to pay them. When a person runs up a credit card bill, or loses a job, or has an unexpected expense, he or she may take a loan from the bank. When a person takes out a loan, there are conditions when it comes to paying it back. He or she must pay it back with interest over a certain time period and usually cannot borrow any more money until the present debt is reduced.

A country turns to the IMF when it has trouble paying its loans. That happens when it spends more than it earns. If a country has a debt crisis, it turns to the
International Monetary Fund (IMF)
an international lending institution established with the World Bank in 1944 at Bretton Woods to help nations overcome the economic problems caused by World War II

More recently, the IMF has become more involved with its member countries to provide advice, debt restructuring, and short-term loans. It has had an important role in helping developing countries deal with their debt issues, often through the use of conditionalities in which the loan or debt restructuring will occur only if the country agrees to implement certain reforms of their economic systems.
International Monetary Fund.
World Bank headquarters
World Bank headquarters
Source: Wikimedia Commons

The IMF lends money to countries in financial trouble, but it also imposes conditions. More complex than the rules set for people who borrow money, the IMF's rules usually require the borrowing country to make some major changes that affect its citizens. The assumption is that poor countries have not managed their money well and must change the way they manage their affairs. These changes are supposed to promote economic growth by creating new income and to enable payment of the country's debts.

A
structural adjustment programs
a term formerly used by the IMF for the changes it recommends for developing countries

These changes are designed to promote economic growth, to generate income, and to pay debts. They are required for countries desiring new loans or reduction of their loans.

Conditions include making changes in how the government does business, including privatization of industry and the reduction of trade barriers. Because almost every developing country carries a large debt, the conditions imposed by these programs tend to dictate  how  developing countries should conduct their affairs. Since the late 1990s, the term structural adjustment has been replaced by an emphasis on poverty reduction although the terms are very similar.
Structural Adjustment Program, or
poverty reduction strategy
a strategy or plan required by the IMF and World Bank before a heavily indebted country can be considered for debt relief

The strategy replaces the former Structural Adjustment Program that the World Bank used to help poor countries eliminate debt and succeed economically.

Some say these plans limit a nation's ability to govern itself and tend to increase poverty rather than decrease it.

From the IMF website:

Poverty Reduction Strategy Papers (PRSPs) are prepared by governments in low-income countries through a participatory process involving domestic stakeholders and external development partners, including the IMF and the World Bank. A PRSP describes the macroeconomic, structural and social policies and programs that a country will pursue over several years to promote broad-based growth and reduce poverty, as well as external financing needs and the associated sources of financing.
Poverty Reduction Program is established. Its rules might insist that the country must ...

  • open borders to trade
  • cut government spending even if that means requiring such measures as elementary age children paying tuition to attend school or doctors cutting salaries
  • increase taxes
  • allow foreign countries to invest in the development of resources (which means profits will leave the country but jobs will be created)
  • sell state-owned property
  • pay interest on the loan

Read more about the The International Monetary Fund here.

Citizens and nations love their
sovereignty
the authority of a country to make independent decisions concerning its own welfare

Recognition by other countries of a nation's sovereignty helps to legitimize that nation's independence in the world community.

Two things are important for a country to have sovereignty:

  1. independence in making its own decisions
  2. recognition by other countries of its independence
sovereignty. They do not want to be told how many hours to spend on their cellphones or what wages to pay their civil servants. They do not want to have to live on someone else's terms, and so they have to be quite desperate to give up part of their sovereignty to the IMF to borrow money. On the other hand, the consequences of financial instability and possible collapse are a worse possibility. Many nations agree to these conditions because they want the money so their economy can recover and so they will not become bankrupt.

Many criticisms are made of both the IMF and the World Bank and the real effects of these loans on poor nations.