IMF the Creation and Criticism

IMF

The creation and criticism of the International Monetary Fund: From Bretton Woods onward

The International Monetary Fund (IMF) is an organization founded upon noble intentions, despite the many controversies it has spawned since its conception. The origins of the IMF lie in the desire of the Allied powers to prevent the worldwide economic crisis of the 1930s from reoccurring. The United States, the United Kingdom, and 45 other nations attempted to create an economic institution to facilitate greater international economic and financial cooperation to serve the interests of the world (IMF -- Creation, 2009, Encyclopedia of the Nations). During the Great Depression, protectionism had become rife. Rather than acting as a bolster to the health of fragile economies, limiting free trade had proved self-defeating (Cooperation and reconstruction (Cooperation and reconstruction: 1944 -- 71, 2009, IMF). Stabilizing world exchange rates and encouraging free trade was the cornerstone of the IMF philosophy.

The organization formally came into being in July 1944, when representatives from the eventual member nations met in the town of Bretton Woods, New Hampshire. The signature countries of what became the Bretton Woods Agreement agreed to keep their exchange rates pegged to the U.S. dollar. The U.S. In turn agreed to keep its rates valued in terms of the price of gold. Rates could be adjusted "only to correct a fundamental disequilibrium in the balance of payments, and only with the IMF's agreement" (Cooperation and reconstruction (Cooperation and reconstruction: 1944 -- 71, 2009, IMF). The IMF's Bretton Woods system existed until 1971, after the U.S. declared the "temporary" suspension of the gold standard, which resulted in the currently fluid exchange rate, "where nations could choose to let their currencies float, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union" (the end of the Bretton Woods System: 1971-1981, 2009, IMF). But the role of the IMF to ensure financial world stability did not end with the death of Bretton Woods and the gold standard. During mid-1970s, the IMF also extended more aid -- and more supervision of poor nations, "by providing concessional financing through what was known as the Trust Fund" and similar supportive organizations and funds soon followed (the end of the Bretton Woods System: 1971-1981, 2009, IMF). While the IMF was focused upon short-term loans, the World Bank, also founded in 1944, was more focused upon long-term loans. Both served critical functions in the world economy.

Yet when the IMF extended its funding it also exercised greater oversight and, some would say, micromanagement of economies receiving IMF funds. Criticism of the IMF grew especially vociferous in the wake of the Asian economic crisis of 1998-1999. The crisis began in Japan but the hardest-hit nations were undeniably the emerging economic powers in the region, such as Thailand. Their fragile and tenuous attempts to establish an economic foothold were severely impacted by the spiraling regional crisis. The IMF mandated that the recipient governments institute deflationary fiscal policy in the form of spending cuts, raise taxes, and charge higher interest rates of lenders. "It is argued the IMF turned a minor financial crisis into a major economic recession with unemployment rates in countries like Thailand, Indonesia and Malaysia shooting up," and in an unusual move, the World Bank, the IMF's sister institution, articulated the dangers of IMF Asian policy (Bluestein 1998). The IMF was admittedly unprepared for the Asian crisis, and the crisis that subsequently occurred in the emerging Slavic nations: these were private international capital account crises although the IMF founders had erroneously assumed "that private capital flows would never again resume the prominent role" that they had in the 1930s (Continued globalization: 2005-present, 2009, IMF History).

Since the 1990s, criticism has mounted regarding the IMF's narrow construction of a 'one size fits all' economic policy. "Policies of privatization and deregulation may work better in developed countries in the West, but, maybe more difficult to implement in the developing world" (Pettinger 2009). There is also alarm that the IMF is excessively directive when extending loans to nations -- for example, mandating user fees for health care, an important issue in the current struggle for Jamaica to borrow funds from the IMF. Jamaica charges no user fees in its system of nationalized care, although the IMF argues that charging money, according to classical economic theory, enables more effective use of scarce healthcare resources. Yet "there is compelling evidence of a link between user fees and poverty. In a study that shows the 'poverty impact' of out-of-pocket payments (OOP), 78 million people in 11 low/middle income countries in Asia were pushed below the international poverty line of a $1 a day because of OOP. Bangladesh, India and China experienced percentage point increases of 3.8, 3.7 and 2.6 per cent respectively, attributed to OOP" (Graham 2009). Furthermore, this type of healthcare rationing strategy may be exemplary of a 'penny wise but pound foolish' strategy. Charging money for routine healthcare services can be prohibitively costly or act as a deterrent to going to the doctor for the very poor, and lead to public health crises such as epidemics. This will only further impoverish struggling nations.