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Emerging Roles of the IMF

Emerging Roles of the IMF


Alexey Sokolin's Entry For The 2004 Moffatt Prize in Economics

The IMF was created as an institution to support the Bretton Woods regime. It aimed to avoid the volatility of previous decades by targeting destabilizing capital flows, exchange controls, beggar thy neighbor policies, and trade protection. Europe required reconstruction after WWII, and the IMF was supposed to ensure an expansion of global trade, thereby promoting recovery. After the breakdown of the Bretton Woods system, the IMF needed to redefine its role as a financial institution. It attempted to become a policy coordinator and advisor, a crisis manager, a provider of credibility, and a type of development agency. In doing so, the IMF overstepped its intended boundaries, taking on roles that are inconsistent with its original objectives.

The original mandate for the IMF was defined in the 1944 Articles of Agreement. The IMF was intended to promote international monetary cooperation, facilitate the growth of world trade, promote exchange rate stability, and help to establish a multilateral system of payments. Furthermore, the fund would make available its assets to member countries with balance of payments problems, creating confidence in the international trade system. These goals were mainly a response to the economic history of the 1920s and 1930s. The floating exchange rates of the interwar period were seen as highly unstable, thus the IMF was meant to monitor the pegged exchange rate. International monetary cooperation would prevent the competitive devaluations of the 1930s, and current account convertibility would expand world trade. The fund would also provide short-term finance based on member contribution, akin to a credit union.

Since the dissolution of the Bretton Woods regime, the IMF has assumed various new roles to remain a significant international institution, an economic equivalent of the United Nations. Its surveillance function has expanded greatly, especially in the provision of data and forecasts. This role is consistent with the original mandate. The IMF publishes information on international capital markets and world economic developments under the Special Data Dissemination Standard. Among other publications, the fund puts out the World Economic Outlook, which examines the trends of the global economy. The reports are put together by the Executive Board, which consists of ministers of finance or central bank governors of the most prominent countries in international trade. Global policy discussions among people in the correct political positions encourage international monetary cooperation. The IMF is best suited for this role because countries will usually provide accurate data to take advantage of the fund's lending capabilities. Information from the fund is easily accessible and follows a common standard-a public good that can foster cooperation and growth.

However, many of the new roles of the IMF are inconsistent with the original mandate. The fund's function as lender of short term finance was meant to fix balance of payments problems, but has expanded so much that the IMF can now be seen as an aid agency. Specifically the Poverty Reduction and Growth Facility (PRGF), the former Enhanced Structural Adjustment Facility (ESAF), allows the IMF to essentially subsidize interest rates for the poorest member countries. Such lending is aimed at poverty reduction and structural overhauls, which require large amounts of financing and long repayment periods, and can create dependency on IMF support. However, resources often flow to corrupt governments, while the impoverished population is put into debt (Stiglitz). The loan's conditionalities do not always benefit the country. Furthermore, ESAF countries tend to require debt relief due to regime changes or other systemic problems. This type of lending surpasses the original mandate-not only does it impinge on the role of the World Bank, but can also be destructive to stability and growth.

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