René Ballivián, Financial Counselor, Bolivian Embassy signs the Bretton Woods agreement, 1944.
Following the events of World War II, and desperate to rebuild the global economy, an effort was made amongst the Allied nations to conceive a post-war order. The culmination of these efforts birthed two new transnational financial institutions: The World Bank and the International Monetary Fund (IMF). Since then, the post-colonial world has shifted its attitude, demanding greater accountability from these institutions. Developing countries have suffered from the IMF’s colonial mentality, and are continuing to spiral into a never-ending loan-debt cycle, exacerbated by the Fund’s conditionalities on its loans that seem to do more harm than good. Will the IMF continue to impose its financial conditions or must it fundamentally restructure to survive in the future?
Before we can assess that, let us examine a brief history of the IMF: The initial negotiations took place at the Bretton Woods conference, New Hampshire in 1944, and established a fixed but adjustable exchange rate based on the convertibility of the dollar into gold at $35 an ounce, ensuring exchange rate stability for its 44 founding members. The IMF was central in monitoring exchange rates and providing short term loans to advanced industrial economies to correct unfavourable balance of payments. More generally, the IMF was tasked with promoting financial stability, fostering economic growth, and facilitating international trade. This latter point was of particular interest to the United States, who had suffered from the effects of protectionist policies in the early and mid-1930s.
As fears grew that there may be a run on the US reserves of gold, President Richard Nixon suspended the gold standard in August 1971, marking the end of the Bretton Woods system. The breakdown of this system can be primarily attributed to a fundamental design flaw which economist Robert Triffin termed the ‘Triffin dilemma’. This dilemma highlights the tradeoff between maintaining confidence in the US dollar as the reserve currency and meeting the increased demand for liquidity in the form of dollars. Following its decline, the IMF remained pivotal in preserving the integrity of the global financial system, focusing on surveilling macroeconomic trends and expanding its mandate to developing countries. Since then, the IMF has been subject to a number of criticisms in its approach that have spurred doubts on its relevance in today’s climate, although its survival since the downfall of Bretton Woods is a testament to its ability to adapt.
The first of its criticisms surrounds the Fund’s internal governing structure, with some claiming that developing countries are subject to inequality when it comes to representation in the decision making process within the IMF. Voting rights are calculated according to a quota system, a sum of money that a country is due upon gaining membership to the organisation. This sum is determined via an assessment of a country’s relative size in the global economy. It follows that a greater Gross Domestic Product (GDP) corresponds to a higher capital subscription (quota) and henceforth a larger voting share. As a result, the United States exerts strong authority on decisive actions by the IMF with 17.43% of the total voting power, essentially constituting veto rights, while countries like Cambodia, Gambia and Mozambique (considered Least Developed Countries (LDC) by the United Nations) exercise only weak influence.
This disparity presents problems in a number of scenarios. Consider the East-Asian financial crisis of the mid-1990s. IMF intervention in response to financial crises have historically followed a strict neoliberal agenda, adhering to deregulation, privatisation, and austerity. Such structural changes can be effective as a remedy to public sector budget deficits as a result of excessive government spending, price inflation, and current account deficits that lead to overvalued currencies. However, the IMF has fallen into the trap of applying its philosophy prematurely in countries whose unique set of political and cultural circumstances do not allow for it to be realised in any fruitful manner, some referring to this as a “one-size-fits-all” mentality. In fact, the main victims of the East-Asian crisis, Thailand, Indonesia and South Korea, did not even give an indication of economic deficiencies as grounds for neoliberal intervention. They were running substantial budget surpluses, saving rates were high, inflation was low and in some cases even falling. In spite of that, the Fund pushed for governments to cut spending, resulting in increased unemployment and higher costs for social services including primary education and health-care. Economist Jeffrey Sachs concludes: “The main IMF prescription has been budgetary belt-tightening for patients much too poor to own belts.” A failure by the IMF to detect the underlying cause of the crisis in time (excessive foreign borrowing by the domestic private sector) produced a grim outcome for the recipient countries. In reference to the Fund’s internal governance structure, “from an Asian perspective, the fact that the resolution of each of these issues was unfavourable to their values and interests was at least in part due to their under-represented position within the IMF.”
On top of the economic shortcomings of austere conditionality demands on IMF loans, the Fund has also been criticised as being fundamentally undemocratic and acting to undermine the sovereignty of nation states. The term “democratic deficit” commonly refers to inadequate representation of the population to policies made at a supranational level. This is reflected in the precarious accountability chain from the executive board at the IMF to the domestic voter, which is quickly broken when government officials fall victim to their country’s indebtedness and implement IMF mandated policy reforms in spite of opposition at home. In absence of alternative aid, governments reluctantly cooperate with the IMF, making the people of flesh and blood to become bystanders to a decline in their own standard of living, in the form of ill-timed policies that result in wage cuts, layoffs, and reduction in their disposable income. Jamaica’s prime minister Michael Manley expressed his concern on IMF interference in his message stressing sovereignty in 1976: “The Jamaican government will not accept anybody, anywhere in the world telling us what to do in our own country. Above all, we’re not for sale.” A year later, Manley had succumbed to desperation and signed Jamaica’s first loan agreement. The Fund in this respect exercises a significant pressure to guarantee the nation state complies with its demands, incongruous with the principles upon which it was founded in the Articles of Agreement at the Bretton Woods conference. Former Chief Economist of the World Bank Joseph Stiglitz concludes: “Conditionalities are adopted without social consensus. It’s a continuation of the colonial mentality.”
However, to ensure that countries are able to pay back loans granted by the Fund and to minimise the problem of moral hazard, conditionalities must be imposed in one way or another. In the absence of structural reforms, recipient countries may be inclined to fall into the same spiral of accumulating debt that led them to seek financial aid in the first place. Moreover, loans to developing nations are contingent on financial contributions from the Fund’s member states. As outlined previously by the quota system, a higher contribution constitutes stronger authority within the fund. Arguably, this is only fair considering it is the issuer’s money which is at stake if the recipient defaults on its loan, and thus to deter reckless behaviour, conditions are placed. Despite opposition, the IMF has shown it can adapt its role in the world, and thus will most likely continue to survive and act as an international watchdog to ensure the restoration of global economic imbalance.