International Monetary Fund

IMF: Framework, institutional structure, its role in the international macro-economy & need for Reforms

Submitted By:
Romit Shah

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International Monetary Fund

CONTENTS:
1. Introduction to IMF--------------------------------------------------------------------------3 2. IMF Membership-----------------------------------------------------------------------------4 3. IMFs organizational structure--------------------------------------------------------------6 4. Purpose of IMF-------------------------------------------------------------------------------8 5. What is IMFs main Business---------------------------------------------------------------9 6. How is IMF Financed------------------------------------------------------------------------10 7. Governance Structure of IMF--------------------------------------------------------------14 8. Achievements & Challenges of IMF------------------------------------------------------15 9. IMF and the World Bank-------------------------------------------------------------------16 10. Role of IMF in the global financial crisis-------------------------------------------------17 11. Criticisms against IMF----------------------------------------------------------------------18 12. Why reform the IMF------------------------------------------------------------------------21 13. How to reform the IMF--------------------------------------------------------------------22 14. References-------------------------------------------------------------------------------------23

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1. Introduction to IMF
IMF was created in 1944, at the Bretton Woods conference, to prevent the kinds of chain reaction in the economic system that caused world currencies to collapse like in the Great Depression of the 1930s. The International Monetary Fund (IMF) is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development through the enforcement of liberalizing economic policies on other countries as a condition for loans, restructuring or aid. It also offers loans with varying levels of conditionality, mainly to poorer countries. Its headquarters are in Washington, D.C., United States. The IMF's relatively high influence in world affairs and development has drawn heavy criticism from some sources.

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2. IMF Membership
The original members of the IMF were the 29 nations whose governments had ratified the Articles of Agreement by 27 December 1945. Any other state, whether or not a member of the UN, may become a member of the IMF in accordance with terms prescribed by the Board of Governors. The IMF had 184 members as of 12 December 2002. (See membership list at the end of this section.) Membership in the IMF is a prerequisite to membership in the IBRD. A member may withdraw from the IMF at any time, and its withdrawal becomes effective on the day that a written notice to that effect is received by the Fund. If a member state fails to fulfill its obligations under the IMF Articles of Agreement, the Fund may declare that country ineligible to use its resources. If, after a reasonable period has elapsed, the member state persists in its failure to live up to its obligations, the Board of Governors may require it to withdraw from membership. The Third Amendment of the IMF's Articles of Agreement came into force on 11 November 1992. It allows for the suspension of voting and related rights of a member that persists in its failure to fulfill its obligations under the Articles. Members of the IMF are 186 of the UN members and Kosovo. Former members are: Cuba (left in 1964), Taiwan (expelled in 1980 due to political reasons). The other non-members are: North Korea, Andorra, Monaco, Liechtenstein, Nauru, Cook Islands, Niue, Vatican City and the rest of the states with limited recognition. All member states participate directly in the IMF. Member states are represented on a 24member Executive Board (five Executive Directors are appointed by the five members with the largest quotas, nineteen Executive Directors are elected by the remaining members), and all members appoint a Governor to the IMF's Board of Governors. All members of the IMF are also IBRD members, and vice versa 2.1 Subscriptions - A member's quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. A member must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own currency. IMF's main resources: subscriptions (quotas)
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Countries pay 25 percent of their quota subscriptions in Special Drawing Rights (SDRs) or major currencies. IMF can call on the remainder, payable in the member's own currency, to be made available for lending as needed. Quotas, o Determine the amount of financing that each country can receive from the IMF o Are the main determinants of countries' voting power in the IMF o Broadly reflect members' relative size in the world economy The United States of America, the world's largest economy, contributes most to the IMF, 17.5 percent of total quotas 2.2 Voting power - The quota largely determines a member's voting power in IMF decisions. Each IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of quota. Accordingly, the United States has 371,743 votes (16.77 percent of the total), and Palau has 281 votes (0.01 percent of the total). The newly agreed quota and voice reform will result in a significant shift in the representation of dynamic economies, many of which are emerging market countries, through a quota increase for 54 member countries. A tripling of the number of basic votes is also envisaged as a means to give poorer countries a greater say in running the institution. 2.3 Access to financing - The amount of financing a member can obtain from the IMF (its access limit) is based on its quota. Under Stand-By and Extended Arrangements, which are types of loans, a member can borrow up to 200 percent of its quota annually and 600 percent cumulatively. However, access may be higher in exceptional circumstances. 2.4 SDR allocations - Allocations of SDRs (Statutory Depository Rights), the IMF's unit of account, is used as an international reserve asset. A member's share of general SDR allocations is established in proportion to its quota. The most recent general allocation of SDRs took place in 2009.

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3. IMFs organizational structure

The IMF organizational structure looks something like this:

In Internation
al Monetary & Financial Committee

Board of Governors

Joint IMFWorld Bank Development Committee

Executive Board

Independent Evaluation Office

Managing Director & Deputy Managing Directors

Investment Office-Staff Retirement Plan Office of Budget & Planning Office of Internal Audit and Inspection Office of Technical Assistance Management

Area Departments

Functional and Special Services Departments

Information & Liaison

Support Services

The IMF has a management team and 17 departments that carry out its country, policy, analytical, and technical work. One department is charged with managing the IMF's resources. This section also explains where the IMF gets its resources and how they are used. The IMF is led by a Managing Director, who is head of the staff and Chairman of the Executive Board. He is assisted by a First Deputy Managing Director and two other Deputy Managing Directors. The Management team oversees the work of the staff, and maintains
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high-level contacts with member governments, the media, non-governmental organizations, think tanks, and other institutions. The current Management team includes Dominique Strauss-Kahn (a French national, became the IMF's tenth Managing Director in November 2007), John Lipsky (an American, has been First Deputy Managing Director since September 2006), Murilo Portugal (from Brazil, became Deputy Managing Director of the IMF in December 2006) & Naoyuki Shinohara (a Japanese national, joined the IMF as Deputy Managing Director in March 2010).

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4. Purpose of IMF The major purposes of IMF are as follows:

o Promote international monetary cooperation, exchange stability, and orderly exchange arrangements o Foster economic growth and high levels of employment o Temporary financial assistance to countries to help the balance of payments adjustments
* Summary of the Article #1 of Articles of Agreement

The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries' policy choices in many areas, including labor, trade, and tax policies. Helping a country benefit from globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how interconnected countries have become in todays world economy. Key IMF activities - The IMF supports its membership by providing

Policy advice to governments and central banks based on analysis of economic trends and cross-country experiences; Research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets; Loans to help countries overcome economic difficulties; Concessional loans to help fight poverty in developing countries; and Technical assistance and training to help countries improve the management of their economies.

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5. What is IMFs main Business?

The IMF's job is to promote a stable international monetary system, in which member countries can achieve high rates of employment, low inflation, and sustainable economic growth. The IMF does this by

Overseeing the international monetary system by regularly reviewing global and regional economic and financial developments; Providing economic monitoring and policy advice to its 187 member countries in the areas most relevant to domestic and external stability, that is, a situation where disruptive exchange rate adjustments are unlikely. The IMF's focus is therefore on macroeconomic and financial policies as well as on developments in exchange rates, the balance of payments, the real economy, and the financial sector Analyzing the impact of countries' policies on others; applying lessons from crosscountry experience to each country's unique situation; and providing a forum for international cooperation on global economic and financial problems.

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6. How is IMF Financed?

The IMF is financed by member countries who contribute funds on joining. They can also increase this throughout their membership. The IMF can also ask its member countries for more money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion last year, sourced from contributions from its 183 members. This initial amount depends on the size of the countrys economy. E.g. the US deposited the largest amount with the IMF. The US currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The UK has 4% of IMF Voting rights. Loans are also available to developing countries to 'deal with poverty reduction.'

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7. Governance Structure of IMF

The IMF's mandate and governance have evolved along with changes in the global economy, allowing the organization to retain a central role within the international financial architecture. The diagram below provides a stylized view of the IMF's current governance structure.

7.1 Board of Governors The Board of Governors is the highest decision-making body of the IMF. It consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the head of the central bank.

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While the Board of Governors has delegated most of its powers to the IMF's Executive Board, it retains the right to approve quota increases, special drawing right (SDR) allocations, the admittance of new members, compulsory withdrawal of members, and amendments to the Articles of Agreement and By-Laws. The Board of Governors also elects or appoints executive directors and is the ultimate arbiter on issues related to the interpretation of the IMF's Articles of Agreement. Voting by the Board of Governors usually takes place by mail-in ballot. The Boards of Governors of the IMF and the World Bank Group normally meet once a year, during the IMF-World Bank Spring and Annual Meetings, to discuss the work of their respective institutions. The Meetings, which take place in September or October, have customarily been held in Washington for two consecutive years and in another member country in the third year. The Annual Meetings usually include two days of plenary sessions, during which Governors consult with one another and present their countries' views on current issues in international economics and finance. During the Meetings, the Boards of Governors also make decisions on how current international monetary issues should be addressed and approve corresponding resolutions. 7.2 Ministerial Committees The IMF Board of Governors is advised by two ministerial committees, the International Monetary and Financial Committee (IMFC) and the Development Committee. The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors that of the Executive Board and its 24 constituencies. As such, the IMFC represents all the member countries of the Fund. The IMFC meets twice a year, during the Spring and Annual Meetings. The Committee discusses matters of common concern affecting the global economy and also advises the IMF on the direction its work. At the end of the Meetings, the Committee issues a joint communiqu summarizing its views. These communiqus provide guidance for the IMF's work program during the six months leading up to the next Spring or Annual Meetings. There is no formal voting at the IMFC, which operates by consensus. 7.3 The Executive Board

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The IMF's 24-member Executive Board takes care of the daily business of the IMF. Together, these 24 board members represent all 187 countries. Large economies, such as the United States and China, have their own seat at the table but most countries are grouped in constituencies representing 4 or more countries. The largest constituency includes 24 countries. The Board discusses everything from the IMF staff's annual health checks of member countries' economies to economic policy issues relevant to the global economy. The board normally makes decisions based on consensus but sometimes formal votes are taken. At the end of most formal discussions, the Board issues what is known as a summing up, which summarizes its views. Informal discussions may be held to discuss complex policy issues still at a preliminary stage. 7.4 Country Representation How countries are represented is key to the IMF's legitimacy as an international organization representing the interests of its 187 member countries. Upon joining the IMF, each country is allocated a quota based approximately on the relative size of its economy. The quota determines the country's financial contribution to the IMF, its voting power, and ability to access IMF financing. Because of rapid changes in the global economy in recent years, the IMF's members agreed that the existing quota allocations had become somewhat misaligned and needed to be adjusted. However, any changes in quotas require approval by an 85 percent majority. A broad-based consensus was therefore needed before any changes could be implemented.

Two-year program
In 2006, the IMF launched a two-year program to reform the system of quota shares. Firstround changes included ad hoc quota increases for the four most underrepresented countries: China, Korea, Mexico, and Turkey (see chart). Agreement to further increase the voting share of emerging market and developing economies was reached in March 2008. This shift will be based on a new quota formula, replacing the old, complex system of five formulas. Under the reform, 135 countries will see increases in their voting power, with an aggregate shift of 5.4 percentage points. A total of 54 countries will see increases in their nominal quotas ranging from 12 to 106 percent, with aggregate quota shares for these countries

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increasing by 4.9 percentage points (see chart). Consistent with the objectives of the reform, some of the largest increases will go to dynamic emerging market countries. The Board of Governors also encouraged the Executive Board to recommend further realignments as a means to raise the shares of underrepresented members in future general quota reviews (conducted every five years). Such realignments would recognize that member country representation should continue to adjust to changes in the global economy.

Protecting voice of low-income countries

Enhancing the voice of low-income countries was another central element of the reform package. A key mechanism for achieving this goal is through an increase in basic votes. Basic votes reflect the principle of equality of states and give the smallest members of the IMF (many of which are low-income countries), a greater voice in the organization's deliberations. The agreement reached endorsed a tripling of basic votes, the first such increase since the IMF was established in 1945. This boost is crucial as it will more than compensate many low-income countries that would have otherwise seemed their voting shares diminished (see chart). Additionally, the Articles of Agreement will be amended so that the share of basic votes in total voting power does not decline in the event of future quota increases.

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8. Achievements and Challenges of IMF

It would take an entire book to cover all the achievements of the IMF but here are some that are worth recollecting:

The IMF triggered Polands economic transition. The transition included institution building, liberalization, and macro-economic management. Initiatives by the IMF initiatives triggered economic growth, liberalized prices and the spread of democratic institutions in countries like the Czech Republic, the Slovak Republic the Baltics and Hungary. In 2008, the Asia Pacific region made considerable progress in addressing downside risks to economic growth.

Gaining sufficient political muscle to grapple with issues that affect economic prosperity, offering speedy solutions to crises and ensuring economic transition for developing nations are some of the challenges ahead for the IMF. Critics of the IMF say that its policies often make economic crises worse because of the severity of some of the austerity measures it imposes. As the global lender of last resort, sovereign nations will normally try to find any other means they can of solving their own problems before turning to the IMF. Whichever way you look at it, with the growing risks in the global financial system, the Fund is going to be busy in the coming years, and will continue its supporting role to help countries stabilize their commodity and oil prices, pursue expansionary policies and reduce inflation.

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To further enhance the participation of low-income countries, the amendment will also enable the two Executive Directors representing African constituencies to appoint a second Alternate Executive Director.

9. The IMF & the World Bank

o IMF and the World Bank, both were created at an international conference convened in Bretton Woods o IMF Promotes international monetary co-operation and provides policy advice and technical assistance to maintain strong economies o The World Bank promotes long-term economic development and poverty reduction to help countries reform particular sectors or implement specific projects o IMF and World Bank collaborate regularly and at many levels on assistance to member countries and are involved in several joint assistances.

10. Role of IMF in the Global Financial Crisis

The current global financial crisis, which began with the downturn of the U.S. subprime housing market in 2007, is testing the ability of the International Monetary Fund (IMF), in its role as the central international institution for oversight of the global monetary system.

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Though the IMF is unlikely to lend to the developed countries most affected by the crisis and must compete with other international financial institutions as a source of ideas and global macroeconomic policy coordination, the spillover effects of the crisis on emerging and less-developed economies gives the IMF an opportunity to reassert its role in the international economy on two key dimensions of the global financial crisis: (1) Immediate crisis management and (2) Long-term systemic reform of the international financial system. The role of the IMF has changed significantly since its founding in July 1944. Late in World War II, delegates from 44 nations gathered in Bretton Woods, New Hampshire to discuss the postwar recovery of Europe and create a set of international institutions to resolve many of the economic issues such as protectionist trade policies and unstable exchange rates that had ravaged the international economy between the two world wars. As the global financial system has evolved over the decades, so has the IMF. From 1946 to 1973, the main purpose of the IMF was to manage the fixed system of international exchange rates agreed on at Bretton Woods. The U.S. dollar was fixed to gold at $35 per ounce and all other member countries currencies were fixed to the dollar at diferrent rates. The IMF monitored the macroeconomic and exchange rate policies of member countries and helped countries overcome balance of payments crises with short-term loans that helped bring currencies back in line with their determined value. This system came to an abrupt end in 1973 when the United States floated its currency and subsequently introduced the modern system of floating exchange rates. Over the past three decades, floating exchange rates and financial globalization have contributed to, in addition to substantial wealth and high levels of growth for many countries, an international economy marred by exchange rate volatility and semi-frequent financial crises. The IMF adapted to the end of the fixed-exchange rate system by becoming the lender of last resort for countries afflicted by such crises.

11. Criticisms against IMF

Over time, the IMF has been subject to a range of criticisms, generally focused on the conditions of its loans. The IMF has also been criticized for its lack of accountability and willingness to lend to countries with bad human rights record.

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11.1 Many Criticisms of IMF include: A) Conditions of Loans On giving loans to countries, the IMF make the loan conditional on the implementation of certain economic policies. These policies tend to involve:

Reducing government borrowing - Higher taxes and lower spending Higher interest rates to stabilize the currency. Allow failing firms to go bankrupt. Structural adjustment. Privatization, deregulation, reducing corruption and bureaucracy.

The problem is that these policies of structural adjustment and macro-economic intervention make the situation worse.

For example, in the Asian crisis of 1997, many countries such as Indonesia, Malaysia and Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and tight fiscal policy to reduce the budget deficit and strengthen exchange rates. However, these policies caused a minor slowdown to turn into a serious recession with mass unemployment. In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a decline in investment in public services which arguably damaged the economy.

B) Exchange Rate Reforms. When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls over flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with - insisting on blanket reforms. C) Neo Liberal Criticisms There is also criticism of neo liberal policies such as privatization. Arguably these free market policies were not always suitable for the situation of the country. For example, privatization can create lead to the creation of private monopolies who exploit consumers. D) Free Market Criticisms of IMF
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As well as being criticized for implementing 'free market reforms' other criticize the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse - it is better to allow currencies to reach their market level. E) Lack of Transparency and involvement The IMF has been criticized for imposing policy with little or no consultation with affected countries. Jeffrey Sachs, the head of the Harvard Institute for International Development said: "In Korea the IMF insisted that all presidential candidates immediately "endorse" an agreement which they had no part in drafting or negotiating, and no time to understand. The situation is out of hand...It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people. F) Supporting Military dictatorships. The IMF have been criticized for supporting military dictatorships in Brazil and Argentina, such as Castello Branco in 1960s received IMF funds denied to other countries. 11.2 Response to Criticism of IMF A) Crisis always lead to some Difficulties - Because the IMF deal with economic crisis, whatever policy they offer, there is likely to be difficulties. It is not possible to deal with a balance of payments without some painful readjustment. B) IMF has had Some Successes. - The Failures of the IMF tend to be widely publicized. But, its successes less so. Also criticism tends to focus on short term problems and ignores longer term view C) Confidence - The fact there is a lender of last resort provides an important confidence boost for investors. This is important during current financial turmoil D) Countries are not obliged to take an IMF loan - It is countries that approach the IMF for a loan. The fact that so many take loans suggest there must be at least some benefits of the IMF.

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E) IMF is an easy target - Sometimes countries may want to undertake painful short term adjustment but there is a lack of political will. An IMF intervention enables the government to secure a loan and then pass the blame on to the IMF for the difficulties.

12. Why Reform the IMF?

Why reform the IMF? The current international economic environment is more hopeful than ever before. For the first time, the overwhelming majority of the world's population lives in some form of market economy. The industrial world enjoys a rare combination of growth and low inflation; the "Washington consensus," a model of economic development that emphasizes macroeconomic discipline and open markets, is being adopted by more countries. The IMF played crucial roles in the 1980s debt crisis and in the transformation of former communist economies. Radical change, many might argue, is neither necessary nor desirable. Such complacency is misplaced. There is a gulf between the rhetoric and reality of the IMF's role, a gulf that has been emerging since the fixed exchange rate system broke down in the early 1970s but which is proving increasingly hazardous. The growth of capital markets has rendered the organization impotent in industrialized countries; the world's richest economies neither borrow from the IMF nor are they required to follow its policy advice. Its role in the developing world is worrisomely unclear. The Mexican crisis earlier this year is a case in point. The IMF proved wholly inadequate at crisis prevention (it did not foresee the Mexican debacle), and its attempts at crisis resolution were dangerously improvised (it pledged a disproportionate share of its liquid resources to Mexico, breaking all existing rules on the limits of financial support).
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13. How to reform the IMF

The International Monetary Fund (IMF) is in eclipse as the preeminent institution promoting international economic and financial stability. Successful reform of the IMF must engage the full spectrum of its members. The IMF should not focus primarily on its lowincome members and the challenges of global poverty nor should it focus exclusively on international financial crises affecting a small group of vulnerable emerging-market economies. Instead, it must be engaged with each of its members potentially on the full range of their economic and financial policies and play a central role in shaping global economic performance. It can be argued systemically that important countries, starting with the Group of Seven, must support the IMF in this role. The reform measures should cover all key aspects of IMF responsibilities and operations including: o In the crucial area of governance, the membership of the IMF should promptly address the reallocation of IMF shares (voting power) and the reallocation of chairs (representation on the IMF executive board), and it is time to discard the old conventions and to adopt a merit-based approach to the choice of the IMFs leadership. o Mechanisms should be put in place to increase the IMFs leverage over systemically important members, and the IMF must act more forcefully in discharging its responsibility to exercise firm surveillance over members exchange rate policies.
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o The Funds central role in external financial crises should be reaffirmed. o The IMF should narrow and refocus its involvement with its low-income members. o The IMFs activities should be updated with respect to members capital account policies and financial sectors. o The IMF should put in place procedures for borrowing from the market to guard against the possibility that it will not receive timely increases in its quota resources.

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References http://economics.about.com/cs/moffattentries/a/imf.htm http://www.imf.org/external/about/govstruct.htm http://www.economicshelp.org/dictionary/i/imf.html http://www.economicshelp.org/dictionary/i/imf-criticism.html http://www.scribd.com/doc/6721697/Imf http://en.wikipedia.org/wiki/International_Monetary_Fund http://www.economywatch.com/international-organizations/internationalmonetary-fund-imf.html o http://www.foreignaffairs.com/articles/50979/zanny-minton-beddoes/whythe-imf-needs-reform o http://bookstore.piie.com/book-store//3985.html o o o o o o o

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