International Monetary Fund

The International Monetary Fund (IMF) is an international organization

headquartered in Washington, D.C., of "188 countries working to foster global
monetary cooperation, secure financial stability, facilitate international trade,
promote high employment and sustainable economic growth, and reduce
poverty around the world." Formed in 1944 at the Bretton Woods Conference, it
came into formal existence in 1945 with 29 member countries and the goal of
reconstructing the international payment system. Countries contribute funds to a
pool through a quota system from which countries experiencing balance of

payments difficulties can borrow money. As of 2010, the fund had SDR476.8
billion, about US$755.7 billion at then exchange rates.
Through the fund, and other activities such as statistics-keeping and analysis,
surveillance of its members' economies and the demand for self-correcting
policies, the IMF works to improve the economies of its member countries.The
organization's objectives stated in the Articles of Agreement are: to promote
international monetary cooperation, international trade, high employment,
exchange-rate stability, sustainable economic growth, and making resources
available to member countries in financial difficulty.

History:
The IMF was originally laid out as a part of the Bretton Woods system exchange
agreement in 1944. During the Great Depression, countries sharply raised
barriers to trade in an attempt to improve their failing economies. This led to the
devaluation of national currencies and a decline in world trade.This breakdown
in international monetary co-operation created a need for oversight. The
representatives of 45 governments met at the Bretton Woods Conference in the
Mount Washington Hotel in Bretton Woods, New Hampshire, in the United
States, to discuss a framework for postwar international economic cooperation
and how to rebuild Europe.
There were two views on the role the IMF should assume as a global economic
institution. British economist John Maynard Keynes imagined that the IMF
would be a cooperative fund upon which member states could draw to maintain
economic activity and employment through periodic crises. This view suggested
an IMF that helped governments and to act as the U.S. government had during
the New Deal in response to World War II. American delegate Harry Dexter
White foresaw an IMF that functioned more like a bank, making sure that
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borrowing states could repay their debts on time.Most of White's plan was
incorporated into the final acts adopted at Bretton Woods.
The IMF formally came into existence on 27 December 1945, when the first 29
countries ratified its Articles of Agreement. By the end of 1946 the IMF had
grown to 39 members. On 1 March 1947, the IMF began its financial
operations, and on 8 May France became the first country to borrow from it.

The IMF was one of the key organisations of the international

economic system; its design allowed the system to balance the
rebuilding of international capitalism with the maximisation of
national economic sovereignty and human welfare, also known
as embedded liberalism.] The IMF's influence in the global
economy steadily increased as it accumulated more members.
The increase reflected in particular the attainment of political
independence by many African countries and more recently the
1991 dissolution of the Soviet Union because most countries in
the Soviet sphere of influence did not join the IMF.
The Bretton Woods system prevailed until 1971, when the U.S. government
suspended the convertibility of the US$ (and dollar reserves held by other
governments) into gold. This is known as the Nixon Shock.

Since 2000
In May 2010, the IMF participated, in 3:11 proportion, in the first Greek bailout
that totalled 110 billion, to address the great accumulation of public debt,
caused by continuing large public sector deficits. As part of the bailout, the
Greek government agreed to adopt austerity measures that would reduce the
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deficit from 11% in 2009 to "well below 3%" in 2014.The bailout did not
include debt restructuring measures such as a haircut, to the chagrin of the
Swiss, Brazilian, Indian, Russian, and Argentinian Directors of the IMF, with
the Greek authorities themselves (at the time, PM George Papandreou and
Finance Minister Giorgos Papakonstantinou) ruling out a haircut.
A second bailout package of more than 100 billion was agreed over the course
of a few months from October 2011, during which time Papandreou was forced
from office. The so-called Troika, of which the IMF is part, are joint managers
of this programme, which was approved by the Executive Directors of the IMF
on 15 March 2012 for SDR23.8 billion, and which saw private bondholders take
a haircut of upwards of 50%. In the interval between May 2010 and February
2012 the private banks of Holland, France and Germany reduced exposure to
Greek debt from 122 billion to 66 billion.
As of January 2012, the largest borrowers from the IMF in order were Greece,
Portugal, Ireland, Romania, and Ukraine.
On 25 March 2013, a 10 billion international bailout of Cyprus was agreed by
the Troika, at the cost to the Cypriots of its agreement: to close the country's
second-largest bank; to impose a one-time bank deposit levy on Bank of Cyprus
uninsured deposits. No insured deposit of 100k or less were to be affected
under the terms of a novel bail-in scheme.
The topic of sovereign debt restructuring was taken up by the IMF in April 2013
for the first time since 2005, in a report entitled "Sovereign Debt Restructuring:
Recent Developments and Implications for the Funds Legal and Policy
Framework". The paper, which was discussed by the board on 20 May,
summarised the recent experiences in Greece, St Kitts and Nevis, Belize, and
Jamaica. An explanatory interview with Deputy Director Hugh Bredenkamp
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was published a few days later, as was a deconstruction by Matina Stevis of the
Wall Street Journal.
In the October 2013 Fiscal Monitor publication, the IMF suggested that a
capital levy capable of reducing Euro-area government debt ratios to "end-2007
levels" would require a very high tax rate of about 10%.
The Fiscal Affairs department of the IMF, headed at the time by Acting Director
Sanjeev Gupta, produced a January 2014 report entitled "Fiscal Policy and
Income Inequality" that stated that "Some taxes levied on wealth, especially on
immovable property, are also an option for economies seeking more progressive
taxation ... Property taxes are equitable and efficient, but underutilized in many
economies ... There is considerable scope to exploit this tax more fully, both as
a revenue source and as a redistributive instrument."
At the end of March 2014, the IMF secured an $18 billion bailout fund for the
provisional government of Ukraine in the aftermath of the 2014 Ukrainian
revolution.

Background
Origins
Prior to World War II, there was no negotiated international regime governing
international monetary and trade relations. It was the shared view among the
allied powers that many characteristics of the international financial system
during the period between the first and second world wars, including
competitive devaluations, unstable exchange rates, and protectionist trade
policies, worsened the 1930s depression and accelerated the onset of the war. To
address these concerns, representatives of the 44 allied nations gathered in
Bretton Woods, NH, in July 1944 for the United Nations Monetary and
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Financial Conference. Their goal was ambitious and largely successfulto

create a cooperative and institutional framework for the global economy that
would facilitate international trade and balanced global economic stability and
growth. At the Bretton Woods conference, Articles of Agreement for the IMF
and the International Bank for Reconstruction and Development (IBRD), later
known as the World Bank, were drafted and adopted. They entered into force,
formally creating the institutions, on December 27, 1945, following the
adoption of implementing or authorizing legislation within member countries.1
The Articles of Agreement of both institutions constitute an international treaty,
imposing obligations on member states, which have changed over time.
In the eyes of its founders, the IMFs purpose and contribution to postwar
macroeconomic stability were threefold:
(1) facilitate trade by restricting certain foreign exchange controls;
(2) create monetary stability by managing a fixed (but flexible) exchange rate
system; and
(3) provide short-term financing to member countries to correct temporary
balance-of-payments problems.
The U.S. Senate agreed to the ratification (by the President) of the Fund and
Bank Agreements in July 1945. U.S. participation in both organizations is
authorized by the United States Bretton Woods Agreement Act, as amended
(Bretton Woods Act).2 Unique among the founding members,
1 The third pillar of the postwar economic agenda, negotiation on multilateral
rules to liberalize and govern international trade, was not completed until the
1947 General Agreement on Tariffs and Trade (GATT). In 1995, the GATT was
succeeded by the World Trade Organization (WTO).

the United States, in the Bretton Woods Act, requires specific congressional
authorization to change the U.S. quota or shares in the Fund or for the United
States to vote to amend the Articles of Agreement of the IMF or the World
Bank. The U.S. Congress, thus, has veto power over major decisions at both
institutions.

The Bretton Woods Monetary System

From 1946 to 1971, the main purpose of the IMF was regulatory, ensuring IMF
members compliance with a par value exchange rate system. This was a twotiered currency regime using gold and the U.S. dollar. Each IMF member
government could choose to define the value of its currency in terms of gold or
the U.S. dollar, which the U.S. government agreed to support at a fixed gold
value of one ounce of gold being equal to $35. Unlike in the classic gold
standard period (1880-1914), monetary policy was not strictly restricted by a
countrys holdings of gold. Member countries were allowed to intervene in the
currency market but were obligated to keep their exchange rates within a 1%
band around their declared par value. When currencies (other than the U.S.
dollar) came under pressure from short-term balance of payments imbalances
that normally arose through international trade and finance exchanges, countries
would receive short-term financial support from the IMF. In cases where the
currency peg was considered fundamentally misaligned, a country could
devalue (or revalue) its currency. By providing monetary independence limited
by the peg, the Bretton Woods monetary system combined exchange rate
stability, the key benefit of the 19th century gold standard, with some of the
virtues of floating exchange rates, principally independence to pursue domestic
economic policies geared toward full employment.
reserve assets, gold and the U.S. dollar. With the economic recovery of Europe
well advanced, the slow growth in gold supplies was hampering the growth of
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international reserve assets. As early as 1960, global foreign dollar holdings

exceeded the value of U.S. gold holdings (at $35 an ounce). The system could
continue to function as long as countries were willing to settle their balance of
payments in U.S. dollars instead of gold. The international communitys
response was to create a new international reserve currency, the Special
Drawing Right (SDR). The SDR also serves as the IMFs unit of account.
Initially defined as equivalent to 0.888671 grams of fine gold, the value of the
SDR was switched to a basket of international currencies following the collapse
of the Bretton Woods system of fixed parity exchange rates in 1973. The current
basket includes the euro, the Japanese yen, the British pound sterling, and the
U.S. dollar. By 1970, a large and prolonged U.S. balance-of-payments deficit
was mirrored by its counterpart, large balance-of-payments surpluses in the
other major industrial countries. As a result, much of the 1960s was
characterized by substantial currency instability, as liberalized capital flows
brought about repeated currency crises in the supposedly fixed exchange rate
Bretton Woods system. Amid declining confidence in the U.S. dollar, foreign
central banks increasingly became reluctant holders of U.S. dollars and began
exchanging their dollar reserves for U.S. gold holdings. After several years of
instability, the Bretton Woods system of fixed exchange rates finally collapsed
in March 1973 when the United States severed the link between the dollar and
gold, allowing the value of its currency to be determined by market forces.

From 1973
A major purpose of the IMF as originally conceived at Bretton Woodsto
maintain fixed exchange rateswas, thus, at an end. Although the IMF had lost
its motivating purpose, it adapted to the end of fixed exchange rates. In 1973,
IMF members enacted a comprehensive rewrite of the IMF Articles. IMF
members condoned the floating-rate exchange rate system that was already in
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place; officially ended the international monetary role of gold (although gold
remains an international monetary asset); and, nominally, but unsuccessfully,
made the SDR the worlds principal reserve asset. Henceforth, member
countries were allowed to freely determine their currencys exchange rate, and
use private capital flows to finance trade imbalances.
The IMF was also given two new mandates, which became the foundation of
its role in the postBretton Woods international monetary system. The first was
for the IMF to oversee the international monetary system to ensure its effective
operation. The second was to oversee the compliance by member states with
their new obligations to collaborate with the Fund and other members to assure
orderly exchange arrangements and to promote a stable system of exchange
rates. Consequently, the IMF transformed itself from being an international
monetary institution focused almost exclusively on issues of foreign exchange
convertibility and stability to being a much broader international financial
institution, assuming a broader array of responsibilities and engaging on a wide
range of issues including financial and capital markets, financial regulation and
reform, and sovereign debt resolution.
The IMF also increasingly relied on its lending powers, as floating exchange
rates and the growth of international capital flows led to more frequent, and
increasingly severe, financial crises. Over the past several decades, the IMF has
been involved in the oil crisis of the 1970s; the Latin American debt crisis of the
1980s; the transition to market-oriented economies following the collapse of
communism; currency crises in East Asia, South America, and Russia; and,
most recently, the global response to the 2008-2009 global financial crisis and
the 2010-2011 European sovereign debt crisis.

Voting and Influence at the IMF

The Executive Board or Board of Governors of the IMF can approve loans,
policy decisions, and many other matters by a simple majority vote. However, a
supermajority vote is required to approve major IMF decisions. The
supermajority may require a 70% or 85% vote, depending on the issue. A 70%
majority is required to resolve financial and operational issues such as the
interest rate on IMF loans or the interest rate on SDR holdings. An 85%
majority is required for the most important decisions, such as the admission of
new members, increases in quotas, allocations of SDRs, and amendments to the
IMFs Articles of Agreement.

Member country:
Not all member countries of the IMF are sovereign states, and therefore not all
"member countries" of the IMF are members of the United Nations. Amidst
"member countries" of the IMF that are not member states of the UN are nonsovereign areas with special jurisdictions that are officially under the
sovereignty of full UN member states, such as Aruba, Curaao, Hong Kong, and
Macau, as well as Kosovo. The corporate members appoint ex-officio voting
members, who are listed below. All members of the IMF are also International
Bank for Reconstruction and Development (IBRD) members and vice versa.
Former members are Cuba (which left in 1964) and the Republic of China,
which was ejected from the UN in 1980 after losing the support of then U.S.
President Jimmy Carter and was replaced by the People's Republic of China.
However, "Taiwan Province of China" is still listed in the official IMF indices.
Apart from Cuba, the other UN states that do not belong to the IMF are
Andorra, Liechtenstein, Monaco, Nauru, and North Korea.
The former Czechoslovakia was expelled in 1954 for "failing to provide
required data" and was readmitted in 1990, after the Velvet Revolution. Poland
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withdrew in 1950allegedly pressured by the Soviet Unionbut returned in

1986.
Qualifications
Any country may apply to be a part of the IMF. Post-IMF formation, in the early
postwar period, rules for IMF membership were left relatively loose. Members
needed to make periodic membership payments towards their quota, to refrain
from currency restrictions unless granted IMF permission, to abide by the Code
of Conduct in the IMF Articles of Agreement, and to provide national economic
information. However, stricter rules were imposed on governments that applied
to the IMF for funding.
The countries that joined the IMF between 1945 and 1971 agreed to keep their
exchange rates secured at rates that could be adjusted only to correct a
"fundamental disequilibrium" in the balance of payments, and only with the
IMF's agreement.
Some members have a very difficult relationship with the IMF and even when
they are still members they do not allow themselves to be monitored. Argentina,
for example, refuses to participate in an Article IV Consultation with the IMF.
Benefits
Member countries of the IMF have access to information on the economic
policies of all member countries, the opportunity to influence other members
economic policies, technical assistance in banking, fiscal affairs, and exchange
matters, financial support in times of payment difficulties, and increased
opportunities for trade and investment.

Leadership:

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Board of Governors
The Board of Governors consists of one governor and one alternate governor for
each member country. Each member country appoints its two governors. The
Board normally meets once a year and is responsible for electing or appointing
executive directors to the Executive Board. While the Board of Governors is
officially responsible for approving quota increases, Special Drawing Right
allocations, the admittance of new members, compulsory withdrawal of
members, and amendments to the Articles of Agreement and By-Laws, in
practice it has delegated most of its powers to the IMF's Executive Board.
The Board of Governors is advised by the International Monetary and Financial
Committee and the Development Committee. The International Monetary and
Financial Committee has 24 members and monitors developments in global
liquidity and the transfer of resources to developing countries. The
Development Committee has 25 members and advises on critical development
issues and on financial resources required to promote economic development in
developing countries. They also advise on trade and environmental issues.
Executive Board
24 Executive Directors make up Executive Board. The Executive Directors
represent all 188 member countries in a geographically based roster. Countries
with large economies have their own Executive Director, but most countries are
grouped in constituencies representing four or more countries.
Following the 2008 Amendment on Voice and Participation which came into
effect in March 2011, eight countries each appoint an Executive Director: the
United States, Japan, Germany, France, the UK, China, the Russian Federation,
and Saudi Arabia. The remaining 16 Directors represent constituencies
consisting of 4 to 22 countries. The Executive Director representing the largest
constituency of 22 countries accounts for 1.55% of the vote.This Board usually
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meets several times each week. The Board membership and constituency is
scheduled for periodic review every eight years.
Managing Director
The IMF is led by a managing director, who is head of the staff and serves as
Chairman of the Executive Board. The managing director is assisted by a First
Deputy managing director and three other Deputy Managing Directors.
Historically the IMF's managing director has been European and the president
of the World Bank has been from the United States. However, this standard is
increasingly being questioned and competition for these two posts may soon
open up to include other qualified candidates from any part of the world

Features:
According to the IMF itself, it works to foster global growth and economic
stability by providing policy, advice and financing to members, by working with
developing nations to help them achieve macroeconomic stability and reduce
poverty. The rationale for this is that private international capital markets
function imperfectly and many countries have limited access to financial
markets. Such market imperfections, together with balance-of-payments
financing, provide the justification for official financing, without which many
countries could only correct large external payment imbalances through
measures with adverse economic consequences. The IMF provides alternate
sources of financing.
Upon the founding of the IMF, its three primary functions were: to oversee the
fixed exchange rate arrangements between countries, thus helping national
governments manage their exchange rates and allowing these governments to
prioritise economic growth, and to provide short-term capital to aid balance of
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payments. This assistance was meant to prevent the spread of international

economic crises. The IMF was also intended to help mend the pieces of the
international economy after the Great Depression and World War II. As well, to
provide capital investments for economic growth and projects such as
infrastructure.
The IMF's role was fundamentally altered by the floating exchange rates post1971. It shifted to examining the economic policies of countries with IMF loan
agreements to determine if a shortage of capital was due to economic
fluctuations or economic policy. The IMF also researched what types of
government policy would ensure economic recovery. The new challenge is to
promote and implement policy that reduces the frequency of crises among the
emerging market countries, especially the middle-income countries that are
vulnerable to massive capital outflows. Rather than maintaining a position of
oversight of only exchange rates, their function became one of surveillance of
the overall macroeconomic performance of member countries. Their role
became a lot more active because the IMF now manages economic policy rather
than just exchange rates.
In addition, the IMF negotiates conditions on lending and loans under their
policy of conditionality, which was established in the 1950s.[ Low-income
countries can borrow on concessional terms, which means there is a period of
time with no interest rates, through the Extended Credit Facility (ECF), the
Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF).
Nonconcessional loans, which include interest rates, are provided mainly
through Stand-By Arrangements (SBA), the Flexible Credit Line (FCL), the
Precautionary and Liquidity Line (PLL), and the Extended Fund Facility. The
IMF provides emergency assistance via the Rapid Financing Instrument (RFI)
to members facing urgent balance-of-payments needs.

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Surveillance of the global economy

The IMF is mandated to oversee the international monetary and financial
system and monitor the economic and financial policies of its member
countries. This activity is known as surveillance and facilitates international
cooperation. Since the demise of the Bretton Woods system of fixed exchange
rates in the early 1970s, surveillance has evolved largely by way of changes in
procedures rather than through the adoption of new obligations. The
responsibilities changed from those of guardian to those of overseer of
members policies.
The Fund typically analyzes the appropriateness of each member countrys
economic and financial policies for achieving orderly economic growth, and
assesses the consequences of these policies for other countries and for the global
economy.
In 1995 the International Monetary Fund began work on data dissemination
standards with the view of guiding IMF member countries to disseminate their
economic and financial data to the public. The International Monetary and
Financial Committee (IMFC) endorsed the guidelines for the dissemination
standards and they were split into two tiers: The General Data Dissemination
System (GDDS) and the Special Data Dissemination Standard (SDDS).
The executive board approved the SDDS and GDDS in 1996 and 1997
respectively, and subsequent amendments were published in a revised Guide to
the General Data Dissemination System. The system is aimed primarily at
statisticians and aims to improve many aspects of statistical systems in a
country. It is also part of the World Bank Millennium Development Goals and
Poverty Reduction Strategic Papers.

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The primary objective of the GDDS is to encourage member countries to build a

framework to improve data quality and statistical capacity building in order to
evaluate statistical needs, set priorities in improving the timeliness,
transparency, reliability and accessibility of financial and economic data. Some
countries initially used the GDDS, but later upgraded to SDDS.
Some entities that are not themselves IMF members also contribute statistical
data to the systems:
Palestinian Authority GDDS
Hong Kong SDDS
Macau GDDS
EU institutions:
the European Central Bank for the Eurozone SDDS
Eurostat for the whole EU SDDS, thus providing data from
Cyprus (not using any DDSystem on its own) and Malta (using
only GDDS on its own)
Conditionality of loans
IMF conditionality is a set of policies or conditions that the IMF requires in
exchange for financial resources. The IMF does require collateral from
countries for loans but also requires the government seeking assistance to
correct its macroeconomic imbalances in the form of policy reform. If the
conditions are not met, the funds are withheld.Conditionality is perhaps the
most controversial aspect of IMF policies. The concept of conditionality was

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introduced in a 1952 Executive Board decision and later incorporated into the
Articles of Agreement.
Conditionality is associated with economic theory as well as an enforcement
mechanism for repayment. Stemming primarily from the work of Jacques Polak,
the theoretical underpinning of conditionality was the "monetary approach to
the balance of payments".
Structural adjustment

Some of the conditions for structural adjustment can include:

Cutting expenditures, also known as austerity.
Focusing economic output on direct export and resource extraction,
Devaluation of currencies,
Trade liberalisation, or lifting import and export restrictions,
Increasing the stability of investment (by supplementing foreign direct
investment with the opening of domestic stock markets),
Balancing budgets and not overspending,
Removing price controls and state subsidies,
Privatization, or divestiture of all or part of state-owned enterprises,
Enhancing the rights of foreign investors vis-a-vis national laws,
Improving governance and fighting corruption.
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These conditions have also been sometimes labelled as the Washington

Consensus.
Benefits
These loan conditions ensure that the borrowing country will be able to repay
the IMF and that the country will not attempt to solve their balance-of-payment
problems in a way that would negatively impact the international economy. The
incentive problem of moral hazardwhen economic agents maximize their own
utility to the detriment of others because they do not bear the full consequences
of their actionsis mitigated through conditions rather than providing
collateral; countries in need of IMF loans do not generally possess
internationally valuable collateral anyway.
Conditionality also reassures the IMF that the funds lent to them will be used
for the purposes defined by the Articles of Agreement and provides safeguards
that country will be able to rectify its macroeconomic and structural imbalances.
In the judgment of the IMF, the adoption by the member of certain corrective
measures or policies will allow it to repay the IMF, thereby ensuring that the
resources will be available to support other members.
As of 2004, borrowing countries have had a very good track record for repaying
credit extended under the IMF's regular lending facilities with full interest over
the duration of the loan. This indicates that IMF lending does not impose a
burden on creditor countries, as lending countries receive market-rate interest
on most of their quota subscription, plus any of their own-currency
subscriptions that are loaned out by the IMF, plus all of the reserve assets that
they provide the IMF.

The IMFs Changing Role

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Even for an organization that had worked to alleviate its share of financial
panics during more than five decades of existence, the International Monetary
Fund (IMF) had an extraordinary year by any standard in 1998. As one tense
month gave way to the next, the financial crisis that had begun the year before
in Thailand spread to East Asia, Russia, and Latin America and was threatening
to engulf the industrialized world as well.
According to IMF Managing Director Michel Camdessus, the crisis had
"already cost hundreds of billions of dollars, millions of jobs, and the
unquantifiable tragedy of lost opportunities and lost hope for so many people,
particularly among the poorest. . . . Even countries with well-managed
economies have not been spared." Yet the traditional remedies the IMF had
employed in the past to alleviate such global financial stresses--loans to
troubled countries in return for pledges to restrict monetary expansion and rein
in budget deficits--seemed curiously inadequate. It was not until the U.S. and
other major economies took a series of striking steps that the crisis began to
stabilize.
After months of debate, the U.S. Congress in October 1998 approved an $18
billion contribution to the IMFs capital base, giving the organization $90
billion for additional emergency loans and easing fears that it was about to run
out of money. Indeed, the move enabled the IMF and other government leaders
to pledge to make available $41 billion in credits for Brazil, where steep budget
deficits left the nations currency vulnerable to speculative attack.
The U.S. Federal Reserve and central banks in Japan and several European
countries cut interest rates and helped ease the crisis further by shoring up
global stock markets that had been falling precipitously for months amid fears
of a worldwide recession. The Group of Seven (G-7) industrial countries agreed
to set up a new IMF facility to provide emergency loans for countries affected
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by "contagion" from other distressed economies and called for more and better
disclosure of emerging-market finances and flows of capital among hedge funds
and other large international investors. At the same time, G-7 members called
for improved supervision of financial flows from investment banks, hedge
funds, and other lenders to emerging markets, the better to spot potentially
destabilizing financial bubbles.
The fact that the IMF and the world financial system needed emergency
assistance to get over the latest global crisis should have been no surprise. The
size and scope of IMF-led financial-aid programs had increased in recent years,
accelerating dramatically after the fall of the Soviet Union and other communist
countries in 1989 thrust a new wave of emerging nations into the world
economy. The organization itself, however, had not changed significantly since
its creation in Bretton Woods, N.H., in 1944 by the U.S. and 43 allies as a
critical element in the American-led Western post-World War II alliance.
Designed to foster monetary cooperation, the IMF sought to enforce strict rules
of behaviour in a world based on the gold standard and fixed currency-exchange
rates. To help bolster international trade, the IMF also provided short-term
financing to countries encountering balance of payments problems. The U.S.
abandonment of the gold standard in 1971, however, led to the collapse of the
Bretton Woods system of fixed exchange rates two years later. The move to
floating exchange rates in Western economies forced the IMF to end its role as
traffic cop of the world monetary system and to concentrate instead on
providing advice and information to its members, which in 1998 numbered 182
countries.
That role was key in helping nations in Latin America, Africa, Asia, and Central
Europe restructure their economies following the 1982 debt crisis. Later the
IMF sought a more ambitious role as an international lender of last resort to the
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world economy. It first assumed that position in the international bailout of

Mexico in 1995. In return for the imposition of an economic austerity plan, the
fund, along with the U.S. and other major industrial countries central banks,
provided credit lines and other facilities totaling $47.8 billion. Although the
assistance gave rise to criticism that the IMF was bailing out international
investors and not the Mexican economy, the fund in 1997 and 1998 increased
the amount each member contributed and expanded its lending activities further
by establishing a $47 billion line of credit--called the New Arrangements to
Borrow--with two dozen countries.
The increase in borrowing authority would allow troubled IMF members to
draw well in excess of what would normally be allowed, a move that was well
timed. In the 1990s capital had flooded into emerging economies--such as
Thailand, Indonesia, and South Korea--with little attention to borrowers
creditworthiness. When economic problems started to occur, foreign and
domestic investors alike rushed to get their money out of those countries. In the
ensuing panic, currencies and stock and bond markets imploded, cutting off
financing and swiftly throwing entire economies into recession. The crisis
persisted, even amid billions of dollars in IMF and Western loan commitments.
With the IMF estimating that world economic growth was only 2.2% in 1998,
half what it had forecast in late 1997, it became apparent that more forceful
moves would be required. Along with the IMFs fortified capital base and
widened lending authority, it still was unclear whether widening the disclosure
of emerging economies foreign-currency reserve levels, publicizing their
growth estimates, and announcing capital inflows and outflows would help
forestall the next crisis--much less put a decisive end to the one that drew
headlines in 1998. This was because the entire face of international finance had
changed since the IMF was created.

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Financial flows were once controlled by a handful of major banks that could be
easily corralled into restructuring problem loans in cooperation with relatively
modest IMF assistance. In the late 1990s, however, flows were dominated by
thousands of banks; securities firms; and mutual, pension, and hedge funds that
could move capital in and out of countries with a click of a computer mouse.
The number of countries seeking international investment, meanwhile, had
proliferated, as had the diversity of debt, equity, and other financial instruments.
This array of investors and instruments made coordinating any response to
financial crises "extremely difficult," concluded Moodys Investors Service Inc.,
a major global credit-rating agency.
The IMF, meanwhile, continued to face criticism that it was secretive in its
dealings, undemocratic in its makeup, and unresponsive to the needs of poorer
members. Many critics noted that the economic austerity programs that were
typically attached to any IMF assistance were not always appropriate. In some
cases spending cuts only deepened local recessions and made the task of
necessary financial and industrial restructurings all the more difficult.
Some economists, including Jeffrey D. Sachs, the director of the Harvard
Institute for International Development, believed the IMF should permit
countries to essentially go bankrupt, imposing formal suspensions of loan
payments while creditors and debtors negotiated the value of the loans and
determined whether any loans could be exchanged for equity. During the
negotiations a troubled country could continue to obtain new financing and
exporters could conduct business, selling their goods and earning foreign
currencies vital to a countrys economic revival.
Suggestions such as these, if they were accepted, might require years to be put
into practice. If the crisis of 1998 had one lesson, it was that nothing short of "a
cooperative effort by the entire world community is needed to repair the major
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shortcomings in the global system," according to Camdessus. The question was

whether the repairs would be performed quickly enough to enable the IMF and
its backers to cope with the next financial implosion.

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