IMF: What for?

April 4, 2007

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On 22 July 1944, 44 countries signed the “Bretton Woods Agreements” establishing the International Monetary Fund (IMF) and its sister organization, the International Bank for Reconstruction and Development (the World Bank).* Originally, IMF was intended to monitor and help maintain pegged but adjustable exchange rates, primary between the industrialized countries of Western Europe and the US. Nowadays, IMF is famous in the economic programmes in developing countries.

The story usually goes like this: less-developed countries yearn for development in light of the poor living environment and quality of life within the country. They aim at becoming a modernized state and believe that this is the only way out. However, often infrastructure in these countries are not maturely developed, making it nearly impossible to develop successfully, like other industrialized states, in areas such as banking and manufacturing.

As a result, they need financial support or investment from foreign countries as well as loans and advice from IMF or the World Bank. Resources are usually controlled by non-state actors, such as the World Bank and multi-national companies. “Conditionality” applies and countries must follow austere policy conditions designed to ensure debt repayment, stabilize the economy and promote national prosperity. There is little evidence, however, of the success of IMF conditionality.

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Since developed countries with larger economic size are supposed to have greater influence at the IMF, the Fund are so powerful that, in most cases, less-developed states need to sacrifice their sovereignty and ownership of raw materials in exchange of loans. For example, the US, as the economically most powerful member, is able to use the IMF as a tool of foreign policy, pushing the IMF to pursue its political goals instead of the mandated economic goals of mitigating balance of payment problems. That’s why Marxists believe that international system is an integrated capitalist system pursuing capital accumulation by exploiting others.

Capitalist states/ideology has manipulated and, hence, controlled the “lower-class” states. Actually, governments do not want to sacrifice their sovereignty but they need the IMF loan in face of, say, shortfall in foreign reserves. They have no choice but to accept IMF conditions. It is also interesting to note that countries with a past history of seeking assistance from the IMF were likely to return again to the IMF. They are just trapped in a vicious circle. No wonder developed capitalist states could also manipulate the ideology of modernization and make it as the only goal for developing countries to pursue.

Instead of looking at how the IMF can do better, maybe we should ask why the IMF should bother.

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Jenny Lee

*James Raymond Vreeland, “What is the IMF?”, The International Monetary Fund – Politics of conditional lending, 2007, Chapter 1.

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7 Responses to “IMF: What for?”

  1. Rachael Tsang Says:

    Yes it can be true that ‘powerful’ states like the US are using the IMF to achieve their political goals. But am just wondering what if there isn’t any organization like the IMF to aid the developing states? Would they suffer even more if they are not integrated with the capitalist system, or so called the Northern Economic System as from the Dependency Theory?

  2. C.H. Says:

    What an interesting blog!!

    People who are ‘pro’ the traditional modernization theory or even the dependency theory would always question like that: what would have happend if these less developed state do not adopt the path of development towards capatialism. but be noted that the Marxist approach is merely a perspective which illustrates what an unjust case would be in the context of international politics.

    Just like other critical theories, say feminist or postmodernist, analytical Marxism is trying to demonstrate the dark-side, such as alienation or exploitation, of modern capitalist states and society. It doesn’t mean that we have to overturn the whole system or negelect its merits.

    As for the dependency theory, the so-called discourse on ‘centre and periphery’ has already been challenged since the enconomic development of East Asia in the 1980s…. then, I just wonder what is going to be integrated, or should we still need to ask this question from the Marxist perspective or even in the context of other critical theories?

  3. Fragile Says:

    Your brief overview of the IMF deeds is enough to make a one-sided story (socialist) story convincing enough and I agree with it for the most part…

    Yet, from a realist perspective the voting scheme in the IMF is a reflection of “reality”, that it reflects the domination of the powerful states in the international system. Interestingly, the IMF and World Bank are multilateral institutions established as part of liberal ideological drive to prevent common world problems. But the point at issue, of course, is that they were established by the powerful states making these institutions, as was the authors of the Global Neighborhood would agree, detrimentally unrepresentative and thus unfair to the less developed countries. The latter is also attributed by socialist theory and can be strengthened further by basic facts: OECD members collectively hold over 50% of votes in all IMF and World Bank Group.

    We may have been overly critical in last class by condemning the practical application of Marxist ideology, but I would like to point out that Marxist theory is not only a powerful critique of realism and liberalism but it also holds some therapeutic characteristics ameliorating the practice of free-market, for instance.

    The example which stands out in my head is about the coffee crisis. In short, when in the 1980s the coffee prices collapsed many coffee-exporting countries suffered economically. One blame was attributed to the green cheap coffee production in Vietnam, which large coffee brewers preferred for its price advantage. In Guatemala farmers responded by forming coffee cooperatives that facilitated bargaining for higher market prices for Guatemala higher quality coffee. An NGO called Fair Trade Labeling Organization (FLO) responded by bonding these cooperatives with importers of coffee that transmit that quality to coffee consumers, agreeing to pay premium for the quality. By branding the coffee with FLO standard, the consumers are able to respond to something other than price mechanisms in making their decisions and thus support fair trade. The FLO practice proved very successful.

    Without going into too much details of this case, I wanted to show how socialist theory finds practical application within the current system of international trade, when it brings in considerations for coffee farmers, their families, consumers and the economy of Guatemala from a sustainable point of view. The moral for me is that the result is beneficial for a number of actors: local coffee workers, the state, the MNCs (coffee brewers and importers), the NGOs… thanks to socialist ideals and ideas.

  4. Joyce Chan Says:

    In my opinion, IMF offers economic assistance to weaker countries to compete with global capital markets through stable exchange rates and balance of payments; this makes the IMF to stabilize but not equalize the country positions. From what we have seen nowadays, the idea of capitalism rules. Countries or corporations are still look for surplus at the expenses of others – one of the major Marxist criticisms to capitalism. Let’s face it, there’s no absolute equality in the world and among countries. States are striving for powers and their own positions and therefore, there’ll be no free lunch to assist these developing countries without any conditions. As mentioned in the blog, countries are required to accept certain conditions or reforms in order to receive aid from IMF. IMF has been criticized for responsible of worsening troubling countries, such as Argentina crisis in 2001 – the inflationary problem hadn’t really been solved. Nevertheless, it did have some successful ones such as Korea in 1998 Asian crisis. Korea had reformed its financial structures and these reforms might offer benefits to other developed/investing countries as aid conditions but looking the rapid restructuring and the recovery in Korea in the past decade, it seems that Korea and other developed/investing countries are both getting their relative gains.

  5. Si Wang Says:

    World inequalities are raised by globalization, but this is an inexorable trend of productive forces development. From Marxism’s point of view, form and development of world history is the result of the industrial technology revolution. Globalization includes economy, political and culture. Economical globalization is the first step of Globalization, because globalization is found on manufacture, products and market. Since global economy and politics are interacted, it is an inevitable outcome that IMF is used as the tool of foreign policy by the U.S. or any other developed states. The less developed states within IMF are exploited by exploiting class (e.g. the U.S.). I think, IMF provides the developing countries an opportunity to compete with the others, and only deeper integration into the global economy can pull the countries out.

  6. Kenneth Li Says:

    It is understood that the IMF will only assist when a country has suffered years of financial difficulties and it has no way out. The economies IMF assists are mostly poor nations of mismanagement by their respective government. Some of which have serious problems of corruptions and malpractices.

    IMF is mostly criticized for its Structural Adjustment Policies which which are over dependent on attracting foreign investment rather than helping the developing nations to go through a state-managed approach for economic recoverys. Also, IMF fails to assist the local government to achieve growth in local employment to relief the problem.

    Having noted that, it is also true that some politicians of developing states merely shift the blame on the IMF after they have made some errors in their decision making process. Thus, using nationalism in their own countries to gain easy political milieage.
    Although the IMF has been created to help stabilizing the global economy since 1980, its overall success record is considered low. Some commentors put the blame on the delay in IMF response to a crisis, and the fact that it tends to only respond rather than prevent the downturn of economies.

    This has led to argument for reform within the IMF. In 2006, an IMF paper on its ‘Medium Term Strategy’ was endorsed by its member countries. The agenda includes changes in IMF governance to enhance the role of developing countries in the institution’s decision-making process and steps to deepen the effectiveness of its core mandate, which is known as economic surveillance or helping member countries adopt macroeconomic policies that will sustain global growth and reduce poverty.

    Despite of the general negative feelings on the IMF held by a number of commentors, a recent research in 2006 shows that more than 60 percent of Asians and 70 percent of Africans feel that the IMF and the World Bank have a positive effect on their country. The following is quoted as examples:-

    “In 2005, the IMF was the first multilateral financial institution to implement a sweeping debt-relief program for the world’s poorest countries known as the Multilateral Debt Relief Initiative. By year-end 2006, 23 countries mostly in sub-Saharan Africa and Central America had received total relief of debts owed the IMF.”

    Thus, I feel that the IMF is still contributing to the developing world but it needs to review its policies and practices to meet the genuine needs.

  7. Carole Chen Says:

    I think Marxists will totally agree with the briefing on IMF.

    However, if think of the issue from a realistic perspective, it is just the case that poor coutries sacrify some national interest for gaining aid from the IMF – zero sum, although the IMF was established from liberial drive.

    Most of the countries are adopting realist idea when making foreign policy bearing the assumption that states are risk-averse and interest-pursuer. Why the rich countries have to provide aid without gaining something, so that the poor countries should ‘offer’ something while accepting the aid, which is a sort of trade in the mind of realists.

    For the liberalists, they will be sad. Why can’t the countries cooperate for the development of human beings?


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