Introduction

In July 1944, 700 representatives from forty-four countries met in Bretton Woods, New Hampshire. On the last day of negotiations, they signed an agreement that created the International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund (IMF).[1] The latter was envisioned to help run the gold standard monetary system. When the United States abandoned the golden standard in 1971, preluding its downfall, the IMF had to find a new raison d’être.

An opportunity window opened in the 1980s, when Mexico and other Latin American countries declared that they could not meet large debts borrowed from commercial banks. The IMF seized the chance to offer financial assistance and economic advice, igniting a role that would soon become extremely relevant — the collapse of the Soviet Union in the next decade will elicit the ambition to integrate the former European satellites into the global market economy.[2] Nowadays, the influence of the IMF as a major source of guidance and financial aid to developing countries can hardly be exaggerated.[3]

In the 21st century, the IMF’s primary purpose is to secure the stability of the international monetary system. Still, supplementary functions may include fostering global monetary cooperation, easing international trade, promoting high employment, advancing sustainable economic growth, and reducing poverty around the world. According to the institution’s own description in its website, “it does so in three ways: keeping track of the global economy and the economies of member countries; lending to countries with balance of payments difficulties; and giving practical help to members.”[4]

Such an expansion comes at a price. First, as Bob Deacon notes, today there are multiples and overlapping global actors trying to shape global policy. At certain levels, the IMF, the World Bank, the World Trade Organization, the International Labor Organization, and the United Nations system compete to implement their preferred visions in social problems.[5] Secondly, Edwin Truman points out that the IMF is meant to primordially safeguard international financial stability. By expanding its functions, the institution might have “failed to exercise effectively its intended role as the steward of the international monetary system.”[6] Thirdly, a larger role also raises questions about legitimacy. By imposing conditions to supply credit that may encompass alternations in the central features of a country’s economy, the IMF, a technical international agency, might be requiring countries to forgo their sovereign in economic policy to get help.[7]

This short paper will address this conjuncture: the positive and negative sides that make IMF loved and hated in equal measure.

IMF’s critique

The movement to expand the IMF’s goals “from reducing currency devaluations to providing development aid to poor countries with balance of payment issues”[8] brought to the institution both a new life and a highway to criticism. This critique can be featured in four main categories — with no intention to exclude others: (1) American interference in the Fund’s activities; (2) spreading of neoliberal policies; (3) double standards in the lending process and enforcement of agreements; (4) the negative social effects of the imposition of austerity measures, besides the risk to the countries’ sovereignty in economic policy.

Regarding the first aspect, Beeson and Zeng, for example, assert that what passes as global governance is the outspread of the “American hegemony in the aftermath of the Second World War”. In their vision, the IMF works to promote the American “form of liberal, free market-oriented economic activity that would ultimately colonize most of the world”.[9] To achieve this goal, according to Holden, the IMF handle neoliberal prescriptions as conditions for debtor countries, based on the belief that only liberalization will foster sustainable economic growth. Holden acknowledges that the IMF today also focuses on alleviating poverty by improving health and education services, plus expanding the safety net (social security), but he points out that the Fund does that just to build human capital and allow developing countries to engage in trade openness.[10] In this line, as Barnett and Finnemore identify, the IMF is a transmitter of norms and principles, which turns out to mean teaching less-developed economies “how to ‘be’ market economies.”[11]

With a certain degree of overlapping, this topic leads to the discussion of the imputed negative social impacts of the neoliberal framework the IMF requires debtor countries to adopt.[12] The Fund long acted under the so-called Consensus of Washington, a structural adjustment program that encompassed, among other aspects, fiscal policy discipline, with avoidance of fiscal deficits by reducing public expending, trade and foreign financial flows liberalization, and privatization of public companies.[13],[14] The exact effect of these policies is a matter of debate, but Przeworski and Vreeland detect long-term negative impacts, such that “once countries leave the program, they grow faster than if they had remained, but not faster than they would have without participation”.[15]

Despite that, the IMF applied a similar set of principles indistinctly in Latin America, Asia, and Africa. Many voices accuse the Fund to try to impose an orthodoxy, a toolkit of technically ‘correct’ responses to ubiquitous challenges of economic development and public policy. In Beeson and Li’s evaluation, such orthodoxy reflects less the accuracy of the solutions than the fact that these measures are backed by powerful inter-governmental organizations with political leverage, a model of development associated with the United States.[16]

The circumstance that the IMF insists on a sort of “one-size-fits-all” policy everywhere in the world, nevertheless, should not be interpreted as though the same rules have been applied to all countries equally. In fact, the inconsistency in the standards with respect to lending and enforcing the agreements is another heated topic. Stone reasons that countries that enjoy influence with developed-country patrons are subject to less rigorous conditions (which they violate more often) and more relaxed enforcement, with frequent program suspensions being granted.[17] Copelovitch emphasizes that this variation is often attributed to a relation of serfdom between the IMF and the United States. He argues, however, that it is more precise to say that it is due to the preference heterogeneity among G5 governments, the Fund's largest shareholders, countries that exercise de facto control over the Executive Board.[18]

The last path of criticism addressed in this paper is that the imposition of austerity measures by the IMF, besides the associated political and social costs, presents important secondary consequences. For instance, “there has been an increasing reliance on unilateral, bilateral or regional solutions rather than on the multilateral safety nets provided by the IMF. National reserves have increased more than tenfold since 2000, against a factor of 3.7 for IMF resources.”[19] As Feldstein notices, when the Fund forces painful and comprehensive adjustment programs it also delivers a strong message to other emerging-market countries: that they should avoid calling in the IMF. To keep the IMF’s noses out, developing countries engage in foreign currency reserve accumulation, surplus that could (and should) be invested in their development —new plants, technology, equipment, education. By inflicting large costs through painful contractions and radical economic reforms, the IMF has become the “painful dentist of the old days: just as patients postponed visits until their teeth had to be pulled, the countries with problems wait too long to seek technical advice and modest amounts of financial help”. Besides that, by forcing measures beyond those necessary to ensure liquidity, the IMF may intrude the countries’ internal business, threatening their sovereignty in economic policy.[20]

IMF accomplishments

Notwithstanding all the mentioned potential glitches, no institution can survive for 75 years in the extremely competitive “market” of international organizations without showing strong upsides. The IMF is not an exception. It survived because of its adaptability and resilience,[21] and the relevance of the role it plays in the highly integrated global economy. It is important, therefore, to offer counterarguments to the criticism introduced above and make the IMF positive aspects explicit.

For a start, in the realm of international financial stability, the IMF’s prolific activity comes as close to a consensus as it is possible in politics and social sciences. The Fund’s “economic policy has contributed to the strengthening of the macroeconomic framework of member countries, […] reducing public sector deficits, improving monetary control, and reducing the distortions and misallocations of resources bought about by high inflation.”[22] And this function allows it prerogatives, sometimes sanctioning it to interfere in the countries’ economic sphere. The strength of the monetary system depends on the entire international community. Financial stability is a global public good whose “provision cannot be left to national authorities acting in isolation”[23] — it is an example of “a complex system whose effects are global and resist the control of individuals and even the most powerful governments.”[24] Therefore, all countries share a responsibility toward the balance of payments, against which the claims for national sovereignty in economic issues must be pondered, especially when a country calls for help amid a debt crisis.

It does not mean that stringency is the universal solution. There is little doubt that elevated levels of poverty make the cost of implementing the IMF-sponsored policies even higher, and austerity always meets open opposition due to its effects on the vulnerable — the perception is that the poor bear the burden at the end of the day. Yet, the IMF might have been taking part of the blame that should fall on recidivist countries where payments disequilibria are as severe as frequent,[25] sometimes due to profligate, incompetent, and/or corrupt governments. In this scenario, political leaders may be using the IMF (with some unintended help from academics) to divert responsibility and “scapegoat unpopular policies.”[26]

Additionally, as Copelovitch and Pevehouse diagnose, there is an ideological component in this equation that cannot be ignored. At least part of the critique about the IMF practices in the developing world centers around redistributionist concerns and the negative influence of the Fund’s policies on national populist-friendly programs. In the Latin American political scenario, for example, “the most vocal opponents of the Washington Consensus policy agenda have been socialist and left-wing populist leaders (e.g., Hugo Chavez [now Nicolás Maduro] in Venezuela, Evo Morales in Bolivia)”.[27]

Another aspect is that even though the core of the IMF’s guidebook can still be considered neoliberal (“stabilize, privatize, and liberalize”[28]) and critics like Deacon believe that its fiscal targets often lead to diminished social spending, over time the criticism over the IMF’s strict policies led to their replacement by the poverty reduction goals, with a significant shift from the ‘old’ structural adjustment days. More recently, the Fund’s prescriptions for countries tend to shelter social spending, and its thrust of social policy comprises a safety net that includes targeted subsidies and cash compensations.[29]

This flexibility might explain why an event that could have represented the ‘death’ of the IMF ended up uplifting the Fund. In 2008, the global credit crisis struck with full force and the world faced the real possibility of the meltdown of the international financial system. The IMF could have seen its key role sink a second time. Instead, by allowing for internal reforms that gave greater voice to emerging economies, the Fund became the perfect multilateral instrument to inject liquidity into the world economy. Its coffers were revitalized and augmented, and the IMF delivered the needed outcomes, helping the G-20 to rack up notable achievements in the period.[30]

Conclusion

All changes in structure and scope the IMF went through over time are illustrative to assert the demand side of the international organizations and, at a certain level, put in check the power-based theories that see the global order as a mere exercise of authority. International Institutions are created and sustained also because countries have legitimate common interests in cooperation to achieve mutual gains. And even when the institution’s initial design is not exactly equitable, critical junctures and the dynamics of the bargaining process can lead it to better arrangements — design in motion.[31] This seems to be the IMF’s case, considering its new role of integrating financial stability with economic and social development.

Jean Vilbert holds a bachelor’s and a master’s in Laws in the field of Fundamental Rights. He taught Constitutional Law and Humanities in Brazil for almost a decade and served as a judge for five years. Currently, he is a candidate in the Master’s of International Public Affairs at the La Follette School of Public Affairs (University of Wisconsin-Madison) and a Franklin Firstbrook Fellow at the Latin American, Caribbean and Iberian Studies Program (Lacis).

Endnotes

[1] Tana Johnson. “The Making of Global Governance: Not By States Alone,” Ch. 1 of Organizational Progeny: Why Governments Are Losing Control Over the Proliferating Structures of Global Governance (Oxford: Oxford University Press, 2014), 6.

[2] Martin Feldstein, “Refocusing the IMF,” Foreign Affairs 77, no. 2 (March - April 1998), 20-33.

[3] Ariel Buria, Challenges to the World Bank and IMF: developing country (London: Anthem Press, 2003), 1.

[4] “About the IMF,” International Monetary Fund, Accessed February 14, 2021. https://www.imf.org/en/About.

[5] Bob Deacon, “Global and regional social governance,” in Understanding Global Social Policy (Understanding Welfare: Social Issues, Policy and Practice), ed. Nicolas Yeates (Bristol: Policy Press, 2014), 55.

[6] Edwin M. Truman, “Reforming the IMF for the 21st Century,” Institute for International Economics, Special Report 19 (April 2006).

[7] Feldstein, “Refocusing the IMF”, 26.

[8] Jon Pevehouse and Inken von Borzyskowski, “International Organizations in World Politics,” in Oxford Handbook of International Organizations, ed. Jacob Katz Cogan, Ian Hurd, and Ian Johnstone (Oxford: Oxford Universitary Press, 2017).

[9] Mark Beeson and Jinghan Zeng, “The BRICS and global governance: China’s contradictory role,” Third World Quarterly 39, no. 10 (March 2018), 1962-1978.

[10] Chris Holden, “Global poverty and inequality,” in Understanding Global Social Policy (Understanding Welfare: Social Issues, Policy and Practice), ed. Nicolas Yeates (Bristol: Policy Press, 2014), 30-2.

[11] Michael N. Barnett and Martha Finnemore, “The Politics, Power, and Pathologies of International Organizations”, International Organization 53, no. 4 (Autumn, 1999), 699-732.

[12] Holden, “Global poverty and inequality”.

[13] John Williamson Williamson, Latin American adjustment: how much has happened (Washington: Institute for International Economics, 1990).

[14] Bela Balassa, Gerado M. Bueno, Pedo-Pablo Kuczynsk, and Mario Henrique Simonsen. Toward Renewed Economic Growth in Latin America. Mexico City: El Colégio de Mexico; Rio de Janeiro: Fundação Getúlio Vargas. (Washington: Institute for International Economics, 1986).

[15] Adam Przeworski and James Raymond Vreeland, “The Effect of IMF Programs on Economic Growth,” Journal of Development Economics 62 (2000): 385-421.

131 Manuel Pastor, The International

[16] Mark Beeson and Fujian Li. “What consensus? Geopolitics and policy paradigms in China and the United States,” International Affairs 91, no. 1 (January 2015), 93-109.

[17] Randall W. Stone, “The Political Economy of IMF Lending in Africa,” The American Political Science Review 98, no. 4 (November 2004), 577-591.

[18] Mark Copelovitch, “Master or Servant? Common Agency and the Political Economy of IMF Lending,” International Studies Quarterly 54, no. 1 (March 2010), 49–77.

[19] Jean Pisani-Ferry, “Should we give up on global governance?” Bruegel, Policy Contribution no. 17 (October 2018) https://bruegel.org/wp-content/uploads/2018/10/PC-17-2018.pdf.

[20] Feldstein, “Refocusing the IMF”, 30-1.

[21] Mark Copelovitch, Sara Hobolt, and Stefanie Walter, “Challenges to the Contemporary Global Order. Cause for Pessimism or Optimism?,” Journal of European Public Policy 27, no. 7 (July 2, 2020): 1114–25.

[22] Buria, Challenges to the World Bank and IMF, 1.

[23] Pisani-Ferry, “Should we give up on global governance?”.

[24] William Nordhaus, “Paul Samuelson and Global Public Goods” (Yale University, May 5, 2005), http://www.econ.yale.edu/~nordhaus/homepage/homepage/PASandGPG.pdf.

[25] Michael M. Hutchison and Ilan Noy, “Macroeconomic effects of IMF-sponsored programs in Latin America: output costs, program recidivism and the vicious cycle of failed stabilizations,” Journal of International Money and Finance, 22 (2003) 991–1014.

[26] Pevehouse and Borzyskowski, “International Organizations in World Politics”, 18.

[27] Mark Copelovitch and Jon Pevehouse, “International Organizations in a New Era of Populist Nationalism,” The Review of International Organizations 14, no. 2 (June 2019): 169–86.

[28] Dani Rodrik, “Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform,” Journal of Economic Literature 44, no. 4 (November 1, 2006): 973–87.

[29] Deacon, “?Global and regional social governance”, 57-8.

[30] Stewart M. Patrick, “The Unruled World,” Foreign Affairs 93, no. 1 (Jan/Feb 2014), 58-73.

[31] Pevehouse and Borzyskowski, “International Organizations in World Politics,” 7.