20 Questions on the IMF
Multinational Monitor magazine, April 2000
1. What is the IMF's mission and how has that changed over
The International Monetary Fund (IMF) was created in 1944
to maintain the standard of fixed exchange rates that was established
at the end of World War II. Since the abandonment of the gold
standard in 1971, the IMF has adopted a new core mission, providing
loans to economically troubled countries.
Countries with balance of payment difficulties-meaning their
earnings from imports and other sources are insufficient to pay
off their foreign debt-turn to the IMF for two reasons. First,
the IMF provides loans to cover immediate obligations to foreign
creditors. Second, private lenders and other public lenders, such
as the World Bank, generally will not lend to troubled economies
unless they have a loan agreement with the IMF.
Thus the IMF plays a "gatekeeper" role-if you are
a poor, indebted country, you can't get access to foreign credit
unless you have a deal with the IMF. IMF agreements typically
require countries to adopt "structural adjustment" policies
as the condition for a loan.
2. What is the current relationship between the IMF and World
Bank How has that changed over time ? Do their functions overlap?
The World Bank was also formed in 1944 to help with European
post-war reconstruction. It later shifted its focus to assisting
development efforts in the Third World. It has traditionally funded
major infrastructure projects - roads, hydroelectric dams, coal
plants, etc. These have been highly controversial for their effect
on the environment, indigenous people, rural communities and women.
Starting in the 1980s, and while continuing to do project
lending, the Bank began shifting its loans toward structural adjustment
and sectoral adjustment loans. About two thirds of the Bank's
lending now goes for structural adjustment and sectoral adjustment.
The World Bank's structural adjustment programs are not appreciably
different than those of the IMF.
The IMF and World Bank jointly administer a program, now called
the Heavily Indebted Poor Country/Poverty Reduction and Growth
Fund that provides very modest debt relief to the world's poorest
countries on the condition that they undergo years of structural
The World Bank respects the IMF's unofficial gatekeeper role,
and generally will not make loans to countries that have not received
an IMF seal of approval.
3. What is the IMF and World Bank's relationship to the World
Trade Organization (WTO) ?
The IMF, World Bank and the WTO all share a commitment to
"free trade" and binding developing countries into the
The WTO, which implements agreements governing world trade
and administers a binding mechanism to resolve trade disputes
between nations, generally operates independently of the IMF and
In November 1999, however, the IMF, World Bank and WTO announced
a new "coherence agreement" in which they pledged to
coordinate future activity. It is unclear what this will mean
in practice, but some fear the IMF and World Bank may incorporate
the very particularized elements of WTO agreements into their
4. How does the IMF set its policies?
The IMF is governed primarily by an executive board that consists
of representatives of the IMF member countries, with a heavier
weighting to countries that provide more money to the Fund. The
executive board sets broad policy and approves loans. The agency's
bureaucracy handles the massive, day-to-day operations and exerts
a strong, de facto influence over policy.
Voting at the IMF is weighted, with bigger contributing countries
having proportionally more say. The United States, the largest
shareholder at the IMF, maintains veto power over major decisions
at the Fund. In practice, the U.S. Treasury Department exercises
overwhelming control at the IMF; the New York Times has referred
to the Fund as a "proxy for the United States."
5. How open is the IMF to outside scrutiny and participation
Although "transparency" (openness) is a favorite
buzzword in development circles, the IMF is extremely secretive
in its operations. In recent years, as criticism of the IMF's
secrecy has grown in developing countries, the IMF has made "Policy
Framework Papers"-the documents establishing the parameters
of structural adjustment programs in specific countries - and
some other important materials public. These are all papers that
a few years ago the IMF said it could not make public out of respect
for the sovereignty of the countries they affected. Meanwhile,
other critical documents remain secret.
Although it assumes a dominating role in economies undergoing
structural adjustment-with IMF officials often posted in national
finance departments - precise IMF demands are typically concealed
from the affected populations.
As a general matter, the IMF does not seek public input into
the policies it imposes on borrowing countries through structural
6. Given that the U.S. taxpayer kicks in a great deal for
the IMF, what kind of oversight of the IMF is provided by Congress
or other agencies?
The IMF is generally viewed as following a line set by the
U S. Treasury Department.
Congressional efforts to influence policy at the Fund have
generally failed. Congress has directed the U.S. executive director
to the IMF to use "voice and vote" to push for certain
reforms, but this has had virtually no effect on IMF policy. Almost
all decisions at the IMF are reached by consensus, and recorded
votes rarely taken; the U.S. Executive Director to the IMF, Karen
Lissakers, told a Congressional committee in 1998 that the Fund's
executive board had taken votes on approximately a dozen out of
2,000 decisions taken during her tenure.
The only time Congress has affected IMF policy is when it
refused to provide requested funds.
7. What is structural adjustment?
Structural adjustment is a policy package in line with what
is often called "neoliberalism," a far-reaching version
of the "free trade" agenda. In many ways, it is a harsh
version of Newt Gingrich's Contract with America.
Key structural adjustment measures include: privatizing government-owned
enterprises and government-provided services, slashing government
spending, orienting economies to promote exports, trade and investment
liberalization, higher interest rates, eliminating subsidies on
consumer items such as foods, fuel and medicines and tax increases.
The basic idea of these policies is to shrink the size and
role of government, rely on market forces to distribute resources
and services and integrate poor countries into the global economy.
8. How do multinational corporations benefit from IMF policies?
Structural adjustment policies open up developing countries
to foreign investors on terms most favorable to multinational
corporations. They require countries to remove barriers to foreign
investment, and push countries to orient their economies to producing
exports-typically produced by or sold to multinationals. State-owned
enterprises privatized under structural adjustment are frequently
sold to multinationals-often at bargain-basement prices.
IMF-orchestrated bailouts of countries-assistance to countries
whose exchanges rates are plummeting-provide money primarily so
that developing countries can pay off their foreign creditors
(including private banks). Many critics view these bailouts effectively
as bailouts of the creditors who don't absorb the cost of risky
loans gone bad.
This particular kind of corporate welfare can have especially
pernicious effects, since it may encourage excessively risky lending
by bankers and others. If they know they have free, de facto insurance
from the IMF, they can make very risky loans at high interest
rates without fear of paying for failures.
9. What is the IMF's approach to helping countries that are
deeply in debt.?
The IMF program for helping poor countries that are deeply
in debt was, until recently, called the Enhanced Structural Adjustment
Facility (ESAF). Last year, under fire for a program poorly run,
the Fund changed the name to Poverty Reduction and Growth Facility
(PRGF). This program is operated in conjunction with the World
Bank's Heavily Indebted Poor Country (HIPC) Initiative.
The purpose of PRGF/HIPC is to provide some debt relief-that
is, to cancel part of the debts-for poor countries that have no
hope of paying back their foreign debt and for whom debt payments
are draining their economy.
However, the debt relief afforded by PRGF/HIPC is very modest.
Under the plan, for example, many countries find that while the
absolute amount of their debt may decline, the amounts they actually
pay are only minimally affected. That is because many poor countries
cannot meet their debt payments, and, often with the agreement
of their creditors, only pay a portion of what they formally owe.
Compounding the problem, the price of receiving debt relief
under the PRGF/HIPC program is implementing a carefully supervised
structural adjustment program for three years (previously six
10. What would the alternative be ?
An alternative would call for immediate debt cancellation
of the debts of the poorest countries and, at least, far-reaching
debt cancellation for other developing countries. For less poor
countries, debt cancellation could focus on "odious"
debt-debt incurred by dictators, military regimes or for boondoggle
projects pushed by foreign interests.
This cancellation would come without any structural adjustment
conditions. Many developing country economic justice advocates
urge instead conditions related to the establishment of democracy,
or a commitment to devote resources to meeting the basic needs
of the poorest segments of society.
In the case of the poorest nations, debts could be canceled
by drawing on the existing resources of the IMF and World Bank-that
is, without rich countries providing these institutions with any
Beyond approaches to debt cancellation, many in the developing
world are also calling for an alternative approach to economic
development. One of the demands arising from grassroots movements
is respect for a diversity of national approaches, so there would
be no "blueprint" for development to parallel the IMF's
cookie-cutter structural adjustment policies. But there is growing
agreement about the importance of a number of principles: national
food security, land reform, devoting attention to production for
local needs, an emphasis on egalitarian wealth distribution, emphasizing
smaller enterprises, empowering workers and respecting worker
rights, imposing regulations on foreign capital to limit exposure
to volatile international capital markets, involving "civil
society" in development planning, and preserving a substantial
role for government in planning, regulating and carrying out economic
11. What are the economic and social impacts of structural
Structural adjustment has been successful at its intended
efforts to diminish the scope of government and to integrate developing
countries into the global economy.
It has failed by many other measures. By and large, countries
undergoing structural adjustment have not experienced economic
growth, even in the medium term.
Those developing countries that have experienced the greatest
economic successes in recent decades have violated many of the
central precepts of structural adjustment. They have protected
certain parts of their economy, and they have maintained an active
governmental role in economic planning.
An external review of ESAF sponsored by the IMF illustrated
the basic failure of structural adjustment. Countries undergoing
ESAF-sponsored structural adjustment experienced stagnating growth
rates and saw their foreign debt nearly double-dramatic evidence
of failure, since reducing foreign debt is one of ESAF's ostensible
In the two regions with the most structural adjustment experience,
per capital income has stagnated (Latin America) or collapsed
(Africa, where per capita income dropped more than 20 percent
between 1980 and 1997).
The emphasis on exports tends to be socially disruptive, especially
in rural areas. Poor subsistence farmers frequently find their
economic activity described as nonproductive, and experience land
pressures from expanding agribusinesses, timber companies and
mines. Pushed off their land, they frequently join the ranks of
the urban unemployed, or move onto previously unsettled, and frequently
environmentally fragile, lands.
Structural adjustment has generally contributed to rising
income and wealth inequality in the developing world, a fact tacitly
acknowledged by both recently retired IMF Managing Director Michel
Camdessus and World Bank President James Wolfensohn.
12. How did the Asian financial crisis of 1997 start and what
was the IMF's response?
The Asian meltdown was caused in large part by South Korea,
Thailand, the Philippines, Malaysia and Indonesia's heavy reliance
on short-term foreign loans. When it became apparent that private
enterprises in those nations would not be able to meet their payment
obligations, international currency markets panicked. Currency
traders sought to convert their Asian money into dollars, and
the Asian currencies plummeted. That made it harder for the Asian
countries to pay their loans, and it made imports suddenly very
There were other underlying causes for the financial crisis,
including over-investment in real estate and other speculative
and unnecessary ventures, but almost everyone agrees the currency
crash and financial disaster were vastly disproportionate to the
weaknesses in the Asian economies.
The IMF treated the Asian financial crisis like other situations
where countries could not meet their balance of payment obligations.
The Fund made loan arrangements to enable countries to meet foreign
debt payments (largely to private banks in these cases) on the
condition that the recipient countries adopt structural adjustment
But the Asian crisis differed from the normal situation of
countries with difficulties paying off foreign loans. For example,
the Asian governments were generally not running budget deficits.
Yet the Fund instructed them to cut spending-a recessionary policy
that deepened the economic slowdown.
The Fund failed to manage an orderly roll over of short-term
loans to long-term loans, which was most needed; and it forced
governments, including in South Korea and Indonesia to guarantee
private debts owed to foreign creditors.
In retrospect, even the IMF would admit that it made things
worse in Asia.
Malaysia stood out as a country that refused IMF assistance
and advice. Instead of further opening its economy, Malaysia imposed
capital controls, in an effort to eliminate speculative trading
in its currency While the IMF mocked this approach when adopted,
the Fund later admitted that it succeeded. Malaysia generally
suffered less severe economic problems than the other countries
embroiled in the Asian financial crisis.
13. Has the 1997-1998 global financial crisis led to a shift
in the debate surrounding structural adjustment policies in the
The IMF's structural adjustment prescriptions for countries
suffering through the Asian financial crisis were roundly denounced,
including by many conservative and mainstream economists and opinion
makers. The widespread criticism of the Fund undermined its political
The IMF response has been to make some minor concessions in
making its documents more publicly available, limiting its demands
that countries liberalize their capital markets (including by
allowing unlimited trade in their currency, and permitting foreign
investors to invest in domestic stocks and bonds without restriction),
and increasing its rhetorical commitment to paying attention to
poverty in its structural adjustment programs.
14. What were the consequences of the Asian financial crisis
in countries like Thailand and Indonesia? Did IMF policies help
The financial crisis led to massive human suffering.
In South Korea, a country whose income approaches European
levels, unemployment skyrocketed from approximately 3 percent
to 10 percent. "IMF suicides" became common among workers
who lost their jobs and dignity.
In Indonesia, the worst hit country, poverty rates rose from
an official level of 11 percent before the crisis to 40 to 60
percent in varying estimates. GDP declined by 15 percent m one
most populous island, were suffering from malnutrition.
At one point, the food shortage became so severe that then-President
B.J. Habibie implored citizens to fast twice a week. Many had
IMF policies exacerbated the economic meltdown in countries
hit by the Asian financial crisis. Mandated reductions in government
spending worsened the Asian nation's recessions and depressions.
And the forced elimination of price controls and subsidies for
the poor imposed enormous costs of the lowest income stratas.
In Indonesia, food and gasoline prices rose 25 to 75 percent overnight
or in the course of a few days.
15. What has been the IMF's role in Russia? Russia in the
1990s has witnessed a peacetime economic contraction of unprecedented
scale. Many believe much of the blame for the social and economic
catastrophe rests with the IMF, which has had a central role in
designing and supervising Russia's economic policy since 1992.
The number of Russians in poverty has risen from 2 million to
60 million since the IMF came to post-Communist Russia. Male life
expectancy has dropped sharply from 65 years to 57. Economic output
is down by at least 40 percent. The IMF's "shock therapy"-sudden
and intense structural adjustment-helped bring about this disaster.
"In retrospect, it's hard to see what could have been done
wrong that wasn't," Mark Weisbrot of the Center for Economic
and Policy Research told a Congressional committee in late 199S.
"First there was an immediate de-control of prices. Given
the monopoly structure of the economy, as well as the large amount
of cash savings accumulated by Russian households, inflation soared
520 percent in the first three months. Millions of people saw
their savings and pensions reduced to crumbs." In September
1998, UNICEF reported that more than Then the IMF and Russian
policymakers compounded half the children under two years old
in Java, Indonesia's their mistakes, Weisbrot explained. "In
order to push inflation down, the authorities slammed on the monetary
and fiscal brakes, bringing about a depression. Privatization
was carried out in a way that enriched a small class of people,
while the average person's income fell by about half within four
Meanwhile, Russia kept its economy functioning with an influx
of foreign funds, lent at astronomically high interest rates because
of the strong possibility of default. In 1998, with the Asian
crisis still unfolding and with Russian default seemingly near,
the IMF agreed to a $23 billion loan package to Russia, seeking
to maintain the ruble's overvalued exchange rate. An initial $4.8
billion portion of the loan left the country immediately-some
used to pay off foreign lenders, much of it stolen by Russian
Soon after that fiasco, the ruble collapsed-with none of the
horrible consequences predicted.
For the IMF, the prospect of Russia deciding to continue not
to repay loans was extremely worrisome. To avert this problem,
the Fund continued its loan program, but its loans to Russia don't
actually go to Russia; all IMF money disbursed to Russia is held
at the IMF-and used to pay off prior IMF loans to Russia.
Does the IMF think it made fundamental mistakes in Russia?
No. From the IMF's perspective, the problem has been not enough
IMF-style "reform." Here's how former IMF Managing Director
Michel Camdessus put it in September 1999: "[Russia's economic]
shortcomings represent not so much the failure of reform as the
effects of 70 years of central planning and the incomplete implementation
of reform policies-itself a result of a lack of domestic political
consensus on reform."
16. How do IMF programs affect workers?
As outgoing World Bank economist Joseph Stiglitz says, the
IMF views labor as just another commodity. One of the IMF's emphases
has been on promoting "labor flexibility" -meaning making
it easier for workers to be fired. The Fund has supported regulatory
changes throughout the developing world to remove restrictions
on government and private employers firing or laying off workers.
The IMF has actively promoted government downsizing, even
though in many countries the government is the major employer
and there are few prospects for alternative employment.
The IMF has also viewed many worker benefits as too costly
(if they are provided by the government) or too inefficient (if
required of private employers). It has urged major scaling back
of government pension programs throughout the world. And it has
even called for the roll back of minimum wages in countries like
Respect for workers' right to organize is not included in
he IMF's structural adjustment policy prescriptions.
17. To what extent do IMF and World Bank structural adjustment
lending practices incorporate environmental considerations? How
do structural adjustment policies impact the environment?
"The IMF claims to defer to the World Bank on environmental
matters, but promotes export-led development that has major environmental
impacts without asking the World Bank for any formal assessment
of the environmental implications of its approach," explains
Friends of the Earth in a recent report, "IMF: Selling the
"The World Bank has failed to provide environmental guidance
to the IMF, and is even delinquent in assessing the environmental
impacts of its own structural adjustment loans," Friends
of the Earth concludes. "A recent internal World Bank study
found that fewer than 20 percent of World Bank adjustment loans
included any environmental assessment. "
But the failure to consider environmental implications does
not mean there aren't any. Here is how Friends of the Earth summarizes
the effects of structural adjustment on the environment:
"The IMF's economic policies affect the environment in
various ways. One major goal of structural adjustment programs
(SAPs) and stabilization programs is to generate foreign exchange
through a positive trade balance. To meet the IMF's ambitious
targets for currency reserves and trade balance, countries must
quickly generate foreign exchange, often turning to their natural
resource base. Countries often over-exploit their resources through
unsustainable forestry, mining and agricultural practices that
generate pollution and environmental destruction, and ultimately
threaten future exchange earnings."
"[E]xports of natural resources have increased at astonishing
rates in many countries under IMF adjustment programs, with no
consideration of the environmental sustainability of this approach.
Furthermore, the IMF's policies often promote price-sensitive
raw resource exports, rather than finished products. Finished
products would capture more added value, employ more people in
different enterprises, help diversify the economy and disseminate
more know-how. "
"Structural adjustment and stabilization also aim to
generate positive government budget balances. In the effort to
rapidly trim budget deficits, governments are forced to make choices,
and inevitably, the environment loses. Decreased spending weakens
government ability to enforce environmental laws and diminishes
efforts to promote conservation. In addition, governments are
told to increase private investment and to reduce the role of
the state in favor of private sector development. Budget priorities
are often directed toward business promotion, creating a further
strain on cash-strapped environmental enforcement agencies....
Governments may also relax environmental regulation to meet SAP
[structural adjustment program] objectives of increasing foreign
investment, as occurred in the case of the Philippines."
As one example of how IMF-mandated budget cuts can hurt the
environment, Friends of the Earth points to the Brazilian Amazon
forest: "Because of IMF budget restrictions, as of July 1999,
funding for the enforcement of environmental regulations and supervision
programs was reduced by over 50 percent.... The Brazilian Institute
for the Environment and Renewable Natural Resources, responsible
for implementing Brazil's environmental and conservation protection
programs, had expenditures that totaled only 16.28 percent of
18. What is the Meltzer Commission and what d id it say?
The Meltzer Commission, formally known as the International
Financial Advisory Commission to the U.S. Congress, was created
by the 1998 U.S. legislation that allocated an additional $18
billion to the IMF. The Commission was charged with reviewing
the operations of the IMF and World Bank, and making recommendations
for changes in the international financial institutions.
The Commission, which included both Republican and Democratic
appointees, unanimously agreed on two points: the debts of the
41 most indebted and impoverished countries should be canceled;
and the IMF should get out of the business of long-term development
Commission members split over how severely the IMF's functions
should be limited (with most Democratic members aiming to preserve
a broader role for the IMF) and over proposed changes in the World
Bank. Eight of the eleven Commission members supported a proposal
to change the World Bank to the World Development Agency, to eliminate
the Bank's lending function and replace Bank loans with grants,
and generally to shrink the size of the Bank.
19. Given the international nature of markets, does structural
adjustment indirectly affect the U.S. economy even if the United
States is not directly forced to structure our economy in response
to IMF ,guidelines? How?
Politically, structural adjustment and trickle-down economics
(broadly, the set of policies often described as "neoliberal")
in richer countries like the United States reinforce one another.
Just as structural adjustment carries the U.S. system of privatized,
fee-for-service health care to the Third World, those seeking
to privatize the U.S. social security system point to Chile's
social security system as a model.
More concretely, structural adjustment forces developing countries
to orient their economies to produce exports. The primary target
for those exports is the United States, and secondarily other
rich countries. The IMF and World Bank economic programs do not
support regional trade.
The IMF model of unregulated global economic integration places
countries in competition with each other to produce goods with
the lowest possible wage bill. That puts downward pressure on
wages in all countries, including in richer countries like the
United States (particularly in markets like steel and textiles
that are produced in both rich and poor countries).
20. What should Congress do to reform/abolish the IMF/World
Bank? What could the IMF do to promote sustainable development?
Were the IMF actually concerned about sustainable development,
there are various policy measures it could promote. Friends of
the Earth has called on the IMF to emphasize ecological taxes
rather than value-added taxes, among other measures.
Some organizations, including some members of the Jubilee
2000 coalition in the United States, have called on the IMF to
pay more attention to poverty and the effect of its lending on
poverty. They place hope in the IMF's newly stated commitment
to address poverty in its lending practices, and hope that the
renaming of the Economic Structural Adjustment Facility-now the
Poverty Reduction and Growth Facility-will signal more than just
a name change.
Others, however, believe the IMF is irredeemable. (This is
the Multinational Monitor editorial position.) They believe the
emphasis should not be on pushing the IMF to adopt better policies,
but on finding ways to shrink the IMF's influence and power, so
it has less say over developing country policies.
This group is loathe to support more funding for the IMF,
even funding that is supposed to be allocated for debt relief.
Instead, they say, the IMF should draw on its existing resources
to enact immediate debt cancellation for the poorest countries.
And, if the Fund is to continue at all, they call on IMF lending
to be delinked from structural adjustment conditions.
There is growing support for the idea of limiting the IMF's
reach. Even U.S. Treasury Secretary Lawrence Summers has urged
that the Fund be restructured so that it cease engaging in long-term
development lending-the sort of lending done to the poorest countries,
invariably with structural adjustment conditions attached. The
Meltzer Commission echoed this position, as has the head of the
German central bank.
Structural Adjustment page