International Monetary Fund 101

Multinational Monitor magazine, January / February 1998

While there has been widespread condemnation of the International Monetary Fund (IMF) and World Bank among sustainable development proponents for more than two decades, in the United States only Friends of the Earth has maintained a consistent focus on the IMF. Multinational Monitor turned to Friends of the Earth for assistance in describing the nuts-and-bolts of the IMF and reviewing the experience of the poor countries of the world with the Fund.

Multinational Monitor: What is the IMF? What does it do?

Friends of the Earth: The International Monetary Fund (IMF), along with the World Bank, was created in 1944. While the World Bank was supposed to spearhead post-war reconstruction, the IMF was created as the "guardian" of the global economy, overseeing countries' economic policies and ensuring that countries' exchange rates were staying within their set values. (At that time, the world was following the gold standard.)

When the gold standard was suspended in 1971, the IMF lost one of its core missions. Since then, the IMF has increasingly focused on providing financial assistance to troubled economies. The oil price shocks and the ensuing debt crises of the 1980s allowed the IMF to get in the business of development. It still continues its unsuccessful development loans to the poorest countries. Most recently, the IMF has been deeply involved in trying to bail out the Asian economies.

MM: Why is the Clinton Administration askin,g for more money for the IMF?

FOE: The International Monetary Fund (IMF) is asking governments from around the world to make sizable additions to the IMF's resources. The United States is being asked to contribute about $18 billion for this IMF capital expansion.

About $14.5 billion of the total is for a quota increase.

Congress is also being asked to provide a $3.5 billion line of credit to the IMF. Known as the New Arrangements to Borrow (NAB), this would double the approximately $25 billion the IMF already has in emergency lines of credit established with the world's richest countries. A major impetus behind this doubling was the 1995 bailout of Mexico. The United States already has a $6 billion line of credit established with the IMF.

MM: What is a quota within the context of the IMF?

FOE The quota is a member's subscription in the IMF, or what a country must pay to "belong" to the IMF. A member must pay its subscription, or quota, in full to the IMF; up to 25 percent must be paid in reserve assets as specified by the Fund (SDRs, the Fund's currency, or usable currencies like dollars, deutsche mark, pounds, yen etc. ). IMF quotas currently total SDR 144.9 billion.

MM: Why are quotas important to the IMF and to member countries?

FOE: Quotas are the IMF's main source of liquidity and are the central resource that enables the IMF to carry out its mandate (balance of payments support and exchange rate stabilization).

For countries, quotas are important because they determine a member's voting power in the IMF, which is based on one vote for each SDR 100,000 of its quota plus the 250 basic votes each member has. The US has the largest quota, SDR 26.5 billion, which is about an 18 percent share in the total quotas. The G-7 countries with individual votes in the IMF (as opposed to blocs of countries voting as one) are the United States, Germany, Japan, France and Great Britain, and they have a combined quota share of 38 percent. Russia, China and Saudi Arabia also have individual votes.

The quota also helps the IMF calculate SDR allocations. SDRs and the quota determine, in all but exceptional circumstances, a member's maximum borrowing access to the IMF's financial resources. A member that proves it has a balance of payments need may withdraw up to the full amount of its reserve tranche, the 25 percent of its subscription that the country paid in reserve assets. It must then transfer to the IMF an equal amount in Its currency.

MM: What discussion is occurring about a quota increase?

FOE: The IMF Executive Board recently agreed to increase the IMF's quotas by 45 percent, which translates to a quota increase of about $90 billion. The U.S. share of this increase is approximately $14.5 billion. The last quota increase, a doubling of quotas, was agreed to in 1990. The U.S. appropriated its share in 1992. Once the IMF Board agrees to an increase, member governments have two years to seek the money from their legislatures.

MM: Why does the IMF want a quota increase?

FOE: Quotas are the IMF's main source of liquidity. IMF officials and government finance ministers contend that the growing size and volatility of international capital flows merit a quota increase so that the IMF will supposedly be better equipped to influence the market. However, with $1.4 trillion being traded in the currency markets every day, a quota increase will not increase the IMF's ability to influence the global economy through monetary measures. The IMF also wants a quota increase in order to expand its structural adjustment programs in developing countries.

The IMF is also using the Asian financial crisis as justification for a quota increase. The reality, however, is that since the quota is a country's "membership tee" in the IMF, quotas largely belong to individual countries and do not really finance emergency bailouts. A country can borrow against its quota, but the massive amounts of money required for bailouts far exceed a country's quota allotment. For example, Korea has borrowed the equivalent of almost 2,000 percent of its quota. Bailout money must largely be drawn from other sources so that other countries' quotas are not compromised. Failure to approve this next quota increase therefore does not mean the IMF will have no money for bailouts.

MM: What is the danger of a quota increase?

FOE: A quota increase for the IMF means that the IMF has more resources to extend its loans and their harmful conditions to more countries. The IMF can use its leverage over cash-strapped developing countries to force them to open up their economies to powerful Northern multinational corporations, even before a country has built up its domestic economy If the IMF gets a quota increase, it has even more money to hold over more countries.

MM: If the United States has such a large voting share, why can't the United States work to force changes from within?

FOE: Congress has directed the U.S. executive director to use "voice and vote" to push for certain reforms at the IMF. In principle, the United States can use its large voting share to push change. The practice at the IMF however, is to operate by consensus with no recorded votes. With a system of consensus, proposals are only adopted if everyone agrees to them and votes are not forced on controversial issues. Deals are made in the hall and reform proposals are essentially weakened until and if everyone can agree to them.

This practice means that it is difficult to determine whether the U.S. executive director is pushing for Congress' directives and interests. It is even possible that behind the closed doors, an executive director is undermining his or her marching orders. The lack of recorded voting and secret Board discussions at the IMF make it impossible for outsiders to determine a particular executive director's position. This has been a serious impediment to the efficacy of U.S. legislators' efforts to make reform language enforceable.

MM: How much influence does the United States have at the IMF?

FOE: The IMF uses a system of weighted voting power: countries that pay more money into the institution have correspondingly greater share of the total votes at the IMF. As the largest shareholder, the United States has the greatest voting power at about 18 percent. Many of the most important issues at the IMF require an 85 percent majority to pass. The United States therefore has veto power over most of the critical decisions at the IMF.

However, as a multilateral institution, pressure on the IMF must come from many countries. Endorsement of reforms by the U.S. executive director to the IMF is no guarantee that the IMF will implement them.

In fact, the IMF has been extremely resistant to change. It has only been since the 1994 U.S. appropriation to the IMF, which made 75 percent of the appropriation payable only upon certain reforms at the IMF, that the IMF has begun to make changes. Previously, in 1989 and 1992, Congress passed comprehensive reform language for the IMF, but the IMF largely ignored Congress' recommendations.

MM: Doesn't the IMF need more money to address the Asian financial crisis?

FOE: No. The IMF has already conducted its "rescue" operations in Asia with existing resources. The debate over giving the IMF more money is about the IMF's future, not its present.

MM: Well, doesn't the IMF at least need more money to address future crises?

FOE: No, even leaving aside the issue of whether IMF intervention is helpful or harmful.

The IMF itself admits that even after its loans to Thailand, Indonesia and South Korea, it still has about $45 billion left in liquid resources available for loans. Other sources of money are also available. These include:

* General Arrangements to Borrow: The General Arrangements to Borrow is a set of credit lines provided by the world's richest countries to the IMF in the event of a global financial crisis. The IMF can borrow about $25 billion through GAB. The U.S. portion of this is about $6 billion. The Mexican peso crisis or the Asian currency crisis would qualify as events that fit within GAB's financial purpose. GAB was not used for these crises, however.

The proposed $3.5 billion in New Arrangement to Borrow money would be the U.S. contribution to a doubling of existing credit lines. This means that under the NAB, the IMF would have access to about $50 billion in emergency credit. The U.S. allotment would be in addition to its already committed $6 billion.

* The private capital market: The IMF also has the ability to borrow from the private capital market if it needs resources. The IMF may borrow any amount the market wishes to lend.

* Idle gold reserves: The IMF has over 100 million fine ounces of gold reserves, worth about $37 billion.

The IMF members are reluctant to sell gold reserves for a variety of reasons, but the Fund could sell off a portion of its gold, retain proceeds worth the gold's current book value of $5.25 billion and use the profits for a number of purposes, such as debt relief and emergency bailouts.

* Bilateral contributions: The IMF also periodically requests bilateral contributions from its members for special facilities. The Enhanced Structural Adjustment Facility program, for example, is financed through member government loans and grants to the IMF. These accounts are established separately from regular IMF lending operations and their financing is distinct.

MM: How are the IMF bailout packages in Asia harmful?

FOE: The IMF exacerbates the social misery of financial collapse. It emphasizes low inflation and export growth through tight fiscal and monetary policies, currency devaluation and market deregulation. This recipe depresses wages and encourages rapacious resource exploitation. It also promotes a favorable environment for foreign capital rather than formation of domestic demand, sustainable development and labor rights.

IMF bailout packages are recessionary. Tight monetary policies restrict access to capital for domestic firms. Thus, firms that could weather the downturn with access to short-term capital are faced with bankruptcy. Tight fiscal policy limits the ability of government to protect the poor and to soften the blow of recession to the unemployed. IMF officials, unaccountable to local populations, do not consider these matters.

With certain recession on the horizon, foreign investors continue to withdraw their investments from these countries. When they do, they sell the domestic currency for foreign exchange. All this baht, rupiah and won on the market depresses the price of these currencies. Further currency depreciation requires further bailout funds. Thus, the recessionary bailout plans are counterproductive.

MM: Why do countries go along with IMF reforms if they are so detrimental?

FOE: Indonesia, South Korea and Thailand, on the brink of default, turned to the IMF as a lender of last resort. The IMF takes advantage of this vulnerability to impose requirements, based on rigid economic theory, to which these countries would not otherwise agree. These requirements are essentially the same as those made by the IMF in its structural adjustment loans to poor countries.

MM: How do IMF policies of "structural adjustment" limit the power of governments to serve and protect their citizens?

FOE: Before the International Monetary Fund (IMF) will release funds to developing countries, it requires structural adjustment of their governments and economies.

The IMF pushes the governments of debtor nations to dismantle, or privatize, many state agencies, ostensibly in order to reduce government spending. It also encourages countries to adopt "flexible," or lax, labor and environmental standards.

In order to balance the budget, the IMF typically pushes governments to slash their spending to very low levels, sometimes completely eliminating some government programs. Such spending cuts force governments to hand over crucial government functions, such as health care and education, to the private sector, where services which may have been free or inexpensive are subjected to high charges that often put them out of reach for the poor.

In addition to the privatization of social services, the Fund pushes governments to become more "competitive" by lowering environmental, labor and financial standards. IMF-imposed budget cuts further cripple governments capacity to develop and enforce regulations regarding the environment and social welfare.

The combination of these policies, downsizing or privatizing government agencies and lowering regulatory standards, shrinks the government's capacity to provide essential services and to protect citizens by monitoring labor laws, environmental guidelines and financial regulations.

MM: How does IMF-imposed deregulation hurt the environment?

FOE: IMF-imposed deregulation schemes have serious negative impacts on the environments of developing countries. When the IMF forces countries to reduce government spending, environmental protection, including enforcement of environmental regulations, is one of the first programs to be cut.

Countries undergoing structural adjustment generally relax existing standards in order to encourage private investment, as directed by the IMF. A 1996 study by the World Wildlife Fund found that, in all but one of nine cases reviewed, IMF deregulation forced cuts in natural resource department staffs and budgets and a scaling back of their mandates. Natural environmental considerations were sacrificed for short-term financial gain.

In Guyana, a Friends of the Earth-UK study found that IMF-imposed budget constraints led to low levels of funding for the environment ministry, thereby weakening the government's capacity to enforce existing environmental laws. At the same time, the Fund was encouraging the government to increase timber exports and grant concessions to private companies. Regulations were relaxed and unprecedentedly large concessions were given to private developers. Lax regulations and reduced enforcement led to increased clear cutting and environmental degradation.

In addition, the IMF does not encourage governments to set realistic values on the commodities which they sell on the world market. Despite the fact that natural resources around the world are underpriced-environmental and social costs are not figured into the economic costs of such resources-and despite the fact that many developing countries rely on natural resources as a prime source of revenue, the IMF has never taken explicit action to lessen environmental degradation or to set accurate values on natural resources in its lending programs.

MM: How does deregulation affect workers?

FOE: The International Monetary Fund promotes deregulation of labor markets because it contends that labor markets are overburdened with regulations, creating disincentives for employers to hire more workers. Deregulation tends to empower employers to fire "surplus" workers and use increased profits to enlarge executive salaries and shareholders' dividends. The United Nations Trade and Development Report 1995 concludes that employers use their post-deregulation "flexibility" to shed labor and downsize, rather than add to productive capacity and create jobs.

Deregulation harms the labor force in many ways. One of the most significant impacts is through abolishing minimum wage and collective bargaining laws. In many cases, the Fund encourages countries to foster low wages in order to attract foreign investment. In Haiti, for example, the government has been pressured to exploit its low wage labor and abolish the minimum wage, which in Haiti is $0.11 an hour.

The deregulation of labor standards in these countries is especially devastating to workers because they are not organized, generally are not permitted to organize and are unable to bargain for better working conditions. People end up working longer hours for less pay. Economically, the effect is equally negative; underpaid workers have little purchasing power, further shrinking the economy and preventing the maintenance or establishment of stable small- and medium-sized businesses providing goods and services.

The deregulation of the economy also results in rapid and substantial job loss as public sectors are quickly privatized. In many developing countries, the public sector has in the past provided a great deal of employment. As the IMF forces countries to downsize government agencies, the ranks of the unemployed grow quickly, usually faster than the private sector can absorb them.

IMF, World Bank, Structural Adjustment