1.1 Introduction
The International Monetary Fund (IMF), also known as the Fund, was established in July 1944 as a product of a conference that was held in Bretton Woods (New Hampshire, US) to formulate and implement monetary arrangements, pertaining to exchange rates and international payment mechanisms, for the post-war period. Exchange rate arrangements were the prime focus of the 44 participating countries in view of the damage inflicted on the world economy by competitive devaluation and the extensive use of beggar-thy-neighbour policies in the 1930s. Those policies contributed to the intensification of the Great Depression and led to dwindling international trade. In essence, the primary function of the IMF was set to be the supervision of the Bretton Woods system of fixed but adjustable exchange rates.
In 2012, however, the Fund’s mandate was upgraded to give it more responsibilities encompassing issues that pertain to international macroeconomic and financial stability. This may sound peculiar, given that the Bretton Woods system of fixed but adjustable exchange rates collapsed in 1971 following the announcement by President Richard Nixon of the decision to abolish the convertibility of the dollar into gold, which was one of the main pillars of the system. By 1978, and following years of drifting towards floating, a new international monetary system emerged whereby countries are allowed to adopt the exchange rate systems that they deem suitable for their economies. Hence the extended IMF mandate must have been in place long before 2012—otherwise, the Fund would have had nothing to do in the absence of a system that it was created to supervise. Currently, this is how the IMF describes its responsibilities in the factsheets posted on its website:
The International Monetary Fund, or IMF, promotes international financial stability and monetary cooperation. It also facilitates international trade, promotes employment and sustainable economic growth, and helps to reduce global poverty.
In a way, therefore, the IMF has turned itself into many things, including a financial and macroeconomic advisor, a trade promoter and a development agency. These functions are invariably performed and the underlying responsibilities assumed by other international organisations, including the Bank for International Settlements, the World Trade Organisation (the United Nations Conference on Trade and Development [UNCTAD] before that) and the World Bank.
The objective of this chapter is to present an overview of how the IMF perceives itself, particularly with respect to its responsibilities and accomplishments. We present a description of these responsibilities and accomplishments as portrayed by the IMF—hence it is a portrayal of the IMF at “face value”. We start by examining the origin and growth of the IMF. An account of the international monetary systems in operation before and after the establishment of the IMF is presented in Sect. 1.8.
1.2 Origin and Growth
The 1944 Bretton Woods conference materialised as a result of the work of John Maynard Keynes (then of the British Treasury) and Harry Dexter White, of the US Treasury, on the development of ideas pertaining to the post-war international monetary system. H.D. White believed that the IMF should function like a bank, making sure that borrowers would not default and meet their repayments on time. J.M. Keynes, on the other hand, was in favour of the idea that the IMF would be a cooperative fund upon which member states could draw to maintain economic activity and employment through periodic crises. The view of H.D. White prevailed, eventually leading to the use of conditionality provisions to make sure that borrowing countries repay their debt.
Following negotiations, mainly between British and American officials, a “Joint Statement by Experts on the Establishment of an International Monetary Fund” was published simultaneously in a number of Allied countries on 21 April 1944. In the following month, the US government invited the representatives of 44 countries to participate in a conference that was held in the Mount Washington Hotel in Bretton Woods, New Hampshire, to discuss a framework for a post-war international monetary system. The conference became known as the “Bretton Woods Conference” or, more formally, “the United Nations Monetary and Financial Conference”. A total of 730 delegates participated in the conference over the period 1–22 July 1944. Schuler and Bernkopf (2014) provide a “nearly complete list” of the people who attended the conference by collating published documents containing lists of participants.
The main products of the Bretton Woods conference were (i) articles of agreement for the establishment of the IMF to supervise exchange rate arrangements; (ii) articles of agreement for the establishment of the International Bank for Reconstruction and Development (IBRD), which subsequently became the World Bank, to supervise post-war reconstruction and foster economic development; and (iii) other recommendations and thoughts pertaining to international economic cooperation. The IMF agreement comprised the following components: (i) an exchange rate system of fixed but adjustable exchange rates whereby adjustment is resorted to only to correct a “fundamental disequilibrium”; (ii) currency convertibility for the purpose of settling current account transactions; and (iii) subscription to the IMF’s capital (the quota system). The articles of agreement for the IMF signed at Bretton Woods did not come into force until its ratification by countries commanding at least 80% of capital subscriptions—that threshold was reached on 27 December 1945 with the participation of 29 countries.
The IMF was organised formally in a meeting held in Savannah, Georgia, during the period 8–18 March 1946. By the end of 1946 the IMF had grown to 39 members, and on 1 March 1947, the Fund began its financial operations when France became the first borrower on 8 May of that year. Because of the damage inflicted on Europe in World War II, the Bretton Woods agreement allowed for inconvertibility of the currencies of European countries while they were rebuilding their economies. It was not until the late 1950s that European currencies became convertible again. The Japanese yen (JPY) did not become convertible until the early 1960s.
The IMF’s influence was enhanced by the growth of membership as more and more countries joined the Fund following their independence from colonial powers. It is noteworthy, however, that not all member countries of the IMF are sovereign states, in the sense of being members of the United Nations (UN). Examples are non-sovereign regions that are officially under the sovereignty of full UN member states, such as Aruba, Curaçao, Hong Kong and Macau. Former members include Cuba (left in 1964) and Taiwan, which in 1980 was replaced as a member of the UN by the People’s Republic of China. However, the IMF recognises the “Taiwan Province of China”, at least for statistical purposes. Apart from Cuba, other UN members that are not members of the IMF include Andorra, Liechtenstein, Monaco and North Korea. The former Czechoslovakia was expelled in 1954 for failing to provide the data required by the IMF, which is a condition of membership, but it was readmitted in 1990 following the collapse of the Soviet Union. Poland withdrew from the IMF in 1950 but resumed membership in 1986.
To qualify for IMF membership, a country must (i) make periodic membership payments towards their quotas, (ii) refrain from currency restrictions unless granted IMF permission, (iii) abide by the code of conduct in the IMF articles of agreement and (iv) provide national economic data and information. During the period between 1945 and 1971, when the Bretton Woods system was in operation, member countries agreed to maintain their exchange rates at levels that could be adjusted only to correct a “fundamental disequilibrium” in the balance of payments, and only with the IMF’s approval. According to the IMF, the benefits of membership include (i) access to information on the economic policies of all member countries; (ii) the opportunity to influence other members’ economic policies; (iii) technical assistance in banking, fiscal affairs and exchange matters; (iv) financial support for countries experiencing payment difficulties; and (v) increased opportunities for trade and investment (see, e.g., https://www.imf.org/external/np/exr/center/mm/eng/mm_bnfts.htm).
1.3 Surveillance
Surveillance is a formal system used by the IMF to monitor economic policies and indicators on national, regional and global levels, with the objective of maintaining stability and avoiding crises. By monitoring economic and financial developments, the IMF is in a position to provide advice to member countries and promote policies. According to the IMF’s website, the Fund supports policies that “foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards”. Surveillance is believed to be important for the purpose of “identifying stability and growth risks that may require remedial policy adjustments”. The IMF describes “vigilant monitoring” as “critical” because “the problems or policies of one country can affect many others”.
The function of surveillance involves annual visits to member countries to enable the IMF staff to meet government and central bank officials for the purpose of conducting discussions about exchange rates, monetary policy, fiscal policy and regulatory policy, as well as “structural reforms”. The visits also involve meetings with members of the legislature and representatives from the business community, labour unions and civil society. The results of the discussions are presented in a report to the Executive Board, which subsequently transmits the findings and recommendations to the country in question as part of what is known as “Article IV consultation”. The country may issue a press release summarising the analysis and recommendations coming out of the exercise.
A product of the function of surveillance is a set of reports, including World Economic Outlook, Global Financial Stability Report, Fiscal Monitor and External Sector Report, as well as a series of regional economic outlooks. The World Economic Outlook provides analysis of the global economy and its growth prospects, dealing with issues such as the macroeconomic effects of global financial turmoil and the potential for global spillovers. The Global Financial Stability Report monitors financial imbalances and vulnerabilities that pose potential risks to financial stability. The Fiscal Monitor updates medium-term fiscal projections and assesses the state of public finance...