Establishment objective of International Monetary Fund and its criticism

Establishment objective of International Monetary Fund and its criticism

International Monetary Fund

A landmark in the history of world economic cooperation is the creation of the International Monetary Fund, briefly called IMF. The IMF was organized in 1946 and commenced operations in March 1947.

The International Monetary Fund (IMF) is a worldwide organization that plans to support global economic development and economic constancy, support international trade, and diminish poverty.

The major functions of the IMF:

  1. It functions as a short-term credit institution.
  2. It provides machinery for the orderly adjustments of exchange rates.
  3. It is a reservoir of the currencies of all the member countries from which a borrower -nation can borrow the currency of other nations.
  4. It is a sort of lending institution in foreign exchange. However, it grants loans for financing current transactions only and not capital transactions.
  5. It also provides machinery for altering sometimes the par value of the currency of a member country. In this way, it tries to provide for an orderly adjustment of exchange rates, which will improve the long-term balance of payments position of member countries.
  6. It also provides machinery for international consultations.

Criticism of International Monetary Fund –

(1) Conditions of Loans

The first criticism is about the conditions of the loans. The IMF makes the loan conditional on following specific economic policies. On giving loans to countries, the IMF makes the loan conditional on the implementation of certain economic policies. A country has to fulfill certain conditions before the IMF loans the money. These policies tend to involve:

  • Reducing government borrowing – Higher taxes and lower spending,
  • Higher interest rates to stabilize the currency.
  • Allow failing firms to go bankrupt.
  • Structural adjustment, Privatization, deregulation, reducing corruption and bureaucracy.

(2) Neo-Liberal Criticisms

There is also criticism of neo-liberal policies such as privatization. Arguably these free-market policies were not always suitable for the situation of the country. For example, Privatization can create lead to the creation of private monopolies who exploit consumers.

(3) Inflationary devaluations

The IMF has also been criticized that they allow inflationary devaluations. Devaluation is a decline in the value of a currency. This leads to a more competitive export and a more expensive import. Inflation is an increase in the general price level. The devaluation could cause inflation for three reasons.

(4) Free market criticisms of IMF

As well as being criticized for implementing ‘free market reforms’ Others criticize the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention.

(5) Lack of transparency and involvement

The IMF has been criticized for imposing policy with little or no consultation with the affected countries.

The goals of the IMF are the following:

  1. To promote international monetary cooperation;
  2. To facilitate the expansion and balanced growth of international trade and contribute thereby to the promotion and maintenance of high levels of employment and real income;
  3. To promote exchange stability, maintain orderly exchange arrangements among member states, and avoid competitive currency depreciation;
  4. To assist in establishing a multilateral system of payments of current transactions among members and in eliminating foreign-exchange restrictions that hamper world trade; and
  5. To alleviate serious disequilibrium in the international balance of payments of members by making the resources of the fund available under adequate safeguards, so as to prevent the members from resorting to measures that endanger national or international prosperity.