Rethinking the IMF: Considerations for Economic Reform
Introduction
Towards the end of World War II, world leaders gathered in New Hampshire to take part in the United Nations Monetary and Financial Conference in 1944, with the aim of discussing what a new world economic order could look like, which subsequently resulted in the establishment of the Bretton Woods system.1 Primary objectives included hindering competitive devaluations and strengthening economic development.2 The gold standard was also used to create a fixed currency exchange rate, which was abandoned in 1971.3 As such, this was then considered “the first international economic order” of its kind at the time.4
Notably, the Bretton Woods system established two key institutions: the International Monetary Fund (IMF) and the World Bank (WB) Group.5 While both were launched as intergovernmental organizations,6 the WB was tasked with financing economic development in specific and the IMF’s goal was to manage the global monetary system itself, ensuring an expansion in trade and the enhancement of living standards globally.7 However, the IMF’s historical roots, shaped by the power imbalances of its founding members, have led to a complex dynamic where the institution has often, and to this day, reflected the interests and policy priorities of the most powerful economies at the expense of developing nations.
More recently, there have been increased calls for reforming the IMF. In May 2023, on the sidelines of the Annual Meeting of the African Development Bank Group, the Africa High-Level Working Group on the Global Financial Architecture called for altering the allocation of the IMF’s international reserve asset known as the Special Drawing Rights (SDR) to ensure more liquidity is accessible for developing countries.8 Similarly, last year’s G20 Leaders’ Declaration indicated the importance of reforming the organization’s governance system.9 Notably, there were also discussions under India’s G20 Presidency to amend the IMF’s quota system – which governs the voting power of each member state based on the capital contribution the country makes to the organization.10 Introducing necessary structural changes to key global governance institutions, including the IMF, has also become a key priority this year for Brazil’s Presidency of the G20.11
Such calls underscore a growing consensus on the need to address some of the IMF’s core issues. This Issue Brief will examine the problematic foundational makeup of the IMF, looking more closely at its current quota system, which grants disproportionate influence to advanced economies. It will also look into the imposition of one-size-fits all conditional loans that often harm the Global South, in addition to the inequitable allocation of the SDR. These are all points of contention that highlight the urgent need to ensure a more equitable international monetary system that represents the interests and needs of all member countries, particularly those who have historically been marginalized within the global financial architecture.
Background
To better understand the early influences that shaped the making of the IMF, it is important to dissect the political, ideological, and economic background of its creation. Until the 19th century and early 20th century, the international political realm – which included “questions of religion, dynastic succession, and constitutional matters” – took priority over economic governance issues.12 Although trade agreements were inked in the 19th century, tariffs were still seen as “strictly domestic policies.”13 During the early 20th century, it was generally perceived that states that allowed other entities to intervene in their fiscal system were no longer considered “full state[s]” – rather, they were “quasi-sovereign or semi-colonized polit[ies].”14 One of the reasons that the United States refused to join the League of Nations in 1920 was out of fear of intervention in the country’s tariff policies.15,16 Similarly in the Paris Peace Conference in late 1918, the great powers did not prioritize discussions about international economics.17 This was despite the financial turbulence that followed after World War I (WWI) in 1918.18
With the absence of any “clear guidance or any institutional check” on global economic policies, countries started to implement competitive devaluations and harsh tariff practices as immediate solutions for their economic challenges.19 This has resulted in an international scene that was characterized by protectionism,20 where the countries restricted international trade to guard their domestic industries against foreign competition.21 The system was also characterized by “beggar-thy-neighbor devaluations,”22 where with the aim of having an international edge against rivaling economies, countries started to devaluate their currencies, and accordingly, shield their domestic economies by expanding exports and decreasing imports.23 Such practices harmed international trade and led to unstable exchange rates. Additionally, the Great Depression in the late 1920s amplified the need for an intergovernmental agency with the required influence to help countries correct their balance of payments.24
This economic context guided the thinking of the Head of the British delegation at the Bretton Woods Conference, John Keynes, and the Head of the US delegation, Harry White – among other scholars who were dissatisfied with the state of international finance in the 1920s and 1930s, including Eugene Staley and Herbert Feiss.25 Keynes and White saw the need for a bold arrangement that would change current governmental practices. In 1942, two years before the Bretton Woods Conference, Keynes mentioned in his documents that there was a necessity to create an “International Clearing Union” that would reduce the states’ protectionist policies, which resulted from their need to protect their unbalanced foreign payments.26 Similarly, White believed that the countries’ protectionist policies for two decades would create a significant challenge to trade development, and thus, an “international monetary fund” would allow these countries to “economize on their gold reserves” and, thus, avoid resorting to trade and payment barriers.27
As global economic affairs took center stage at the Bretton Woods Conference,28 with their respective proposals, Keynes and White were able to formulate the conceptualization of the IMF, and by extension shape its Charter.29 The Charter laid out the organization’s objectives and established its mandate, members’ rights and obligations, governance policies, and rules of operations.30 Article I, for instance, details the aim of IMF lending as an “opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.”31 This would have theoretically ensured that destructive unilateral measures, mentioned previously, would not be used again by potential member states. Similarly, the Charter includes defining the IMF’s primary responsibilities to include the “surveillance of the international monetary system and the monitoring of the members’ economic and financial policies” and providing technical and financial support.32 The organization was established on the idea of a credit union, where member states’ withdrawals of funds can alleviate their pressing economic ills.33
In essence, White’s stabilization fund was similar to Keynes’ proposals,34 however, his plan was more multilateral compared to the latter’s exclusionary approach.35 It is within Keynes’ ideas that one can recognize imperial influences, as he proposed in his drafts the leadership of the UK and US as co-founding states who would manage the organization jointly and tried to minimize the agency of other states, fearing the formation of a “great monkey house,”36 as he described it at the time. Keynes was skeptical of bringing developing countries into the planning process of the IMF, as he believed they would have “little to contribute” and “would get in the way of the leading men.”37
As the IMF was formed and slowly took shape, it was “designed to be dominated by the US,”38 with the American dollar becoming the basis of the organization’s financial structure, and the headquarters being in the country’s capital, where the US Treasury is.39 More importantly, during the founding conference, the US government “had all the bargaining power” to impact the organization’s ethos, and was expected to be “the big creditor” to ensure that countries would pay back their debts.40 The US offered the majority of the loanable assets to the organization at the time and dominated most of its lending decisions for the three decades after its formation.41
Discussion
One of the significantly problematic structural challenges facing the IMF’s effectiveness today is its governance structure, which operates on a quota system. Each member state is assigned a quota or a number which determines its financial contribution to the IMF, and in turn its voting power and access to financing mechanisms including loans and SDR allocations.42 Quotas at the Bretton Woods Conference were originally determined through negotiations,43 and were predominantly decided on by White.44 Raymond Mikesell, an economist who was part of the Bretton Woods Conference, explained that he gave “the United States a quota of approximately $2.9 billion; the United Kingdom (including its colonies), about half the US quota; the Soviet Union, an amount just under that of the United Kingdom; and China, somewhat less.”45
In an interview for this piece with Sujeong Shim, Assistant Professor of Political Science at NYU Abu Dhabi, she noted that “in this sense, (colonial thinking) kind of played a role” in deciding the quota. She further explained that colonies of Britain and France at the time were viewed by the US as “partners of Britain and France”, and thus, they were “more likely to get a larger quota” than other countries.46 However, she noted that in the beginning, developing countries seemed to agree with this allocation and the idea of unequal voting. She explained that by looking at the transcript from the Bretton Woods conference, we see that “developing countries and small economies seemed to buy the idea that creditors would have a bigger voice within the organization when it comes to lending their money to borrower countries. We see this in the statements of the Mexican delegation at the Bretton Woods Conference.”47 Over time, the quota was based on several mathematical formulae that became growingly complex.48 More importantly, it was not transparent, and as Assistant Professor Shim noted, different members have relied on different formulae. She pointed out that “we do not know quite well which formula which country used. It is really not transparent how [a country] gets to end up with this quota.”49
This remained the case until 2008 when the IMF decided to adopt one formula, which is the current one.50 Until this point, the quota did not reflect voices from rising economies.51 Moreover, the quota was largely affected by the country’s trade volume with the US. Accordingly, if the country was a big trading partner with the US, it received “substantially a large quota increase in the IMF.”52 As Assistant Professor Shim noted, this highlights the enduring “strong US influence within the IMF.”53
The present formula considers four variables of each country: GDP (50%), economic openness and imports (30%), economic variability and exports (15%), and international reserves (5%).54 It is based on the country’s standing in the global economy,55 where economically dominant countries have more voting power than developing countries.56 Under the current distribution of voting rights, the US holds 16.5% of the vote share on the IMF Board of Governors,57 which effectively grants the country a veto power that can block decisions. Countries of sub-Saharan Africa account for only 4.7% of the vote share.58 Thus, the economic concerns of developing countries are scarcely represented in the IMF’s decision-making process, despite the fact that they constitute a considerable population globally.59 This maintains “unfair global power relations rooted in colonial legacies” as it diminishes the Global South’s agency in determining its economic future for the benefit of its citizens.60
In addition to voting power, the quota system determines access to financing mechanisms including SDR allocations. Created in 1968, the SDR is an international reserve asset whose value is based on five currencies – the US dollar, Euro, Chinese yuan, Japanese yen, and the British pound.61 It was decided that the SDRs would be allocated to all members according to the size of their IMF quotas.62 Basing it on the quota system further aggravates global economic imbalances and represents a “literal representation of how colonialism continues to lock poor countries out of global governance.”63 This is evident when looking at the allocation of SDRs in 2022. In August of that year, the IMF’s Board of Governors mandated $650 billion in new SDRs – the “largest allocation since 1945.”64 Yet, despite this, because of the quota system, low-income developing countries were only given 1.4% of this total sum. While high-income developing countries were provided a larger share, for example, China’s 22% of the SDRs, developed countries received a staggering 60%.65
Based on this discussion, the IMF’s quota in its original form gave more power to traditionally powerful states.66 Effective reform of its current manifestation still faces significant pushback. Recent reform proposals in the 15th IMF Review of Quotas in 2020 were blocked by the US,67,68 as any change in the quota necessitates an 85% consensus for it to come into force.69 Accordingly, despite the economic growth in emerging and developing countries in the past two to three decades, their relative weight in the IMF voting system remains limited with little increase of influence on this front.70
Another major policy issue is the IMF’s conditional loans. The evolution of loan mechanisms increasingly disadvantages the needs and priorities of developing countries. This pattern emerged distinctly during the 1956 Suez Crisis.71 The IMF provided loans to France, Israel, Egypt, and the UK. However, the significant loans disbursed to the UK underscored a precedent where the IMF, under considerable influence from major Western powers, particularly the US, embarked on providing substantial financial support to the UK to help balance its capital account and not the current account, which would also maintain the British pound’s exchange rate. This reflected a departure from the IMF’s traditional role and set a precedent for future lending practices.72 The crisis highlighted the influence of major Western powers in directing the IMF’s financial strategies. It also marked the institution’s transition into a significant player in managing global financial challenges, where up until then, the IMF was “almost totally untested in crisis management,” given that since its initial financial operations in 1947, it had only lent “sporadically and in small amounts” to its member states.73
The subsequent establishment of the General Arrangements to Borrow (GAB) in the early 1960s further exemplified the dominant role of powerful nations within the IMF. Designed as a mechanism to bolster the IMF’s lending resources, the GAB was negotiated by the Group of Ten, an assembly of the world’s major economies.74 The GAB’s structure allowed these countries to lend additional resources to the IMF, which, in turn, were primarily available to support the financial transactions of the Group of Ten members themselves.75 Although later in 1983, the GAB was enlarged to allow other countries to utilize this fund instead of only the Group of Ten as it used to be,76 its initial exclusivity reflected a systemic bias within the IMF’s lending architecture, privileging the strategic interests of dominant nations at the expense of a more inclusive and equitable financial system. More importantly, this gave the Group of Ten “a much greater role” to play.77
In the early stages of the Cold War, the IMF performed “like the earlier imperial creditor arrangements by making loans conditional on austerity and anti-inflation policies.”78 This was mainly directed at Latin American countries. During the 1960s and 1970s, as many African nations were starting to gain their independence, the IMF started providing financial assistance to a number of low-income countries that had structural economic problems and were among the least economically developed. The IMF conditioned its loans on requesting the borrowing country to develop its policies to catalyze economic growth and improve its status, emphasizing that the country sustains sound macroeconomic policies.79
In the 1980s and 1990s, conditional loans emerged on the premise that borrower countries adhere to “extensive market reform” policies.80 Since, the conditions developed by the organization have been criticized for their negative influence on the borrowing country’s national policies, as the IMF introduced the Structural Adjustment Programs (SAPs),81 which was a reformed requirement for loan granting.82 The SAPs came as part of the Washington Consensus, which was a set of policies developed to help countries amid the debt crisis of the early to mid-1980s, with the support of international institutions in the US, such as the IMF and WB, alongside the US Treasury.83 While the IMF’s loans were not intended for developmental projects but the wider balancing of payments financing,84 the SAPs imposed requirements on the borrowing country’s domestic policies, including liberalizing its trade and investment, minimizing inflation, enhancing exports, reducing government spending and employment, devaluing the local currency, decreasing real wages, and reducing tariffs.85 The US has been “a principal force” in applying the SAPs, where starting in the 1980s, it conditioned its aid agreements on the acceptance of reform packages and adherence to the WB and the IMF. “Virtually all developing countries,” with the majority being in Latin America and Africa and the transition countries in East and Central Europe, have adopted SAPs.86
Jamie Martin, Assistant Professor of History and Social Studies at Harvard University, points out that conditioning loans on certain national policies is a continuation of financial imperialism.87 He notes that the first time an international institution conditioned loans on “austerity and central bank independence” was in the 1920s, by the League of Nations.88,89 Commissions working on countries’ debt were made up of European and American investors, which were created to “discipline borrowers and extract revenue.”90 These loans acted as “tools of informal financial imperialism” that were revived later by the IMF.91
Additionally, as SAPs are general policy requirements, they do not take into consideration the borrowing country’s specific economic problems, which further exacerbates its financial conditions. This has resulted in aggravating inequality in the Global South, increasing the bankruptcy of national industries, and escalating the borrowing country’s reliance on food imports. It also resulted in local political and social unrest as the gap between the rich and the poor widened.92 In Jordan, demonstrations against the IMF-imposed austerity measures contributed to the resignation of Prime Minister Hani Mulki in 2018.93 Other borrowing countries have also witnessed similar protests, including Argentina, Ecuador, and Tunisia.94
Yet, some scholars believe that the IMF cannot be blamed for these countries’ policies. They argue that these countries would “have to do something, maybe make some sacrifices” as they already are facing payment and macroeconomic difficulties that led them in the first place to ask the IMF for loans.95 In an interview for this piece with Jeffry Frieden, Professor of Government at Harvard University, he mentioned that criticizing the IMF because countries are “forced to adjust” based on its conditions is “unjustified.”96 He further explained that these countries “are being forced to adjust because [they] are facing debt servicing difficulties” and not because of the IMF-required conditions.97 However, he acknowledged that “there is certainly evidence that indicates that IMF conditions tend to be more anti-labor and more pro-capital than would perhaps be necessary.”98
Additionally, while the Global North selects to adhere to its own neoliberal policies, the developing countries have to adopt the SAPs in order to qualify for an IMF loan. The conditionality of the SAPs echoes a perspective reminiscent of colonial attitudes, suggesting a belief in the superiority of the approaches developed by more economically powerful nations, and positing that it is their responsibility to guide the economic restructuring of the borrowing countries, especially since the SAPs are often framed to be required to ensure successful structural improvement of the borrowing country’s economy. Former colonial states utilize conditional loans to “retain control over other countries through continued financial dependence or sizable political influence.”99 Some of the conditions that are imposed as part of these loans are not related to the balance of payments policies – which the IMF should be more focused on.100 In commenting on the nature of these conditions, Professor Jeffry noted that they “could not be explained on purely economic grounds” as they “take into account security interests,” particularly American, European, and Japanese.101 He pointed out that the US regards Latin America as “its region of interest” and Europe regards Sub-Saharan Africa and part of South Asia as their region of interest too.102 Accordingly, the loans are given with inconsistent policies. He highlighted that lending has always been a political decision, and not a purely economic one. As an example, no lending was extended to the Soviet Union and its allies before the detente, and even after, “the US in particular made sure that whatever loans were extended to countries like the Soviet Union or Poland were in line with what the US thought was its security interest.”103
Assistant Professor Shim agreed with this point, as she mentioned that “a lot of studies consistently find that countries that are politically and economically important to the US tend to get more favorable treatment from the IMF,” further indicating that former colonies “that still have good relations with France and Britain tend to get more favorable treatment from the IMF.”104 With these countries, the organization “tends to enforce its conditions rather weakly and loosely,” where even if these countries do not fully adhere to the conditions, the IMF overlooks noncompliance.105
Assistant Professor Shim further highlighted that the IMF conditionality “is a new form of colonialism” where it “limits the government’s policy autonomy and dictates what to do when it comes to economic policy.”106 She mentioned examples of South Korea and Indonesia, where there were drastic public spending cuts as part of the IMF conditions. In response, she noted, the developing countries started having their own foreign reserves.107 In fact, countries stopped resorting to the organization for loan requests at the end of the 1990s, given its disproportionate conditionalities.108 With this turn, the organization has learned that conditionality in this way “is actually making things worse and hurts the IMF’s legitimacy and relevance to the world,” and since 2010, the conditions started not to include the structural conditionality, and instead encompassed “soft policy areas like gender equality and environmental issues.”109
Yet, with the outbreak of the COVID-19 pandemic, more countries started to resort to the IMF for loans, especially since poorer nations were already suffering from staggering debt levels.110 More importantly, although the IMF announced at the time that there would be new opportunities for lending without required conditionalities,111 it was found that 13 out of the 15 IMF loan programs during 2021 mandated “new austerity measures such as taxes on food and fuel or spending cuts that could put vital public services at risk.”112 Moreover, 14 out of 16 countries in West Africa had plans to cut their budgets in 2021 by a total of $26.8 billion, as encouraged by the IMF’s pandemic loans.113 Reductions in government spending in developing countries lead to a decline in subsidized governmental services, and an increase in prices – which is a burden borne by the people, especially the poorest.114
Recommendations
1. Revising the conditions for IMF loans
Reevaluate and adjust the conditionality of IMF loans to ensure they are more flexible, context-specific, and supportive of the UN’s sustainable development goals. This includes moving away from one-size-fits-all structural adjustment programs to more tailored approaches that consider the unique economic and social challenges of borrowing countries. In addition, conditions have to be more focused on the balance of payment rather than socio-economic policies.
2. Refining the Special Drawing Rights (SDR) system
This includes creating specific equitable criteria for allocation that better reflect the vulnerabilities and economic needs of developing countries rather than basing allocations on existing quota shares, which disproportionately favor wealthier nations. This would ensure increasing the allocation of SDRs to developing countries to provide them with greater liquidity based on their economic needs. This would also serve as a mechanism for addressing financial stability, particularly for developing countries.
3. Integrating economic vulnerability into the existing quota formula
This means revamping the quota formula to incorporate a measure of economic vulnerability alongside traditional economic indicators. The current quota formula focuses on including variables that reflect the economic performance of the country, which limits the developing countries’ share, given their economic status. This reform should aim to better account for the specific challenges and financial needs of developing countries. By developing an economic vulnerability index, the IMF can ensure a fairer distribution of power and access to resources, allowing for a more equitable representation of all member countries in decision-making processes and financial allocations. Such a change will acknowledge the unique circumstances of developing nations and ensure that IMF policies and support are more closely aligned with their specific immediate context and priorities.
Conclusion
It is important to continue shedding light on the intricate and colonial-rooted power dynamics within the IMF and to highlight the urgent need for reforms to foster a more equitable global economic order. The historical backdrop of the IMF’s establishment, deeply interlinked with the remnants of colonial legacies, has manifested in a contemporary governance structure that disproportionately amplifies the voice and influence of the world’s most powerful economies at the expense of developing nations. This imbalance is notably evident in the IMF’s quota system, SDR allocations, and the conditionality of loans, which collectively perpetuate economic disparities and underscore the institution’s departure from its original mandate to serve the global economy impartially. The calls for reform, echoed by various stakeholders, underscore a collective aspiration towards rectifying these foundational imbalances to ensure that the IMF can truly serve its purpose as a cornerstone of global financial stability and economic prosperity.
To access the works cited & endnotes, download the full report.
The statements made and views expressed are solely the responsibility of the author, and do not represent Fiker Institute.
