In any discussion of economics these days the International Monetary Fund, or IMF, is likely to be mentioned. This often causes alarm – it’s a powerful organization that isn’t accountable to US taxpayers, and its interventions can have significant effects on the economy. What exactly is it, what does it do and who makes the decisions?
The IMF was originally set up as a result of the 1944 Bretton Woods talks between the Allied nations. The aim was to stabilize exchange rates between nations and reduce economic uncertainty, and at first the preferred method was by tying currencies to bullion values – the Gold Standard. The IMF itself began operating on March 1, 1947; its role in the Bretton Woods system was to give loans, usually of cash, to members that had temporary payment imbalances. Since the collapse of the Gold Standard in 1971 it has adapted its methods, but the main function is still to use lending and capital transfers to keep national economies stable.
Today the IMF has 188 member states, up from an original 29, and operates in six official languages that include English, French, Spanish and Arabic. Its headquarters is in Washington, D.C. – although many people think it’s a United Nations organization it actually isn’t. Instead it’s controlled by a Board of Governors. Each member nation has one governor and one alternate governor, which it appoints itself. The Board of Governors usually meets annually, and is mostly responsible for electing members to the Executive Board.
The Executive Board has most of the real power and is made up of 24 members, appointed from the Board of Governors. Eight countries have their own member on the Executive Board – the USA, the UK, Germany, Japan, France, Russia, China and Saudi Arabia. The other 16 members represent geographical areas, and are chosen from among the countries in the area they’re responsible for. The Executive Board invites new members, suspends existing members if necessary and allocates members’ voting shares.
Because each member state has one governor but very different population sizes and economic power, votes are weighted using a complicated system. For example Poland has 17,621 votes; the USA has 421,961 to reflect its much larger economy. This system makes sense, because nations with larger economies contribute more to the funds the IMF administers so deserve more influence. What’s more controversial is the means of appointing the top officials.
The IMF’s senior figure is the Managing Director, the head of the Executive Board. There’s a tradition that the USA provides the head of the associated World Bank while a European is the IMF Managing Director. That naturally attracts criticism from growing economies like China and Brazil, but it’s also very noticeable that certain European countries have supplied more than their fair share of IMF chiefs. In total there have been eleven Managing Directors – and five of them, including the incumbent Christine Lagarde and her predecessor, were French. Two more were Swedish. Meanwhile Europe’s largest economy, Germany, has only held the position once – and the UK has never held it at all. The result is that despite criticism that the IMF tries to force US-style capitalism on the whole world, in practice it leans heavily towards continental-style social democracy.
The IMF has helped avert many financial crises, but the strict terms it imposes in exchange for loans probably caused plenty more. It’s definitely a valuable tool for stabilizing the world economy but for an advanced nation like the USA it carries risks to, and needs to be closely monitored.