Puzzle Finance Blog

What is the IMF ?

The International Monetary Fund is seeking another $US500 billion to bolster its war chest. This economic primer looks at the background and operations of the IMF.

Why was the IMF created?

The IMF was created in July 1944, when representatives of 45 countries met in the New Hampshire town of Bretton Woods in the US to agree on a framework for international economic cooperation for the post-World War II era.

Leaders and experts, including famed British economist John Maynard Keynes, believed “that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression,” according to the IMF website.

What does the IMF do?

Originally, the IMF aimed to promote exchange rate stability while discouraging nations from putting up barriers that hindered global trade.

Competitive currency devaluations and tariff raisings on imports in the late 1930s further exacerbated the Great Depression.

The original “Bretton Woods” agreement, which pegged the value of currencies against the US dollar and the greenback against the price of gold, ended in the early 1970s. Since that period, the IMF focusing on bailing out poorer countries from financial crises, although the reforms it demanded in return for aid became a source of controversy.

Asian leaders and development specialists criticised the IMF for its handling of the Asian Financial Crisis of 1997 when it required draconian "structural" reforms - such as slashing government spending - of developing Asian nations in return for funds to stabilise those economies.

According to the IMF website, at the time of the Asian Financial crisis in 1997, the body "came under criticism that was more intense and widespread than at any other time in its history".

In recent years, the IMF has had to turn its bailout attention away from developing nations - with support for struggling European economies now central to its concerns.

Who runs it?

The US and European dominance of the global economy in the decades after 1945 saw the two regions carve up control of the two global financial institutions.

By a "gentleman's agreement", the head of the IMF has always been a European while the president of the World Bank has been an American. Other regions, particularly emerging Asian giant China, now challenge that arrangement - not least because developing nations are increasingly being asked to fork out funds for both bodies.

The current IMf managing director of is the former French politician Christine Lagarde who succeeded Dominque Strauss-Kahn. Mr Strauss-Kahn resigned last May as he faced charges of sexual assault in New York that were later dropped.

How big is the IMF?

Today the organisation has 187 members. The IMF's total assets in October of last year were $US447 billion.

How is it funded?

Members of the IMF contribute to the fund through the payment according to quotas, proportional to the country's size in the global economy. Those quotas also determine the country's voting power.

How much can it currently lend?

The fund currently has an unused lending capacity of about $US380 billion, according to the New York Times.

Has the IMF outlasted its usefulness?

Australian National University economist Chunlai Chen says the IMF's original mandate to stabilise the world economy has become more difficult in recent years.

"In reality the IMF is very limited to do this kind of work," he says.

Dr Chen says the IMF should undergo reform not just to increase its funding but to diversify the currencies it uses for international settlement.

Currently, the IMF uses the US dollar, the pound, the euro, and the Japanese yen, all currencies from economies that are in financial crisis.

The IMF should consider adding currencies from the developing world, he said, including China's yuan. "But these reforms will take a long time,” Dr Chen says.

Posted by Chris Zappone - The Age on 19th January, 2012 | Comments | Trackbacks

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