The International Monetary Fund: A Primer

The IMF is one of the most powerful political institutions in existence. It is also one of the least understood, in part because it is purposefully secretive. Much of what is written about the IMF in the popular press is incorrect, but the IMF rarely reacts to stories about it, or attempts to educate the general public. Actually, the basics of the IMF are quite simple.

The IMF is a club. Its members are virtually all the countries of the world. Switzerland, a number of Soviet Bloc countries, and a few non-aligned socialist countries are not members of the IMF, The Fund has three important functions: monitoring the international exchange system, allocating its own currency - Special Drawing Rights - for members' use, and making loans to its members,

Members holding the currencies that are used for international transactions (such as dollars, marks, and yen) allow the club to borrow these currencies from them to lend to other members who are having trouble paying their international bills. Both the borrowing and lending are done on easy terms.

Once a member country requests a loan, the club's huge staff studies that country's economy exhaustively. The staff f agrees with the borrowing member on changes - the club never says "imposes" - to be made in her economy so that she will be able to build up enough international currency to pay back the loan and reduce the chance that she will have to borrow again. It is these changes that have generated much of the controversy surrounding the IMF. If the agreement fulfills the IMF's usual criteria, the staff recommends that the club's board of directors approve the loan. A majority of the board - made up of 22 executive directors representing all 143 member countries - must then agree to the loan and the agreed-upon conditions.

Some members o f this club are more equal than others: one's voting power is determined by the amount of money one contributes to the Fund, which of course depends on the size o f one's economy. The "developed, "democratic nations hold a majority of the votes, and are strongly oriented towards capitalism (both international and national). Most are also official military allies of the United States, Their primary purpose in belonging to the club (although they, at times, actually borrow through it themselves) is to promote the order, growth and current allocation of resources and opportunity in the international economy that they feel is crucial to their national interests. The "developing" countries share this goal, of course, but their real reason for belonging to the club is to borrow from it.

The changes a member must make in her economy to receive a loan from the IMF are known as the "conditionality" of the loan. For members whose need for a loan to pay international bills is caused by a temporary drop in exports, the IMF makes loans from its Compensatory Finance Facility. Little conditionality is attached to this type of loan. Members whose payment problems are caused by a continuing decline in exports, or by debt and import bills that can not be serviced by new borrowing or exports, borrow from the IMF under the "stand-by" program.

Stand-by loans (which can be much larger than loans from the Compensatory Finance Facility) are disbursed to the member in portions over a period o f time, with the remainder always "standing-by, "as the member meets the sequential targets of the conditionality of the agreement. The purpose of the conditionality, again is to enable a member to pay for her international bills by increasing receipts from exports and new borrowing, or decreasing expenditures for imports, or both.

The IMF, in accordance with the dictates of the developed countries, invariably counsels a borrower to pursue this purpose by devaluing her national currency and reducing the size of (or the rate o f growth of) her budget deficit, supply of domestic credit, and domestic money supply. The IMF calls this demand management. In conventional terms, it is an austerity plan.

The IMF austerity plan has always been criticized for hurting the poorer and less powerful members in a developing country, since her rulers must, for political reasons, allocate most of its ill effects to that group. Most governments could easily hit their IMF targets by halving their international and military expenditures, but that would probably lead to overthrow. Instead, the components of the federal budget that attend to the needs of the poor, such as food subsidies and expenditures for clean water, health care and education, are reduced. In addition, prices rise for imported essentials because of devaluation and employment (and hence income) drops as the economy contracts.

Caleb Rossiter is an assistant professor at Cornell University's Washington Program.