Explain the IMF to me
January 16, 2007 4:46 PM   Subscribe

Explain the IMF to me like I'm a ten year old.

I'm more interested in the balance-of-payments stuff - why the IMF cares and what it does about imbalances - than in surveillance etc. Extra information on how it complements the World Bank is welcome.
posted by xammerboy to Law & Government (32 answers total) 14 users marked this as a favorite
I thought the book Globalization and Its Discontents did a good job of explaining these topics. The author was the Former Senior Vice President and Chief Economist at the World Bank
posted by Staggering Jack at 4:58 PM on January 16, 2007

An excellent contemporary book is: "The Globalizers: The IMF, the World Bank, And Their Borrowers" by Ngaire Woods.

The Wikipedia entry is also a good place to start.
posted by sindark at 5:02 PM on January 16, 2007

Perkins' Confessions of an Economic Hitman is an excellent read.
posted by Blazecock Pileon at 5:24 PM on January 16, 2007

Those look like good books and I'll definitely look into them, but right now I'm looking for a brief explanation.
posted by walla at 5:51 PM on January 16, 2007

Imagine you owe your rent for the month but you haven't got it. You're probably a bit of a deadbeat. Maybe you've got a job but tend to blow your cash on booze and lottery tickets.

Your landlord's threatening to throw you out if you don't pay up. Your friends in the apartment building take pity on you, club together and lend you the cash. They say that you've got to pay them back and you've gotta cut back on the drink and gambling.

That's what the IMF does except the landlord is your bondholders, the borrowing country is the deadbeat, your friends are other countries, and the IMF is just the room they use to work out the details.
posted by TrashyRambo at 6:02 PM on January 16, 2007 [3 favorites]

Oh - and going easy on the beer is called "conditionality". The World Bank is the pastor or community worker who comes round and tries to get you a better job.
posted by TrashyRambo at 6:04 PM on January 16, 2007 [1 favorite]

Best answer: To give a starting point to answer your questions, the IMF, World Bank and a predecessor of the WTO (the GATT) were set up in post WWII, to manage the economic recuperation of the world economy. The meetings that set up these organizations were called the Bretton Woods meetings.

I may get some of this wrong, but the major change that occurred after WWII, was the shift of the world off of the Gold Standard (where any spending must be matched by the existence of a comparable unit of gold), to a regime of tradable currencies valued economically by market valuations. To facilitate this shift the IMF was set up.

Now basically, moving off the gold standard gives a country much more flexibility and freedom in its internal economic decisions. But it also gives countries more opportunities to mess up (now that a country is in charge of printing up your own currencies, it is liable to run up domestic spending beyond its means causing inflation which hurts holders of the inflated currency). The point is that a country can only spend as much as it actually makes and taxes -in the real world as opposed to the amount of money it say decides to print.

Now I don't know the history of the evolution of roles of the IMF. But today it basically acts to make sure the world economic system has some sort of a backup system.

Essentially in the cases when a countries economic stability is entirely out of balance (causing everyone to want to pull his money out of a country), it can flood money into an economy to lift consumer confidence in that currency/ economy. It has done this successfully and unsuccesfully in a number of cases: like the Mexican Peso Crisis, the Asian Financial crisis, and other cases. Now this part of the IMF (the bailout function) is criticized by some, because it creates a moral hazard allowing investors and country governments to act recklessly (knowing that there is a safety net).

Stiglitz's book is more of a personal polemic against the IMF, and not a purely unbiased source of information about the history or function of the organization.

and Blazecock's suggestion for Confessions of an Economic Hitman is so far out of the mainstream that it should not even be suggested as a source of information, as to its being an excellent read, I can't comment.
posted by stratastar at 6:10 PM on January 16, 2007 [1 favorite]

On the World Bank, and the IMF's complementarity: this is less important now, but in the past few decades countries were pushed into adopting the World Bank's Pollyanna type policies, by having their arms twisted by the IMF (thus the prevoiusly mentioned conditionality.

Essentially a country would owe money to a western country or the IMF directly and good terms of repayment would be tied to agreeing to World Bank/IMF (eat your medicine!) policies/ programs.
posted by stratastar at 6:16 PM on January 16, 2007

Trashy Rambo gives a fairly good explanation, but many would paint a slightly different picture.

The main difference for many is that the IMF often requires that countries cut back on spending for health, education, and essential infrastructure as well as privatize natural resources. Health and education aren't exactly analogues for beer and gambling. Furthermore, the debts in question may be less than fully legitimate in some cases (for example, debts resulting from loans to past corrupt dictatorships of a country).
posted by ssg at 6:23 PM on January 16, 2007 [3 favorites]

As in, the debts may be less than fully legitimate in a moral sense, if not a strictly legal one.
posted by ssg at 6:25 PM on January 16, 2007

Conditionality may involve austerity programs, privatisation of national resources, liberalisation of trade or currency, and a range of other things.

To continue TrashyRambo's analogy, your friends may require you to drop out of night school, eat only ramen, sub-lease the spare room to a lard rendering plant, and get a job where you have to wear a chicken suit.
posted by zamboni at 6:29 PM on January 16, 2007

Your friends may require you to live within your means - whatever that entails. Hey - they didn't force you to take their money - you could have chosen to get kicked out.

They may be wrong about what they prescribe but generally are just trying to help you get your shit together.
posted by TrashyRambo at 6:38 PM on January 16, 2007

Imagine you owe your rent for the month but you haven't got it. ...Your friends in the apartment building take pity on you, club together and lend you the cash....


You have a family and you own some land. Maybe you're raising food for the family, but you can't get them clothes, medicine, education, running water, etc. When you try to sell your crops on the market, you find that they're not worth much. You come up with the brilliant idea of using the natural resources on your land to benefit your family. You'll use the river to transport food and goods, the land to grow a marketable crop. If you find sources of other natural resources - say copper or zinc - you'll mine them and sell them on the open market. All the money will go to buy your family the things they need.

Now this is a huge undertaking and it takes a lot of preperation and organization. And you have to have the right equipment and so forth. But finally you get the ball rolling. And then, suddenly, these guys show up carrying machine guns. They tell you they don't want you using your land to benefit your family. They don't like this organization you've created. They beat you severly and shoot one of your children. They take your mining equipment and your farming implements. They destroy your carefully built organization and terrify you into doing as you're told.

Now you're really screwed. You have no money and no way to get any because you're not allowed to use your land. Plus, everything you had invested in this big enterprise is gone.

That's when the guys in suits show up. They tell you that they can loan you some money if you meet certain conditions. You've got to sell off your land and your resources. And everyone in your family - including each child - has to rent themselves out as laborers for whatever wages employers are willing to pay (It turns out that's very little). You all end up working for nearly nothing. And since you don't own the land anymore, you can't even raise food on it.

In exchange, you're allowed to borrow enough money to buy some - though not enough - medicine, clothes, books, etc. But the amount of interest you're going to be charged on this debt and the rules you're forced to follow while you pay it back insure that you'll always be in debt. In addition, even when you do have money in the bank, you have to make sure you spend a large chunk of it on taking care of the people who now own your land. They may need new railroads or highways or houses. These things will always be a higher priority than medicine or food for your family because, as the men in suits will explain very patiently, your survival depends on them. Without them, everything you have will go straight down the toilet. They'll abandon your little farm, taking all the money and going elsewhere. Your loans will be cut off. So you work very hard to keep them happy.

And everyone lives happily ever after.
posted by Clay201 at 6:39 PM on January 16, 2007 [11 favorites]

stratastar gave a good response. The economy is complex. World politics is complex. The IMF sometimes works, sometimes doesn't. I think microfinancing will show itself to work better than large, messy organizations working with large messy, organizations.

Basically the world said, "There's a lot of countries that are doing bad. With our understanding of economics, government and capital spending, we realize that whatever the fault is this can get really worse without some cash." Sometimes the loans are effectively donations, sometimes they don't work.

It is really hard to judge what works and what doesn't work. Did the IMF bail out Mexico and Asia during their financial crisis? Or was the market ready to reverse? Did they help Africa or prevent it from falling into worse poverty? The governments feel compelled to do something when the wealth disparity and the situation becomes dire.
posted by geoff. at 7:03 PM on January 16, 2007

Best answer: "I'm more interested in the balance-of-payments stuff - why the IMF cares and what it does about imbalances - than in surveillance etc."

Why does it care? It cares because that's its mission: it supports the international currency exchange system by providing medium-term (2-10 years) loans to countries that owe more money than they have. This prevents those countries from just printing more money to meet external obligations, which could lead to a collapse of their currencies and hyperinflation. I suppose that also tells you what it does about imbalances: it loans countries money to allow them to meet their obligations without inflating their currencies.

The purpose of the IMF is to provide loans that smooth out irregularities in countries' balance-of-payments ledgers. In this context, it is somewhat passive; it just sits around until there's a potential crisis. The World Bank, on the other hand, was created to play an active role in international economic development. It's mission is to eliminate global poverty by helping the economies of poor countries grow with investments in infrastructure etc.

We could argue about conditionality until we're blue in the face, but I don't think it goes to xammerboy's question.
posted by mr_roboto at 7:13 PM on January 16, 2007 [1 favorite]

Thank you Clay201 for saving me a lot of typing.

stratastar wrote: "........so far out of the mainstream that it should not even be suggested as a source of information"

That little fragment disturbs me, regardless of the merits of the book or ideas it refers to. That kind of attitude eventually results in lots of flag waving, to be followed shortly by huge piles of corpses.
posted by Idiot Mittens at 7:17 PM on January 16, 2007

Actually confessions of an economic hitman isn't about the IMF. More about export banks which are a different thing, so its not specifically related to this conversation.
posted by JPD at 8:04 PM on January 16, 2007

That little fragment disturbs me, regardless of the merits of the book or ideas it refers to. That kind of attitude eventually results in lots of flag waving, to be followed shortly by huge piles of corpses.

I don't want to derail the question (which is why I am not going to start ranting about "Confessions of an Economic Hitman"), but simply, the book does not contain (any?) information to answer the OP's question.

If one wants an actually legitimate book that is very critical about (hopefully older) World Bank policies (and has actual (rather than metaphoric) piles of bodies) I would recommend An Economist's Tale.
posted by stratastar at 8:19 PM on January 16, 2007

"I don't want to derail the question (which is why I am not going to start ranting about "Confessions of an Economic Hitman"), but simply, the book does not contain (any?) information to answer the OP's question."

My response had nothing to do with that book (I am not a fan of it), and everything to do with the part of your answer that I quoted. You encouraged a dismissal of information because it was far outside the mainstream. I thought the OP might want to think twice about that principle in general.
posted by Idiot Mittens at 8:38 PM on January 16, 2007

If you've overlooked the Wikipedia entry on Bretton Woods, it's quite germane.
posted by ikkyu2 at 8:44 PM on January 16, 2007

I think that stratastar's response has the chronology and purpose a bit off. It wasn't till the Nixon administration's sudden (unlawful under US law, and contrary to what we'd been telling the rest of the world) decision that the US went off the gold standard.

Today, the IMF is often termed "the lender of last resort" in crises, as others have pointed out.
posted by ibmcginty at 8:46 PM on January 16, 2007

ibmcginty: You're right, I did completely screw up history and intent of the IMf, and it was Nixon that pulled the Gold Standard.

Idiot Mittens - I see your point about the language I used. By "out of mainstream" I was trying to say that the book should not be read, (and is not seen) as an authoritative non-fiction account of how the system of international finance works. It's not a dismissal of information, it's more a dismissal of a fabrication.

Recommending that book to someone asking about the IMF or about international development, is like showing a 9-11 conspiracy theory website to a young child who asks "what happened on 9-11?" Yikes, once again, how paternalistic of me.
posted by stratastar at 9:09 PM on January 16, 2007

Oh, and stratostar, I strongly suggest you talk to an Indonesian about the IMF someday.

You'll find out that your opinion of what they do, like everything else you have said in this thread, is wrong.
posted by Tacos Are Pretty Great at 10:31 PM on January 16, 2007

A bit about the economic times post-WW2. America's economy was booming, and all of Western Europe was basically collapsed. Britain was bankrupt, and the rest of the continent was savaged.

America had been supporting Britain during the war, but the day the war ended, told Britain that there would be no more free American money. This pulled the economic rug from underneath Britain, which was bankrupt.

Britain sent Keynes over to the US to negotiate a grant, a proposal that he called "Justice", because he felt that Britain deserved some money, because of the vast efforts they made fighting fascism, while the United States was watching from afar.

The US didn't go for this, but after a LOT of lobbying, including a trip from Churchill, they quietly agreed to give a $2 billion loan to Britain. One of the conditions of this loan was that Britain had to float their currency by (I believe) 1947.

They knew this would be disastrous, but they had no other options. Prominent British politicians referred to the United States as "shylock", but noted that they had no other options. So it floated, and it was, in fact a disaster.

Britain lost nearly all of the loan money on the following currency disaster, and then watched more trade flow direct to America, as dollars replaced pounds for international trade.

They were rescued when the United States decided that they feared the Soviets enough that it was in the US's self-interest to just give $13 billion to Europe.

Anybody who thinks that the IMF, or deals like it, are done for charity is off their rocker. They are done for the good of the United States, and it's leaders. This is not far-left fan-fiction, it is merely historical truth.
posted by Tacos Are Pretty Great at 10:42 PM on January 16, 2007 [1 favorite]

And for what it's worth the IMF was original envisaged by Keynes as a globally stabilizing force, but right from the get-go it was heavily politicized, and quickly turned into a method for the US to exercise foreign control.
posted by Tacos Are Pretty Great at 10:45 PM on January 16, 2007

I'm a bit disturbed. The highlighted answers are those that were written like they came from true "economists." The IMF and World Bank were set up with noble intentions, but they no longer serve the roles that were intended for them. The highlighted answers only give part of the story. Here's a bit of the other part:

Yes, these institutions were originally intended to assist the "developing" world by doling out cash.

After Nixon took the international monetary system off the gold standard, everything changed. The purpose of this move was to bolster the dollar. Now, everyone buys their reserve currency in dollars, so the U.S. (and by extension, the World Bank and IMF) has nearly absolute control of which countries get (internationally valuable) money, and which don't. If we (the U.S.A) like them and their policies, we print money for them. If we don't...too bad. No money for you.

A result of this, and other neoliberal policy initiatives, was that the IMF turned into the international equivalent of a payday lender/loan shark.

Say you are Jamaica. It's 1962, and you have just declared your independence from Great Britain. That's all well and good, but how are you going to fund your country? You've just thrown off the chains of colonization, and you already have crushing debts to pay off. All of your wealth left with the British colonizers, and they left you with their problems! In comes the IMF's economists to help you out. They will give you a loan, and in exchange, you will be left with the burden of ridiculous interest percentages to pay off over many years.

In fact, the loans will periodically be adjusted, so that you can never pay it off. Jamaica still uses something like 50% of it's gross national product just to pay off IMF loans! In other words, half of all the money Jamaicans make goes just to paying off IMF loans! No wonder they are still poor.

It gets worse. Part of the conditions of the loans are something that is called "structural adjustment." When you, as Jamaica, agree to accept a loan (you really have no choice but to agree), you also agree to make changes to the way your country operates. You agree to cut "the fat" - funding for public education and health care. They're not necessary anyway!

You agree to eliminate subsidies - no loan money may be used to bolster local agriculture. Your people need food and social services - but...SORRY...you can't use any of the loan money for that stuff. You can just buy your food from the U.S.!

It gets even worse. Now that you have taken the loan and made your "structural adjustments," everything will work itself out, right? Wrong. You have eliminated farm subsidies, so your farmers can no longer compete with the cheap produce coming out of the United States (which heavily subsidizes it's agriculture - in other words, the U.S. gives tons of money to farmers so that our food is cheaper than everyone else's, but we force other countries to refrain from this by making it a condition of IMF loans). Because your farmers can't compete, your loan money just goes right back to the United States - to buy food that you could have grown yourself, if you had been allowed to invest locally. The game is rigged.

Perhaps your people could become better educated and so you could build up an economy based on intellectual industry....oh, wait...part of the "structural adjustment" was the requirement that you cut your education funding. All of your schools have closed.

I haven't even mentioned "free trade zones," because it doesn't directly apply. Look it up if you're interested.

Now Jamaica is in a debt spiral - their local agriculture has been decimated by structural adjustment, and the populace is largely uneducated and without adequate health care. Perhaps the IMF loans, even with their ridiculous interest rates, would have been helpful - if only they hadn't mandated structural adjustments. The money could have been spent on developing local agriculture so that the country could become self-sufficient and could later pay off the loans. Now, they have little chance.

We can only hope that nations who have been forced into accepting "payday loans" from the post-1970 IMF have their debts forgiven. There is a large push in the international community to do just that, and it could help immensely to relieve the burden of the mistakes that IMF policy has made during the neoliberal period, but it will never erase the opportunities lost to "structural adjustment."

I hope there is a way to un-highlight "correct" responses...
posted by gaiamark at 3:23 AM on January 17, 2007 [12 favorites]

By the way, if anyone is interested in "seeing" how this all works, check out the fantastic film "Life and Debt" by Stephanie Black.


It shows everything I just wrote, in a comprehensible and true-to-life manner, by documenting the real story of Jamaica and the IMF.
posted by gaiamark at 3:25 AM on January 17, 2007

stratastar wrote: "It's not a dismissal of information, it's more a dismissal of a fabrication."

You have no idea if it's a fabrication. But it is certainly a different point of view than Stiglitz el al. will give. Unless you can demonstrate that all of the claims in that book are false, then you are essentially saying that it should not be even read, because you find it's conclusions distasteful. Again, this willingness to fall into line is the reason that wars happen.
posted by Idiot Mittens at 6:29 AM on January 17, 2007

I think we're getting dangerously off-track here. It's true that the IMF is deeply politicized and that is a VERY important thing to understand about the IMF, but the poster only asked for an explanation about how the IMF functions. He did not ask for AskMeFi's Theory of International Policy!

Let's keep it civil, no?

There's a wonderful short story and maybe some other Mefi-ite can give you the author, but it's about an African nation that uses up all it's water and they end up buying water and cattle through an IMF-like body. It paints a wonderfully simply pictures of how nations get into the circumstances where they need the IMF and how disadvantageous that is. Anyone know what I'm talking about? It was by a notable African author, I'm just drawing a total blank.
posted by GilloD at 7:28 AM on January 17, 2007

I think the highlighted questions are highlighted because they actually try to answer the question instead of going off on an ideological/political tangent. The question was about the nuts and bolts of what the IMF does, not about how terrible or great the IMF is.
posted by walla at 9:33 AM on January 17, 2007

I think the highlighted questions are highlighted because they actually try to answer the question instead of going off on an ideological/political tangent. The question was about the nuts and bolts of what the IMF does, not about how terrible or great the IMF is.

You are not issued a mortgage or a credit card because somebody wants to help you. It is done because it benefits the bank.

The IMF operates similarly, and it is a bit silly to say that discussion of this fact is maligning it, or that it is off-topic. After all, banks exist to make money in a number of ways (investment, interest, etc.) Similarly the IMF exists not as a charity, but as a way to reach certain economic and political goals.

I am not advocating the destruction of the IMF or whatever, but one should be aware who the World Bank is. Or at least be aware that the current president is Paul Wolfowitz, and that previous appointees have been almost evenly split between bankers and politicians like Robert McNamara.
posted by Tacos Are Pretty Great at 11:05 AM on January 17, 2007


What is particularly ideological or political about stating the facts? The highlighted answers made me uneasy because they are echoes of the textbook definitions of what the IMF is. They are exactly what IMF personnel and classical economists will tell you - and what they have told to their debtor nations - that they lend money with the goal of "helping" "developing" nations to build up their economies. Perhaps some IMF officials even believe this, although I doubt that most of them do.

In any case, the job description they feed to the public is not at all what they really DO. If you would like to know how the IMF actually operates and why, please see my previous post, as I feel I did an adequate job of detailing exactly how and why the system works the way it does.

IMF loans are a way of keeping the game rigged by destroying local economies and forcing nations to rely on imports. I didn't even touch on how precarious this system is, even if you consider that debtor nations are already ridiculously poor. What would happen if by some chance "free market" economic phenomenon, the price of U.S corn and wheat would increase fifty percent? This would induce horrible shortages on already stressed debtor nations, because they are reliant on our food exports.

Why are they reliant on our food exports? Because the conditions of IMF loans make it impossible for them to grow their own food. Their economies are supposed to be geared toward export of specialized products - like clothing or electronics. This is supposed to be the way to achieve success, but nobody points out that none of the currently wealthy nations achieved success in this manner. Europe, the U.S., and now China have all achieved economic success by first being able to supply themselves with their own homegrown food!

In other words, the game is rigged, and the IMF is the corrupt referee. Their function is the maintenance of U.S. hegemony.

On the other hand, the World Bank has turned around in recent years, when James Wolfensohn decided to go back to the Bank's original purpose and fight world poverty. Of course, their policies do not always yield positive results - in fact, many times their policies yield horribly negative results - such as with the Narmada Dam project in India. But the will seems to be there for a return to "noble intentions," unlike at the IMF.

Again, there is nothing ideological or political about recounting the way something actually works.

Please, for the love of whatever god you believe in, if you really want to know how the IMF operates and are too occupied/afraid to look into the facts, at least check out a copy of "Life and Debt." It explains it very well, and it gives you a real-life example of how the IMF works. You don't have to take it from me. Take it from Michael Manley, the former Prime Minister of Jamaica. He was forced to sign on the dotted line because his country needed help, and he found out what the IMF is really about.
posted by gaiamark at 4:40 AM on January 18, 2007

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