The IMF & US Political Economy
Date: Monday, July 25 @ 04:44:31 UTC
Topic: US Foreign Policy
Contributed by serendipity
Permanently established in December of 1945, but not operational until March 1947, the International Monetary Fund was originally chartered to make loans of foreign monies to nations with temporary payments deficits (which would be determined by their gold reserves). The organization was also made to serve as the regulator of public international management. Subsequently, if member countries wanted to change exchange rates approval from the organization was necessary.
Like Broughton says in The Silent Revolution, the Fund was to be "as an independent, objective, and essentially automatic force, subject to broad political constraints and the limits of predetermined financial resources" (p. 1). Currently, due to trends in the world's political and economic spheres, the IMF is a bit different in nature than it was intended to be. According to The American Heritage® Dictionary of the English Language, the term "political economy" refers to the interrelationship between political and economic processes.
In this paper this concept of "political economy" will be heavily probed, as the IMF directly engages this type of mixture of politics and economics particularly in its relationship with the government of the United States of America. Traditionally, the United States, with deference to international affairs and in all honesty, most things, has been in a position of supremacy. The very standing of the United States in the initial planning of the IMF makes this influence very evident. This decision making function of the U.S. government has been seen from day one at the IMF and it remains to be seen to this day. Also to be discussed is the manner in which internal U.S. political economic choices created policies of the International Monetary Fund.
In July of 1944, 730 delegates from the 44 Allies nations gathered in Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference. From that day onward, the conference has commonly been referred to as the Bretton Woods Conference. At this conference the delegates from the different nations were to devise a system to regulate the international political economy; the agreement that was reached became known as the Bretton Woods Agreement.
The tenets of the plan included the establishment of a global gold standard. According to Campbell McConnell and Stanley Brue this refers to the value of currency being determined by a fixed relationship to gold. The amount of the precious metal that was held by any given member country was to be equal to the amount of currency circulated by that country's government. Another provision of the agreement was the establishment of the Bretton Woods Sisters, the International Monetary Fund and the International Bank for Reconstruction and Development, which would later become known as the World Bank (which would lead to the creation, over time, of the group of institutions known as the World Bank Group).
As stated in information found at Wikipedia.org, the United States and Great Britain were the two countries that had the greatest input in the drafting of the policy; respectively and specifically, former chief economist at the U.S. Treasury Harry Dexter White and British economist John Maynard Keynes. The aforementioned section of the Bretton Woods Agreements was drafted by Keynes and White. As Great Britain was in an economic crisis caused by World War II, Keynes proposed a plan that would establish a world bank which would be vested with the tasks of generating currency and making other large scale decisions as to discourage any decrease in price level, or the average of the prices of all goods and services produced in an economy. For squaring the imbalanced currencies, Keynes suggested that creditor countries should increase their imports from the debtor countries to foster equilibrium in foreign trade. But White, in his capacity as the representative of a country [the U.S.] that had even at that point been given or had simply taken hegemonic status, offered a dissenting scheme, seeing the problem of balance as an issue to be resolved by the debtor country, thus setting in motion the as some may call the "it's not our fault you're in debt" modus operandi of the Bretton Woods institutions.
According to The Commanding Heights, by Daniel Yergin and Joseph Stanislaw in the early 1970's "the growing U.S. deficit meant that foreign governments were exceeding the U.S. governments stock of gold. These governments, or their central banks, could show up at any time at the ‘gold window' of the U.S. Treasury and insist on trading in their dollars for gold, which would precipitate a run" (pp. 42). At the same time the U.S. inflation was nearly rampant, caused in part by the burden that the American military presence in Vietnam placed upon resources, the "gold run," and other issues. In 1971, in an attempt to check the inflation, President Richard M. Nixon, in a unilateral move (meaning without consent from the Congress), implemented a 90-day wage freeze, a ten percent import surcharge and the abolition of the gold standard.
Aside from the implications for American citizens, the ramifications for the international community were weighty- it signified the collapse of the system of fixed but adjustable exchange rates. In the guidelines set forth by Keynes a gold standard was to be the key in the success of the sister organizations' efficacy. At the time of the conference and for many subsequent years, the gold standard was based upon United States currency, to be exact 35 dollars an ounce. This system, in some measure, insured monetary interdependence between member countries. Abolishing the gold standard would be, in essence, like turning the entire agreement on its head. As said in a speech given by, the director of European offices of the International Monetary Fund, Flemming Larsen years after the decision, "the price mechanism is absolutely essential for the economy to function…" and a countries' capacity to withstand financial upheavals. Article IV of the IMF operational code states that the Fund is to "exercise firm surveillance over the exchange rate policies of members," but it also obligates member countries "to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates." In no way is the abolishing the gold standard complicit with that.
Larsen later goes on to say that "however essential market forces are to allocate resources efficiently, there are many market failures and a need for public policies to build and defend the essential infrastructure of the economic system… [and] to safeguard the stability of the financial system." Here the United States government did not do that.
Judgments on policy and basic governing principles at the IMF are generally made through votes based upon a quota system. A prevalent criticism, as said in an IMF pamphlet written by Leo Van Houtven, is that the organization is "undemocratic because the large majority of the membership, the developing and transition countries, who are in practice the borrowers from the IMF, are minority shareholders, while the relatively small group of industrial countries holds 60 percent of the voting power" (p. 9). This criticism is not completely unfounded according to information given later on in the same document.
The original formula used at Bretton Woods for the calculation of the quotas of the 45 countries that participated in the conference included as economic variables national income, reserves, external trade, and export fluctuations. The quota formula was, and continues to be, directed in the first place at meeting the capital requirements of the institution. On the occasion of the first reexamination of the Bretton Woods quota formula in the early 1960s, a multi-formula method was devised that included the choice of assigning differing weights for national income, on the one hand, and for current external payments and the variability of current receipts, on the other. With the flexibility that this provided, national income became a major weight in the formula for most industrial and other large countries, while current payments and variability of current receipts became important components for small open economies and for most developing countries. Since the early 1980s, the variables in the quota formula have included GNP, official reserves, current external payments and receipts, the variability of current receipts, and the ratio of current receipts to GNP. (Ibid. p. 12)
If the member country is not in a financial position stable enough to make sizeable contributions to the fund then therefore, its vote won't count for very much. The votes that do count, as criticisms suggest, are those of a "relatively small group of industrial countries," known as the G-7/8 (Ibid.).
According to a Brookings Institute Policy Brief entitled "Global Economic Governance at a Crossroads: Replacing the G-7 with the G-20," the G-7/8 alliance (or seven or eight most industrially developed countries in the world), was founded by French President Giscard d'Estaing and German Chancellor Helmut Schmidt in 1978. The United States, Canada, France, Germany, Italy, Japan and the United Kingdom, make up the G-7, and with the addition of Russia it becomes the G-8. According to information found at GlobalExchange.com, the United States alone holds 17% of the voting power, with the other G-7 countries holding 45% in total, which averages to 7.5% per country. The voting is unequal.
In an IMF pamphlet addressing its governance policies, it is stated that a common criticism of the organization is that "at the political level, there is no effective counterweight to the power of the Group of Seven major industrial countries…" (Ibid, p. 9). Van Houtven goes on to attempt to topple the criticism by citing checks and balances that have been implemented to safeguard against domination by certain groups. The author writes, "the Group of Seven is not a single unified force: the United States, Western Europe, and Japan frequently differ on major issues of policy and management; their record of mutual surveillance is not impressive and each has different regional links" (Ibid. p.19) But then sentences later he writes that "the United States, through the size of its quota share, obtained veto power over some key decisions in the management of the IMF, such as admission of new members, increases in quotas, allocations of Special Drawing Rights (SDRs), and amendments of the Articles of Agreement" (Ibid.)
This criticism is not completely without justification elsewhere, in the Brookings policy brief dated two whole years later, the same issue is made out. Bradford and Linn write,
The twice-yearly meetings of finance ministers in the IMF-World Bank ministerial committees (the International Monetary and Finance Committee and the Development Committee), which include ministers from EMEs, have brought leaders into global conversations on financial and economic development. However, the mandates of these committees remain relatively narrow, their agendas institutionally driven by the operational focus of the World Bank and IMF, and the governance structures of the international financial institutions remain dominated by what are widely seen as antiquated distributions of voting rights, since G-7 countries have an over-representation in the capital and voting structures of these institutions. (p. 5)
So, seemingly there is no way out.
According to the Articles of Agreement of the International Monetary Fund, the mission is as follows,
(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. (v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
Many of the actions of the U.S. government basically annihilate any possibility of accomplishing more than several of the substantive goals of the organization. To quote Director Larsen once again, "Government policies can help to reduce the severity of financial crises through appropriate regulatory frameworks and by fostering the resilience of individual institutions and the financial system to financial shocks." In the case of the United States government it would there could hardly a finer example.
Articles of Agreement of the International Monetary Fund.
Retrieved February 12, 2005, from http://www.imf.org/external/pubs/ft/aa/aa.pdf.
Bradford Jr., Colin I. & Johannes F. Linn. (2004) Global Economic Governance at a Crossroads: Replacing the G-7 with the G-20. The Brookings Institute: Policy Brief, 131.
Bretton Woods Conference. Wikipedia. (2005) Retrieved February 28, 2005 from http://www.en.wikipedia.org/wiki/Bretton_Woods_Conference.
Boughton, James M. (2001) Silent Revolution: The International Monetary Fund 1979–1989. Washington, DC: International Monetary Fund
International Monetary Fund. (2002).
Governance of the IMF: Decision Making, Institutional Oversight, Transparency, and Accountability” [Pamphlet].
Washington, DC: Leo Van Houtven.
Larsen, Flemming. (2002, December). How to Govern (Better) the World Economy. Speech presented at the IMF Helsinki Conference: Searching for Global Partnerships, International Monetary Fund, Helsinki.
McConnell, Campbell R. & Stanley Brue. (2004). Economics: Principles, Problems, and Policies (16th ed.). New York, NY: McGraw-Hill Irwin
Political Economy. (2000). The American Heritage Dictionary of the English Language (4th ed.). Boston: Houghton Mifflin
World Bank/IMF questions and Answers. (2004). http://www.globalexchange.org/campaigns/wbimf/faq.html
Yergin, Daniel & Joseph Stanislaw. (2002). The Curse of Bigness: America’s Regulatory Capitalism. In The Commanding Heights: The Battle for the World Economy (pp. 28-48). New York, NY: Free Press