International Monetary Fund

If you were in charge of balancing the world's economy, how would you manage it? How would you account for all the different countries' interests and priorities? And how would you ensure fair exchanges of goods and services?

International Monetary Fund International Monetary Fund

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    Let's see how the International Monetary Fund (IMF) answers these questions. In this article, we will look at what the IMF is, what its mission and functions are, and how it relates to the United Nations. We will end by looking at some of its advantages and disadvantages.

    International Monetary Fund definition

    The International Monetary Fund, or IMF, is an intergovernmental organisation established in 1944. The IMF is responsible for monitoring exchange rates and the stabilisation of the global monetary system.

    Monetary means related to money and currency, and how money circulates in the economy.

    The need for the establishment of an international organisation like the IMF became apparent after World War II, when, to avoid future conflicts, the world economies became more interdependent. The IMF aims to stabilise the global economy, improve the economies of its member states, and provide solutions to the world's economic issues. There are a total of 190 member states in the IMF as of today.

    Monaco, North Korea, Cuba, Liechtenstein, Taiwan, and the Vatican City are not IMF members.

    The International Monetary Fund emerged from the Bretton Woods agreement of 1944 in response to the Great Depression and World War II. These events led to an increase in trading barriers and a reduction in world trade. The Bretton Woods conference took place to combat this disintegration of international cooperation.

    Initially, the IMF's role was to overview global monetary and exchange rate systems. However, in the 1970s the Bretton Woods system of international exchange collapsed, and the world saw multiple oil crises. In the aftermath of this, the IMF's role shifted to that of aiding countries in the Global South. These are mostly countries that used to be colonies.

    For more details on this, check out our explanation on the Bretton Woods Conference 1944.

    The International Monetary Fund Papers from the 1944 Bretton Woods Conference StudySmarterFig. 1 Papers from the 1944 Bretton Woods Conference

    The IMF's financial structure is based on a contributory system, or quota system, which is made up of the contributions of its member countries. In total, the IMF has $1 trillion as the total amount available for it to lend to its 190 member countries.

    While every member state gets a say in political decisions, not every state has an equal say. Instead, this is based on quotas. Quotas:

    • determine how much each country is supposed to provide to the IMF;
    • determine voting power (the richer a country is, the more say it will have);
    • determine the amount of financial support a county can receive;
    • determine how much supplemental financial support a county can receive this is also referred to as SDR, or special drawing rights)

    Mission of International Monetary Fund

    The overall mission of the International Monetary Fund is international financial stability and world poverty reduction. It aims to achieve this by encouraging international trade to stimulate economic growth and promote high employment.

    According to the IMF, there are three main missions of the International Monetary Fund, these are:

    1. The furthering of international monetary cooperation

    2. The expansion and encouragement of economic growth

    3. The disapproval and discouragement of policies that could potentially harm the prosperity of any one economy1.

    Functions of the International Monetary Fund

    The IMF has 3 main functions which are policy advice, capacity development and financial assistance.

    Policy advice

    One of the main functions of the International Monetary Fund is to provide policy advice to any IMF member who asks for it. The main reason they're able to do this is that they monitor the economic and financial policies of all of their member states. This is known as surveillance.

    This function serves to provide the IMF with an overview of the global economy and allows it to observe trends and foresees the impact one member's economic policies may have on another member. These observations allow the IMF to work closely and advise other international organisations such as the G20.

    Check out this article on the G20 to find out more!

    Capacity development

    Capacity development refers to the IMF's role in offering assistance and training to the economic institutions of its members.

    Economic capacity is how much a country's economy can produce with its current resources. It's important to be aware of one's country's capacity to assess efficiency and decide whether to increase or decrease production and investments.

    Capacity development can comprise online courses, placements, and other training methods to assist with strengthening governance as well as ensuring the cohesive dissemination of financial data. The IMF helps its members with the management of public finances, modernising monetary policies, and building effective institutions, among other things. Capacity development, however, is not imposed on a member, but it's at the request of its member states that the IMF undergoes capacity development initiatives.

    Capacity development is especially important for small states and developing countries that don't have the expertise or financial resources to develop this capacity by themselves.

    The IMF launched a YouTube channel in April 2020 which offers training for its members as well as the general public.

    Financial Assistance

    Financial Assistance is the final function of the International Monetary Fund. The IMF provides the members that need it, with financial assistance to help improve or restore their economy. As well as funds, the IMF also helps to advise and assist its members through the suggestion of policies that can help to restore the economy.

    Historically, much of the IMF's financial loans have come with concessions or stipulations. While these can be extremely beneficial, in some situations they have been detrimental to the receiving members, particularly in developing countries. We will explore this more when we look at some of the criticism of the IMF below.

    International Monetary Fund United Nations

    Like the IMF, the United Nations emerged in the aftermath of World War II. While the IMF's focus is financial stability, the United Nations is subdivided into 5 main bodies that work collaboratively to maintain international peace and security. These are:

    • The UN The General Assembly.

    • The Security Council.

    • The Secretariat.

    • The Economic and Social Council.

    • The International Court of Justice.

    The International Monetary Fund United Nations Institutions StudySmarterFig. 2 United Nations Institutions

    On top of the five main bodies that constitute the United Nations, there are also fifteen specialised agencies. While maintaining their independence, these agencies are coordinated by the Economic and Social Council to work with the UN and with each other. The IMF falls in this category of specialised agencies, and it advises and assists on financial matters.

    To achieve the UN 2030 Sustainable Development Goals, the IMF is providing statistical evidence of how countries are doing financially, and, based on these, providing policy and financial support.

    Advantages of the International Monetary Fund

    One of the key strengths of the IMF stems from its lending function. It ensures that economic disasters can be minimised and controlled by helping to mitigate the damage caused, as in the Iceland example above. In turn, it also minimises the broader economic damage to global economies.

    American economist Benjamin Friedman argues that it's impossible to accurately measure the success of the IMF because we don't know if its policies are “worse than whatever the alternative would have been3”. However, historically, by encouraging a more stable exchange rate the IMF was incredibly effective in maintaining financial stability in one of the most unstable periods in history, the aftermath of the Second World War.

    The IMF has continued to operate for close to a century as a long-standing international body. Over the years, the IMF has had to continuously readjust its aims and methods, focusing on debt reduction at times and on economic growth at others. This adaptability is another major advantage of the IMF, which contributed to its longevity.

    After the collapse of the Soviet Union, the IMF was a key player in maintaining economic activity. This was done by dividing the assets and liabilities (outstanding payments) among the newly independent states, to help settle Soviet debt and by playing an advisory role to stimulate the new economies3.

    Weaknesses of the International Monetary Fund

    One of the main criticism of the IMF is the disproportional representation and dominance of the G7, and in particular of the US, making it potentially biased towards the priorities of the Global North.

    To achieve a majority in a vote, 85% is needed. The USA, being the largest economy and the largest contributor, has roughly 17% of the vote in the IMF. Therefore, the USA has a de facto veto power4.

    Critiques of the IMF argue that whilst the IMF does provide economic assistance, its conditions are too harsh, cause considerable damage, and are a force for neo-colonialism.

    Neo-colonialism is the re-imposition and continuation of imperial powers on ex-colonies. In this context, it implies policies that keep ex-colonies in a state of inferiority and dependency.

    The Structural Adjustment Programmes of the IMF.

    In the 1970s and 80s, a number of postcolonial African states experienced difficulties under newly independent governments and were forced to seek loans from IMF. When crediting them with loans, the IMF forced nations to adopt Structural Adjustment Programmes (SAPs) which are intended to reduce fiscal imbalances and promote long-term economic growth.

    However, as SAPs and the requirement of loans and debt repayments at times fail to assess the specific needs of nations, they can leave the countries' economies in a worse state.

    It reduced the governments' ability to regulate and manage their own economies and created opportunities for multinational organisations to insert themselves and take advantage of the situation. This resulted in large sums of the nations' capital being moved out of the state instead of being invested in local communities, which harms their long-term survival and independence.

    An example of this is Zambia. Under its first generation of African leadership, Zambia witnessed a copper crash which forces its leader, President Kaunda, to reluctantly seek a loan from the IMF which came with SAPs. The SAPs forced governments to shrink state subsidies on necessities such as grain, which meant that Zambians could not afford basic food supplies.


    The International Monetary Fund - Key takeaways

    • The IMF is an international organisation that is responsible for promoting financial cooperation and stability across the world.

    • The International Monetary Fund emerged out of the Bretton Woods agreement of 1944.

    • Its main 3 functions are policy advice, capacity development and financial assistance.

    • The IMF's chief mission includes the increase in economic growth, discouraging harmful economic policies and furthering monetary cooperation.

    • The IMF's advantages are that it is effective, adaptable and helpful in reducing negative economic impact.

    • The IMF's disadvantages can be seen in the disproportionate representation of the US and its harsh lending conditions.


    References

    1. What is the IMF, IMF website
    2. Benjamin Friedman, Globalization: Stiglitz’s Case, 2002
    3. IMF website Building Nations out of the Soviet Union
    4. CADTM website The International Monetary Fund
    5. Sarai-Anne Ikenze Exploring the Links Between African Underdevelopment in Colonial and Post-colonial Times: The Role of Structural Adjustment Programs 2019
    6. Fig. 1 Papers from the 1944 Bretton Woods Conference (https://commons.wikimedia.org/wiki/File:International_Monetary_Fund_formed_1945_(15839176617).jpg) by Archives New Zealand (https://www.flickr.com/people/35759981@N08) licenced by CC-BY-SA-2.0 (https://spdx.org/licenses/CC-BY-SA-2.0.html) on Wikimedia Commons
    7. Fig. 2 UN institutions (https://commons.wikimedia.org/wiki/File:UN_Institutions2.svg) by Wleizero (https://commons.wikimedia.org/w/index.php?title=User:Wleizero&action=edit&redlink=1) licenced by CC-BY-SA 4.0 (https://spdx.org/licenses/CC-BY-SA-4.0.html) on Wikimedia Commons
    Frequently Asked Questions about International Monetary Fund

    What is international monetary fund?

    The International Monetary Fund is an intergovernmental organisation established in 1944 and is responsible for monitoring exchange rates and the stabilisation of the global monetary system. 

    What are the functions of International Monetary Fund?

    The IMF has 3 main functions which are policy advice, capacity development and financial assistance

    Why is the International Monetary Fund important?

    It ensures that national and international economic disasters can be controlled and minimised.

    When was the International Monetary Fund established? 

    It was established in 1944 at the Bretton Woods Conference.

    Are all countries members of the International Monetary Fund? 

    No, as of today, the IMF has 190 members but Monaco, North Korea, Cuba, Liechtenstein, Taiwan, and the Vatican City are not IMF members.

    Test your knowledge with multiple choice flashcards

    How many countries are a part of the IMF?

    How much money does the IMF have in total to lend to its member countries?

    What organisation, other than the IMF emerged from the Bretton Woods Conference?

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