The International Monetary Fund (IMF) was established at Bretton Woods, New Hampshire in 1944. It was originally tied closely to the gold-exchange standard established at that time. It originally provided a pool of funds for distressed countries to use temporarily to correct imbalance issues. Once the gold-exchange standard was removed, the IMF became more involved with assisting developing countries.
The IMF has developed an unfortunate negative perception in the eyes of many developing countries. The goal of the IMF has always been to provide a safety net for countries with temporary payment imbalances. Unfortunately, the IMF can not lend money unconditionally. To do so would encourage lenders to make riskier loans with knowledge that the IMF would protect the debtor in case of a fault on the loan. This would lead to the IMF propping up commercial investors rather than protecting temporary financial troubles in distressed countries (Sawyer & Sprinkle, 2006).
The conditionality of loans from the IMF has lead to a great deal of controversy. The IMF has a difficult time enforcing the austerity programs tied to the conditionality of loans. If the developing country is unwilling to meet the conditionality of the loans received from the IMF, it may end up in a great deal of debt without foreign reserves. The end result is a depreciation of its currency. In other words, if a developing country is unwilling to adhere to the IMF’s required adjustments to its macroeconomic policies, it may end up in an even worse condition (Sawyer & Sprinkle, 2006).
The IMF has enjoyed many successes and suffered many failures since its inception in 1944. In 1998, the IMF successfully bailed out Thailand and South Korea at a cost of $17.2 billion and $43 billion respectively. Both countries were able to recover from their financial troubles and resume healthy economies (“IMF success”, 1998). Unfortunately, this success has not been mirrored in Pakistan, which has failed on multiple occasions to fulfill the conditionalities imposed by the IMF. After each failure, the IMF has implemented harsher guidelines, but Pakistan still fails to meet the requirements (Asad, 1998).
Asad, S. (1998, September). IMF and Pakistan. Economic Review (05318955), 29(9), 7. Retrieved September 15, 2008, from Business Source Elite database.
IMF success in S. Korea, Thailand. (1998). Christian Science Monitor. Retrieved September 15, 2008, from Academic Search Premier database.
Sawyer, W. C., & Sprinkle, R. L. (2006). International economics, 2nd ed. Upper Saddle River, New Jersey: Pearson Prentice Hall.