The International Monetary Fund

The Bretton Woods Conference

The need for more effective economic global governance was first seen close to the end of the Second World War at the Bretton Woods Conference, held in the USA in 1944. The 44 nations of the Second World War Allies met in a remote mountain resort in New Hampshire, to consider how the world’s financial systems and trade could be managed in peacetime. Many of today’s global economic governance institutions were founded at the conference, including the

There was also agreement among the Allies that economic pressures had played a part in the rise of fascism in Germany, where the Nazi Party had mobilised a domestic financial crisis as a rallying issue. Just as the world had turned to the League of Nations and then the United Nations (UN) for political global governance, so economists of the Allied nations began to think about how greater international order could be brought to the global economic order.

The aims of the Bretton Woods Conference were to:

■ create an agreed system of rules for international economic matters, including world trade

■ stabilise world currencies and reduce wide fluctuations in the value of currencies

■ prevent a repeat of the Great Depression that occurred in the 1930s

■ bolster capitalism against the rise of communism as a competing economic model in the Soviet Union

The Bretton Woods Conference created the following economic global governance IGOs and arrangements.

■ The IMF (1947): established the US dollar as the basis against which all other states’ currencies would be valued, thereby stabilising world currencies from major fluctuations in their value.

■ The International Bank for Reconstruction and Development (1946): later known as the World Bank. Its aim is to provide a pool of investment for middle-income states.

■ The General Agreement on Tariffs and Trade (GATT) (1947): later known as the World Trade Organization (WTO). It is an international forum in which states can make trade deals and international rules on trade.

Collectively, these institutions and the principles on which they were founded (free trade) are known as the Bretton Woods System. This refers to the forums and institutions of global economic governance that states have put in place to manage the global economy. All three of these founding institutions still exist today, although they have been modified and their roles have developed considerably.

In more recent decades, global cooperation on economic governance has focused on the following.

■ Poverty/development: the value of international coordination through the UN and other forums has progressed considerably. Developed states have increased spending on development. The Millennium Development Goals (MDGs), agreed in 2000 (see page 166), represent the most coordinated effort of IGOs and states to work towards common development targets.

■ Free trade: there has been an increase in multilateral free trade agreements, most notably the Single Market of the European Union (EU) but also the North American Free Trade Agreement (NAFTA) between Canada, Mexico and the USA. The Trans-Pacific Partnership (TPP), agreed in 2016, established a free-trade agreement between most countries of the Pacific Rim, although President Trump’s unilateral withdrawal of the USA from the deal in 2017 means that its future is now in doubt.

■ Single currency: the economic debate in the EU in the 1990s focused on developing a single currency, the euro. The euro came into circulation in 2002 and is now the currency of 19 of the 28 (pre-Brexit) EU member states. While most economic global governance in global politics is entirely intergovernmental in nature, the Eurozone countries have agreed to strict economic rules and given up significant freedom to make economic decisions nationally (such as setting their own interest rates) to supranational institutions, notably the European Central Bank (ECB).

■ Forums: there is a need for a forum for discussion and decision making to enable states to resolve international economic crises. The global financial crisis of 2008 posed a particular challenge for key economic IGOs, notably the IMF. In response to the crisis, the IMF dramatically increased the loans it makes to bail out failing economies.

Economic global governance involves many of the same actors as other forms of global governance.

■ IGOs: principally the World Bank, the IMF and the UN (including the UN Development Programme (UNDP)).

■ Informal intergovernmental forums: such as the Group of Seven/Eight (G7/8) and the G20, which include the world’s most industrialised states and the biggest global economic powers.

■ Multinational corporations (MNCs): privately owned companies that operate in more than one state.

■ Multilateral forums: such as the World Economic Forum (WEF), which provides an opportunity for world leaders, IGOs, business leaders, non- governmental organisations (NGOs) and economists to discuss the challenges facing the global economy.

The International Monetary Fund

The IMF was one of the key global economic governance institutions agreed in 1944 at the Bretton Woods Conference. It became fully operational in 1947 and its headquarters are in Washington, DC.


When the IMF was founded, its main role was to encourage stability in world exchange rates. During the Great Depression in the 1930s, many currencies had been devalued, causing great uncertainty and ultimately deep economic recession. The IMF oversaw a system of fixed exchange rates, linked to the US dollar, which in turn was fixed to the price of gold. This system brought much increased stability and prevented unsettling fluctuations in currency value. States and traders in the international financial system knew how much currency was worth and could make investments with a greater degree of stability, rather than being buffeted by variations in the value of a currency.

The fixed exchange rate system broke apart in 1971, when US president Richard Nixon abandoned the fixed link between the value of the US dollar and The IMF arose from the Bretton Woods Conference held at the Mount Washington Hotel in 1944 gold. The decision reflected the USA’s desire to have greater flexibility over the value of its currency. With the collapse of the IMF’s founding purpose, from the 1970s onwards its role changed to that it retains today.

■ The IMF provides economic stability by giving financial support or loans to states that are suffering, or a likely to suffer, from debt crises (when a state is unable to repay loans that it owes to financial institutions such as the IMF or private banks). This has predominantly seen the IMF focusing on the developing world, but it has also made loans to developed countries. In 1976, the UK borrowed US$3.9 million from the IMF as it struggled to deal with a deep financial crisis. More recently, Greece, Portugal and Spain have received IMF loans in order to help save their economies from bankruptcy.

■ It monitors the economic outlook of both the world economy and individual member countries, including forecasting and commenting on potential threats and weaknesses.

■ It advises member countries on how best to manage their economies, particularly less-developed member countries in which technical economic expertise may be lacking.


The IMF has 189 member states, therefore including the majority of the world’s states. Aside from very small states such as Andorra and Monaco, only North Korea is not a member country.

A managing director leads the IMF. As of 2017, this is the former French minister of finance Christine Lagarde. The managing director makes frequent interventions and commentary on the global economy as a whole, and the economic fortunes of IMF member countries. During the 2016 referendum on the UK’s membership of the EU, the IMF and Lagarde provoked criticism from the ‘Leave’ campaign by publishing a report a week before the referendum that predicted Brexit would lead to increased inflation and reduce the UK’s GDP by 5.5%, pushing the UK into recession. Critics argued that this was unnecessary interference in a decision that should have been left to the British people. On the other hand, some argue that the IMF acts as a useful additional source of economic advice and forecasting to help states and their populations make informed decisions.


The main source of the IMF’s financial resources is payments made to the fund by its member countries. These so-called quotas broadly reflect members’ relative positions and wealth in the world economy. The IMF increased the amount of funds available for lending to its member countries in 2008 in response to the global financial crisis, with member states asked to pay more in their quotas.

Some have criticised the IMF for being undemocratic, as voting power is weighted according to how much states contribute financially in the quota. This means that the most economically powerful states pay the most to the IMF and in return are allocated more power over decision making. One argument is that it is legitimate that those states that contribute the most have influence over how their contributions are allocated. Less economically powerful and less developed states argue that this leads to the powerful states dominating the goals, terms and conditions of the IMF’s lending

Response to crises

A key role of the IMF is to respond to financial crises that impact on one, and often many, states. The key aim is to try to keep afloat the economies that are suffering the most, and to prevent them collapsing or getting into so much debt that they are unable to pay it back. The other key aim in an interdependent global economy is to prevent a financial crisis from spreading to other countries. Apart from the global financial crisis of 2008, the IMF has assisted with three other recent financial crises:

1 The Asian financial crisis (1997)

2 Emergency lending to Brazil (1998) and Argentina (2000)

3 The Eurozone crisis (from 2008 onwards)

Structural adjustment programmes

When the IMF makes a loan to a member country that is in need, it is often conditional. Specifically, the state must undergo economic reforms to overcome the problems that led it to request help in the first place.

For example, this might include:

■ cutting wasteful public spending and raising taxes, in order to eliminate the budget deficit

■ selling government-owned assets to private ownership, known as privatisation

■ increasing the amount of taxes that the state collects in order to help it pay for its own public services

■ reducing public sector wages

These initiatives are called structural adjustment programmes (SAPs)). A criticism of SAPs is that they make excessive demands on states, and that this infringes on state sovereignty, often imposing a Western-driven idea of economic management along the lines of the Washington Consensus . In defence of SAPs, it is argued that states that have got themselves into financial difficulty should not be given unconditional loans and should have an incentive to prevent economic difficulty from recurring in the future. SAPs have become so controversial that the IMF and the World Bank no longer use the term ‘structural adjustment programmes’, replacing it with ‘poverty reduction strategies’.

Frequently, the IMF does not act alone in helping states with emergency loans. In the case of the Greek sovereign debt crisis), the IMF worked in partnership with the ECB and the European Commission to agree a joint loan package. This three-way partnership, dubbed the ‘Troika’, required negotiation and agreement between the three institutions on the amount and conditions of the loans.

Specific criticisms of SAPs include the following:

■ Economic reforms, such as privatisation, see an increase in corporate profits that are not necessarily shared with wider society.

■ Some developing countries see increased prosperity but also an increase in inequality and child poverty, suggesting that the programmes disproportionately benefit the richest.

■ Tax rises can sometimes hit the poorest the hardest, particularly indirect taxation such as a sales tax, which poor people cannot avoid if they are going to continue to buy goods.

■ With many of the poorest working in subsistence activities or the informal sector (such as family-based farming for survival), reform of the formal sector of the economy (such as registered, profit-making companies) has little impact on improving their lives.

■ Opening markets to foreign investors clearly aids in boosting foreign direct investment, but can also expose fragile economies to the effects of foreign economic crises.

■ There is a fundamental clash with state sovereignty, particularly if an SAP is at odds with the policies that a democratic government has been elected to implement.

Is the IMF a force for good in the world economy?

Joseph Stiglitz (born 1943) Nobel Prize-winning US economist. The chair of President Clinton’s Council of Economic Advisors, 1995–97, and chief economist of the World Bank, 1997–2000, Stiglitz is best known for his critical views on global economic governance and on globalization. In Globalization and its Discontents (2002), Stiglitz argued that the IMF had imposed policies on developing countries that often exacerbated, rather than relieved, balance-of-payments crises, being designed more to help banking and financial interests in the developed world than to alleviate poverty. In Making Globalization Work (2006), he linked globalization to ‘Americanization’, environmental degradation, a ‘roll-back’ of democracy and a widening of development disparities, calling instead for stronger and more transparent international institutions to expand economic opportunities and prevent financial crises. Stiglitz’s other main works include Whither Socialism? (1996), The Roaring Nineties (2003) and Freefall (2010).

Force for good

  • The IMF gives loans to states and helps to reduce their likelihood of falling into economic recession.

  • It helps to prevent economic difficulties in one state from spreading to others.

  • Pooling of funds as a fundamental liberal idea for many states to contribute to helping those in need is a good thing, providing a clear framework for states to help each other.

  • It provides an independent monitor of state economies, helping states to identify threats and opportunities.

  • It helps to encourage states to reform their economies to an economic model that has delivered considerable economic growth in most developed states.

Not a force for good

  • The IMF forces states to comply with SAPs in a way that interferes with sovereignty. It relentlessly promotes a neoliberal, Western-dominated economic model.

  • SAPs do not benefit the poorest, but boost corporate profits and serve the interests of developed states.

  • It failed to predict and prevent the global financial crisis in 2008 by failing to challenge reckless lending and inadequate regulation of global financial institutions.

  • It was unable to prevent the spread of the global financial crisis.

Overall Assessment

An argument in favour of the IMF is simply that it seems to be effective. It was created to promote global economic stability, and was arguably successful in doing so, especially over the immediate post-war period. In the 1950s and 1960s the world experienced its longest period of sustained economic growth, particularly when compared with the pre Second World War era.

However, this growth may have been the product of other causes, such as the application of Keynesian demand-management policies by domestic governments, or the stimulus effect of the US economy, which led to the globalisation of production, boosting economic growth beyond America’s borders.

Another strength of the IMF is that it will lend to countries that can find no other source of finance. As such it acts as a bulwark against economic disasters that may spill over and affect other economies in the world. The IMF has taken the lead in bailing out a number of countries suffering debt crises as a result of the 2007–09 global financial crisis – including Cyprus, Greece, Ireland, Portugal and Spain – which prevented the further spread of the crisis. It has also acted as a source of expertise and information for member states to draw on to stabilise their economies.

A final strength of the IMF is that it has adapted to the changing international context. When the US suspended the dollar’s convertibility to gold, bringing an end to the regime of fixed exchange rates, the IMF refocused its activities onto debt reduction and development (for example, helping eastern European states transition from communist to capitalist economies). More recently, the IMF has responded to criticisms about the under-representation of developing countries in decision-making by increasing the quotas for Brazil, India, China and Russia – now among the ten largest members of the IMF alongside France, Germany, Italy, Japan, the UK and USA. Following the widely unforeseen global financial crisis, the IMF refocused on surveillance, warning members when their debt burdens or economic policies are jeopardising economic growth.

However, the IMF has a number of weaknesses. One is that the IMF is dominated by the USA – the country that was the organisation’s leading architect and heavily influenced decisions about its role and functions. The US capital is home to the IMF’s headquarters, facilitating US government influence, and because the US is the largest economy, it contributes the largest quota and enjoys the largest proportion of votes. As decisions require majorities of 85 per cent of votes and the US has nearly 17 per cent, it effectively exercises veto power.