International Monetary Fund: Benefits and Drawbacks

Established following World War II to help with post-war recovery, the International Monetary Fund (IMF) serves as a lender to modern governments and an overseer of international financial markets. It has no shortage of both supporters and critics.

International Monetary Fund: An Overview

In its infancy, the IMF was only responsible for supervising pegged exchange rates, part of the Bretton Woods dollar-gold reserve currency scheme.

The IMF grew in scope and influence in subsequent decades, particularly after the collapse of the Bretton Woods system in the 1970s. Now the IMF provides loans to help member nations fix perceived balance of payments problems and fight off crises. The most notable example was the bailout of the Greek government in 2011.

As of 2021, the IMF has 190 member nations. Each member nation publicly accepts and supports the goal of global economic stability and, in theory, a subjugation of some sovereign authority to support that goal. The IMF is funded mainly through what are called "quota contributions" from its members. Each IMF member nation is assigned an annual quota amount, based on the size of its economy when it joins the IMF. The IMF also has substantial gold holdings that it can sell and is authorized to borrow up to an amount approximately equal to its annual quota contributions.

IMF supporters claim it is a necessary lender of last resort for areas in crisis and it can impose necessary or difficult reforms on backward economies. Critics counter the IMF supersedes national autonomy, exacerbates economic problems more often than not, and serves as a tool for the wealthiest nations only.

Economists also frequently criticize the IMF for creating a moral hazard on national scales. 

Advantages of the International Monetary Fund

The IMF assists member nations in several different capacities.

Provides Loans to Member Nations

Its most important function is its ability to provide loans to member nations in need of a bailout. The IMF can attach conditions to these loans, including prescribed economic policies, to which borrowing governments must comply.

Fills Deficit Gaps

If a country has a balance of payments deficit, the IMF can step in to fill the gap.

Technical Support and Assistance

It serves as a council and adviser to countries attempting a new economic policy. It also publishes papers on new economic topics.

Disadvantages of the International Monetary Fund

Despite its lofty status and commendable objectives, the IMF is attempting to pull off a nearly impossible economic feat: perfectly timing and sizing economic intervention on an international scale. It suffers criticism for the following:

Too Much or Too Little Intervention

The IMF has been criticized for not doing much and for overreaching. It has been criticized for being too slow or too eager to assist failing national policies. Since the United States, Japan, and Great Britain feature prominently in IMF policies, it has been accused of being a tool for free-market countries only. Simultaneously, free-market supporters criticize the IMF for being too interventionist.

Creates Moral Hazard

Some member nations, such as Italy and Greece, have been accused of pursuing unsustainable budgets because they believed the world community, led by the IMF, would come to their rescue. This is no different than the moral hazard created by government bailouts of major banks.