THE IMF’S LIMITATIONS AS AN ILLR

Born out of the Bretton Woods negotiations in 1944, the IMF reflects the United States’ particular vision for how international financial stability would be maintained following World War II. Although the United States could have opted to provide international liquidity on its own, it preferred an institutionalized and decidedly multilateral approach. At the same time, the United States opposed creating a true ILLR. In the classical sense, a lender of last resort should provide automatic and unlimited credit when the financial system is gripped by panic. Britain’s John Maynard Keynes, representing his country at Bretton Woods, favored the creation of just such a mechanism for the international economy. Keynes’s idea was to create a quasi-global central bank (dubbed the International Clearing Union, or ICU for short), which would hold considerable resources equal to three-fourths of prewar international trade, issue its own currency called the "bancor,” and provide automatic, on-demand disbursements to countries facing balance of payments problems.[1] [2] His position was quite clear in one correspondence where he noted, "Our view has been very strongly that if countries are to be given sufficient confidence they must be able to rely in all normal circumstances on drawing a substantial part of their quota without policing or facing unforeseen obstacles.”11

In contrast to Keynes, the US architect at Bretton Woods—Harry Dexter White—pushed for a far less ambitious international co-fnsur- ance scheme, about one-fourth the size of Keynes’s initial proposal.[3] This "International Monetary Fund” was to acquire resources from member states, each of which would be assigned a quota. This "fund” would stipulate how much of its own currency (and some gold) it would deposit with the IMF. The Fund could then make these resources "temporarily available to [members] ... providing them with the opportunity to correct maladjustments in their balance of payments.”[4] Unlike Keynes’ ICU, White’s IMF was not designed to provide automatic financing. Because resources were relatively scarce, loans would only be provided after assessments of policy changes that would address the underlying causes of the balance of payments problem.[5] In other words, the use of conditionality reflected US preferences to place the burden of adjustment on debtor countries. Thus, from the very outset, the IMF’s capacity to provide substantial liquidity in times of need was constrained by member contributions. Its capacity to respond swiftly to crises was constrained by institutional rules precluding automaticity.[6] The problems of resource insufficiency and unresponsiveness, discussed more below, were built right into the Fund’s DNA.

  • [1] Frieden 2006, pp. 256-260; Piffaretti 2009, p. 9.
  • [2] Quoted in Boughton 2002, p. 16. Emphasis added.
  • [3] Bordo and Schwartz 2001; Boughton 2002.
  • [4] See IMF Articles of Agreement, Article I.
  • [5] Boughton 2006, p. 13.
  • [6] Automaticity is the idea that a member country should be able to borrow automaticallyfrom the IMF without condition. The use of conditionality was not mentioned in the original Articles of Agreement. However, in the immediate years after World War II, the UnitedStates felt that most European countries were not particularly creditworthy. The UnitedStates preferred that IMF lending be made contingent on reforms. The Executive Boardapproved a new tiered system of borrowing known as the "tranche policy” in February 1952.The principle of automaticity still applied, but only to the first 25 percent of a member’squota (what was known as the "gold tranche”). Borrowing above this would kick in an application of conditionality and surveillance; repayment was expected within a period of threeto five years.
 
Source
< Prev   CONTENTS   Source   Next >