The EU’s finance ministers recently voted for Kristalina Georgieva, the Chief Executive of the World Bank, to take on the top job at the International Monetary Fund (IMF). Georgieva is almost guaranteed to secure the position, as tradition dictates that Europe chooses the Managing Director of the IMF, while the US selects the World Bank President. This unwritten arrangement has rightly come under fire, with calls for the IMF leadership race to be opened up to applicants from the global south in a more transparent and democratic process. While this would provide a boost to the institution’s legitimacy and could result in some welcome changes, the structural flaws of the IMF would remain. Therefore, beyond questioning the selection process for the Fund’s top job, we must question the very foundations of this deeply problematic institution.
Over the years, the IMF has undergone heavy criticism for a wide variety of reasons. Chief among these are the “conditionalities” or “structural adjustment” policies that the Fund (and the World Bank) imposes on its borrowers. When indebted nations with restricted monetary sovereignty seek a loan from the IMF, they must abide by a list of policies that usually involve deregulation, privatization, liberalization and austerity measures. These are intended to promote global economic stability and ensure that the borrowing country can repay its loan, an often unattainable task in the first place due to compound interest rates. These policies, however, have served financial interests while condemning IMF borrowers to a vicious cycle of growing indebtedness. The IMF’s contribution to inflating the asset bubble that resulted in Japan’s 1990 crisis is a prime example of the financial chaos that the Fund’s policies have caused. Therefore, contrary to its stated mission, the IMF has a track-record of exacerbating macroeconomic instability and inequality.
The IMF’s conditionalities have had significant social and ecological repercussions. Austerity measures in particular have ensured a lack of basic services for the world’s poorest. David Graeber’s Debt: The First 5,000 Years, for example, discusses the consequences of IMF-imposed austerity in Madagascar, which resulted in the termination of its malaria-prevention programme. Furthermore, in undermining environmental regulations and promoting export policies that result in over-extraction of natural resources in the global south, the IMF has contributed to ecological destruction. Given the weak position of these countries in the international monetary system, the sale of commodities occurs at overly cheap prices, feeding excessive consumption in the global north. Since the 2008 financial crisis, there has been rhetoric suggesting that the IMF has been moving towards more Keynesian policies, yet their conditionalities have not reflected any such shift.
An even deeper, structural flaw of the IMF, however, is that it only seeks to address macroeconomic instabilities once they arise rather than preventing them from arising in the first place. Preventatively evening out global imbalances requires constant, active cooperation by all countries, not only action by those that are in the greatest financial trouble. In fact, the plan that established the IMF was put forth in opposition to an alternative proposal that would have incentivized precisely such cooperation. At the Bretton Woods negotiations in 1944, John Maynard Keynes, leading the UK delegation’s negotiations, presented a plan for an International Clearing Union (ICU) that would issue a unit of account called the bancor, to be used for international payments. Whenever a country imported goods, bancors would be subtracted from its account at the ICU, and whenever it exported, they would be added. All member countries’ currencies would have a fixed exchange rate with the bancor.
Contrary to the IMF, Keynes’ ICU would ensure that the burden of evening out global trade imbalances would fall on both debtors and creditors. The main mechanism by which this would be accomplished would be through the charging of interest on excess deficits and surpluses. If excess surpluses remained by the end of the year, they would be confiscated. With a strong incentive to clear surpluses, creditor countries would import greater quantities from deficit countries, thus clearing both deficits and surpluses. Further, deficit countries would be required to devalue their currencies and implement capital controls, while surplus countries would have to appreciate their currency and remove any capital controls. If it were to function as intended, an ICU would systematically “balance out capital flows, volatility, global aggregate demand and productivity.”
However, the largest and only (other than Switzerland) creditor at the time – the US – recognized that such a plan would impose limitations on its own monetary sovereignty. Therefore, Harry Dexter White, negotiating on behalf of the US, insisted on the IMF and the World Bank instead, which would place the burden of adjusting global trade imbalances entirely on debtor countries. All currencies would be pegged to the US dollar (convertible to gold at a fixed rate), making the dollar the world’s reserve currency. This meant that even when the US started running a trade deficit, its size was less constrained than other countries. And when other countries’ willingness to accept excess dollars started to wane, the US abandoned gold convertibility and the world quickly shifted to a system of flexible exchange rate. Nonetheless, it remains the case today that financially poor countries with limited monetary sovereignty bear the greatest burden of adjusting global trade imbalances.
While cosmetic reforms are always possible, the IMF’s undemocratic voting system presents a robust barrier to any radical changes to the institution. The IMF’s key decisions are made through a system of proportional voting, according to which each member nation’s share of votes is determined by their monetary contribution to the Fund. Wealthier countries that contribute more hold the vast majority of voting power. A key outcome of this is that the US still holds de facto veto power, given that it has 16.52% of the total vote, where 85% is necessary for any motion to pass. This is particularly striking when we consider, for example, that India (which has over 17% of the world’s population) has only 2.64% of the Fund’s total votes, or that there are 91 countries that have less than 0.1% of the share (25 of which have as little as 0.03%). Therefore, given that wealthier countries always hold the majority of influence over the institution, we should not expect any radical changes to the policies and structures that benefit these nations.
It is entirely justified to challenge the undemocratic selection process of the IMF, but no matter who leads this institution, the power structures that it maintains won’t be going anywhere anytime soon. Ultimately, we need an international monetary institution that is hardwired to promote social and environmental justice by design. This could be the ICU, some variant of it, or something completely different, but it is definitely not what we have now.
In order to address financial instability, global inequality, and climate and ecological breakdown, we must push for a radically different international monetary institution that puts people and planet before profit.