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Home Columnist Bretton Woods Institutions-The Madate and Role of The IMF in Economic Development...

Bretton Woods Institutions-The Madate and Role of The IMF in Economic Development By Mark Darko

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The Bretton Woods Institutions are the World Bank and the International Monetary Fund (IMF). They were set up at a meeting of 43 countries in Bretton Woods, New Hampshire, USA in July 1944. Their aims were to help rebuild the shattered postwar economy and to promote international economic cooperation. The original Bretton Woods agreement also included plans for an International Trade Organisation (ITO) but these lay dormant until the World Trade Organisation (WTO) was created in the early 1990s.

The creation of the World Bank and the IMF came at the end of the Second World War. They were based on the ideas of a trio of key experts – US Treasury Secretary Henry Morganthau, his chief economic advisor Harry Dexter White, and British economist John Maynard Keynes. They wanted to establish a postwar economic order based on notions of consensual decision-making and cooperation in the realm of trade and economic relations. It was felt by leaders of the Allied countries, particularly the US and Britain, that a multilateral framework was needed to overcome the destabilising effects of the previous global economic depression and trade battles.

A Look at the History of the IMF

The International Monetary Fund was created in 1946, a result of the 1944 international financial conference at Bretton Woods, New Hampshire. As earlier highlighted It was created in order to prevent a return of the international financial chaos that preceded — and in some ways precipitated — World War II. During the 1930s, many countries pursued “beggar-thy-neighbor” economic policies — restricting purchases from abroad in order to save scarce foreign exchange, cutting the value of their currencies in order to underprice foreign competitors, and hampering international financial flows — in ways that deepened the world depression and accelerated the decline in economic activity. The IMF was designed to limit or prevent this kind of economic behavior.
Technically, the IMF is a specialized agency of the United Nations but it functions virtually independently of UN control. The IMF must obey directives of the U.N. Security Council, but it need not comply with directives from the U.N. General Assembly or other U.N. agencies.
Rather than being organized on a one-country, one-vote basis, as is the United Nations, the IMF has weighted voting. The IMF has 184 member countries, whose voting share depends on the size of their quota or financial commitment to the organization. A country’s quota is determined by its size and its level of participation in the world economy. The amount a country can borrow from the IMF is determined by the size of its quota. The United States is the largest single shareholder, with a 17.2% voting share. Together, the nine Executive Directors (EDs) representing the G-7 countries and other advanced countries in Europe have nearly 56% of the vote. Most decisions are reached by simple majority, though a decision is generally expressed by consensus. Some special matters (changes in the Articles of Agreement or approval of new quota increases, for example) require an 85% affirmative vote. No country can block or veto loans or other operational policy decisions by the IMF. However, because the U.S. vote exceeds 15%, no quota increases, amendments or other major actions can go into effect without its consent. The same can be said for other major blocks of IMF member countries.

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The IMF’s Mandate

As set forth in its Articles of Agreement, the purposes of the IMF are (1) to promote international cooperation on international monetary problems, (2) to facilitate the expansion and balanced growth of international trade, promoting high levels of employment and real income and the development of productive resources in all member countries, (3) to promote exchange rate stability and to avoid competitive exchange rate depreciation, (4) to help establish a multilateral system of payments among countries for current transactions and to help eliminate foreign exchange restrictions which hamper world trade, (5) to make loans to member countries on a temporary basis with adequate safeguards for repayment, “thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity,” and (6) to shorten with such loans the duration and to lessen the degree of disequilibrium in the international balances of payments of members.
The International Monetary Fund is an international financial institution (IFI) which deals mainly with balance of payments (BOP), exchange rate, and international monetary concerns. Originally, the IMF focused primarily on macroeconomic issues. It monitored the macroeconomic and exchange rate policies of member countries and it helped countries overcome BOP crises with short-term loans conditioned on their making improvements in their macroeconomic performance. Institutional and microeconomic issues were generally considered the province of the World Bank and the other multilateral development banks (MDBs). In recent years, however, the Fund has found that these issues have a much larger impact on countries’ abilities to pursue effective macroeconomic and exchange rate policies. Increasingly, it has included them among the subjects which need to be addressed in the context of its loan programs. It has also given increased attention to institutional and microeconomic issues in its consultations with member country governments, its surveillance activities, and the technical assistance it offers to member countries.
The IMF is a monetary institution, not a development agency. Its sister agency, the World Bank, was created at the same time as the IMF in order to provide long- term loans and to stimulate growth and economic development in war-damaged and developing countries. Even so, economic development and growth are core objectives of the IMF, as specified in purposes 2 and 4 above. The founders believed that international monetary stability would facilitate the growth of world trade and that this in turn would generate higher levels of employment, increased income, and expanded growth and development in the countries participating in the post-World War II international economy.
The founders also expected (purposes 5 and 6) that the IMF would be a means through which countries could remedy their domestic economic problems without resorting to the kinds of “beggar-thy-neighbor” practices which sought to shift the burden of adjustment onto other countries. Countries with chronic balance of payments deficits could get short-term IMF loans to help them weather a balance of payments crisis. It was generally presumed that BOP deficits, inflation, unemployment and low levels of economic activity were the result of inappropriate domestic economic policies. Better policies and adjustments in the exchange rate for the country’s currency were deemed to be the appropriate response to this situation.

It was expected that IMF assistance would help countries shorten the depth and duration of their economic problems and help contain or prevent the spread of monetary instability to other countries.
As the largest single contributor ($50.4 billion cumulatively) to the IMF, the United States has a leading role in shaping the IMF’s lending, surveillance, and advisory operations. Both House and Senate committees frequently hold hearings on IMF activities in developing countries and on IMF reform. Other countries are also concerned that steps should be taken to make the IMF more effective.
In next week’s article, we will take a deep dive into the role and function of the IMF

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Sources: Bank of Ghana, Bloomberg, GSE, Reuters, Doobia, BBC, Ghana News Agency.

Mark Darko-Accra

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