By Jonny Lupsha, Wondrium Staff Writer
The United Nations says an IMF overhaul should focus on global warming. Proponents say that a shift is needed since world conditions have changed so much since the IMF began. The IMF was founded in 1945 to help stabilize nations through loans and grants.
At a United Nations climate summit, known as COP27, several world leaders called for an overhaul of the World Bank, as well as the International Monetary Fund (IMF). As climate change and extreme weather events continue to devastate countries around the world, updating the programs of both financial institutions, which historically loan or grant money to nations based on other factors, would help such nations to recover. Under the current system, poor countries already in debt due to natural disasters are unable to financially recover or to prepare for the next natural disaster.
The purpose of the IMF is changing, but its stated missions remain the same: economic stability and prosperity. In his video series International Economic Institutions: Globalism vs. Nationalism, Dr. Ramon P. Degennaro, the CBA Professor in Banking and Finance at The University of Tennessee, Knoxville, divulges the institution’s history.
What Is the IMF?
“The articles of agreement of the International Monetary Fund were developed at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire—the Bretton Woods Conference, for short,” Dr. Degennaro said. “That was in July 1944. These articles went into force on December 27, 1945.”
The IMF, which has scores of programs throughout the world, describes itself as an organization that fosters growth and economic stability, provides policy advice and financing to IMF members experiencing economic difficulties, and works with developing nations to reduce poverty and achieve stability. They do this by making loans to countries. Many of the loans are short-term balance of payment needs to countries that can’t otherwise find the funding available on affordable terms.
“To achieve its goal of a stable international economic system, the IMF lists three main tasks,” Dr. Degennaro said. “First, it collects a lot of data—that’s good. Policymakers can’t make good choices if they have little data, or even worse, bad data. Second, it gives practical help to members. Third, it lends to countries with balance of payment difficulties—countries that can’t pay for all the goods they import.
“The IMF is particularly willing to lend to impoverished countries.”
Defining Need
How does the IMF determine a balance of payments “need”? In its Articles of Agreement, the IMF doesn’t define need very well, which was likely done on purpose. According to Dr. Degennaro, British economist Graham Bird interprets need as occurring when countries “have a current balance of payments deficit that they can no longer sustain.”
“In plain English, and exaggerating only slightly, countries come to the IMF when they are either broke, or on their way to being broke,” Dr. Degennaro said. “They’ve borrowed too much for too long. Any surplus funds the nation had in reserve are being unsustainably depleted, or are already gone.”
Unfortunately, politics can come into play with the IMF. When it comes to which nations get funding from the fund, every case involves two parties: the nation doing the borrowing and the nation to whom they owe the money. Often, the borrowing nation approaches the IMF first, but in other instances, the wealthier nation may nudge the IMF to step in and lend to the poorer nation so the wealthier nation can be repaid. This especially happens in the wealthier nation’s election years.
“Professor Bird lists a double handful of pertinent questions that might be asked by the IMF and by policymakers in potential borrowing nations,” Dr. Degennaro said. “What conditions and restrictions will or should the IMF impose on the borrower? Who will be the winners and the losers in the borrowing country, and how powerful are they politically? And as always, when is the next election?”
These questions and many more will affect the UN’s consideration of overhauling the IMF programs to meet the financial needs of nations in the future due to natural disasters caused by climate change.
International Economic Institutions: Globalism vs. Nationalism is now available to stream on Wondrium.