IMF: Framework, institutional structure, its

role in the international macro-economy &

need for Reforms

Submitted By:
Shikhar Tyagi (164)

Sumit Agarwal (182)

Tapan Jain (193)

Ujwal Ghimiray (194)

Yash Agrawal (206)

CONTENTS:
1. Introduction to IMF--------------------------------------------------------------------------3
2. IMF Membership-----------------------------------------------------------------------------4
3. IMF’s organizational structure--------------------------------------------------------------
6
4. Purpose of IMF-------------------------------------------------------------------------------8
5. What is IMF’s main Business---------------------------------------------------------------
9
6. How is IMF Financed------------------------------------------------------------------------
10
7. Governance Structure of IMF--------------------------------------------------------------
14
8. Achievements & Challenges of IMF------------------------------------------------------
15
9. IMF and the World Bank-------------------------------------------------------------------
16
10. Role of IMF in the global financial crisis-------------------------------------------------
17
11. Criticisms against IMF----------------------------------------------------------------------
18
12. Why reform the IMF------------------------------------------------------------------------
21
13. How to reform the IMF--------------------------------------------------------------------22
14. References-------------------------------------------------------------------------------------
23
 1. Introduction to IMF
IMF was created in 1944, at the Bretton Woods conference, to prevent the kinds of chain
reaction in the economic system that caused world currencies to collapse like in the Great
Depression of the 1930s.

The International Monetary Fund (IMF) is the intergovernmental organization that

oversees the global financial system by following the macroeconomic policies of its
member countries, in particular those with an impact on exchange rate and the balance of
payments. It is an organization formed with a stated objective of stabilizing international
exchange rates and facilitating development through the enforcement of liberalizing
economic policies on other countries as a condition for loans, restructuring or aid. It also
offers loans with varying levels of conditionality, mainly to poorer countries. Its
headquarters are in Washington, D.C., United States. The IMF's relatively high influence
in world affairs and development has drawn heavy criticism from some sources.
 2. IMF Membership

The original members of the IMF were the 29 nations whose governments had ratified the
Articles of Agreement by 27 December 1945. Any other state, whether or not a member
of the UN, may become a member of the IMF in accordance with terms prescribed by the
Board of Governors. The IMF had 184 members as of 12 December 2002. (See
membership list at the end of this section.) Membership in the IMF is a prerequisite to
membership in the IBRD. A member may withdraw from the IMF at any time, and its
withdrawal becomes effective on the day that a written notice to that effect is received by
the Fund.

If a member state fails to fulfill its obligations under the IMF Articles of Agreement, the
Fund may declare that country ineligible to use its resources. If, after a reasonable period
has elapsed, the member state persists in its failure to live up to its obligations, the Board
of Governors may require it to withdraw from membership. The Third Amendment of the
IMF's Articles of Agreement came into force on 11 November 1992. It allows for the
suspension of voting and related rights of a member that persists in its failure to fulfill its
obligations under the Articles.

Members of the IMF are 186 of the UN members and Kosovo. Former members are:
Cuba (left in 1964), Taiwan (expelled in 1980 due to political reasons). The other non-
members are: North Korea, Andorra, Monaco, Liechtenstein, Nauru, Cook Islands, Niue,
Vatican City and the rest of the states with limited recognition.
All member states participate directly in the IMF. Member states are represented on a 24-
member Executive Board (five Executive Directors are appointed by the five members
with the largest quotas, nineteen Executive Directors are elected by the remaining
members), and all members appoint a Governor to the IMF's Board of Governors. All
members of the IMF are also IBRD members, and vice versa

2.1 Subscriptions - A member's quota subscription determines the maximum amount of

financial resources the member is obliged to provide to the IMF. A member must pay its
subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own
currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as
the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own
currency.

IMF's main resources: subscriptions (quotas)

 Countries pay 25 percent of their quota subscriptions in Special Drawing Rights
(SDRs) or major currencies.
 IMF can call on the remainder, payable in the member's own currency, to be made
available for lending as needed.
 Quotas,
o Determine the amount of financing that each country can receive from the
IMF
o Are the main determinants of countries' voting power in the IMF
o Broadly reflect members' relative size in the world economy
 The United States of America, the world's largest economy, contributes most to
the IMF, 17.5 percent of total quotas

2.2 Voting power - The quota largely determines a member's voting power in IMF
decisions. Each IMF member has 250 basic votes plus one additional vote for each
SDR 100,000 of quota. Accordingly, the United States has 371,743 votes (16.77 percent
of the total), and Palau has 281 votes (0.01 percent of the total). The newly agreed quota
and voice reform will result in a significant shift in the representation of dynamic
economies, many of which are emerging market countries, through a quota increase for
54 member countries. A tripling of the number of basic votes is also envisaged as a
means to give poorer countries a greater say in running the institution.

2.3 Access to financing - The amount of financing a member can obtain from the IMF
(its access limit) is based on its quota. Under Stand-By and Extended Arrangements,
which are types of loans, a member can borrow up to 200 percent of its quota annually
 and 600 percent cumulatively. However, access may be higher in exceptional
circumstances.

2.4 SDR allocations - Allocations of SDRs (Statutory Depository Rights), the IMF's unit
of account, is used as an international reserve asset. A member's share of general SDR
allocations is established in proportion to its quota. The most recent general allocation of
SDRs took place in 2009.

3. IMF’s organizational structure

The IMF organizational structure looks something like this:

In Joint IMF-
Internation Board of
al Governors World Bank
Monetary Development
& Committee

Executive Independent
Board Evaluation
Office

Managing Director
& Deputy
Managing
Directors Investment Office of Office of Office of
Office-Staff Budget & Internal Technical
Retirement Planning Audit and Assistance
Plan Inspection Manageme

Area Departments Functional and Information Support

Special & Liaison Services
The IMF has a management team and 17 departments that carry out its country, policy,
analytical, and technical work. One department is charged with managing the IMF's
resources. This section also explains where the IMF gets its resources and how they are
used.

The IMF is led by a Managing Director, who is head of the staff and Chairman of the
Executive Board. He is assisted by a First Deputy Managing Director and two other
Deputy Managing Directors. The Management team oversees the work of the staff, and
maintains high-level contacts with member governments, the media, non-governmental
organizations, think tanks, and other institutions.

The current Management team includes Dominique Strauss-Kahn (a French national,

became the IMF's tenth Managing Director in November 2007), John Lipsky (an
American, has been First Deputy Managing Director since September 2006), Murilo
Portugal (from Brazil, became Deputy Managing Director of the IMF in December
2006) & Naoyuki Shinohara (a Japanese national, joined the IMF as Deputy Managing
Director in March 2010).
 4. Purpose of IMF

The major purposes of IMF are as follows:

o Promote international monetary cooperation, exchange stability, and orderly
exchange arrangements
o Foster economic growth and high levels of employment
o Temporary financial assistance to countries to help the balance of payments
adjustments
* Summary of the Article #1 of Articles of Agreement

The IMF provides policy advice and financing to members in economic difficulties and
also works with developing nations to help them achieve macroeconomic stability and
reduce poverty.

Marked by massive movements of capital and abrupt shifts in comparative advantage,

globalization affects countries' policy choices in many areas, including labor, trade, and
tax policies. Helping a country benefit from globalization while avoiding potential
downsides is an important task for the IMF. The global economic crisis has highlighted
just how interconnected countries have become in today’s world economy.

Key IMF activities - The IMF supports its membership by providing

 Policy advice to governments and central banks based on analysis of economic

trends and cross-country experiences;
 Research, statistics, forecasts, and analysis based on tracking of global, regional,
and individual economies and markets;
 Loans to help countries overcome economic difficulties;
 Concessional loans to help fight poverty in developing countries; and
 Technical assistance and training to help countries improve the management of
their economies.

5. What is IMF’s main Business?

The IMF's job is to promote a stable international monetary system, in which member
countries can achieve high rates of employment, low inflation, and sustainable economic
growth. The IMF does this by

 Overseeing the international monetary system by regularly reviewing global and

regional economic and financial developments;
 Providing economic monitoring and policy advice to its 187 member countries in
the areas most relevant to domestic and external stability, that is, a situation where
disruptive exchange rate adjustments are unlikely. The IMF's focus is therefore on
macroeconomic and financial policies as well as on developments in exchange
rates, the balance of payments, the real economy, and the financial sector
 Analyzing the impact of countries' policies on others; applying lessons from cross-
country experience to each country's unique situation; and providing a forum for
international cooperation on global economic and financial problems.
 6. How is IMF Financed?

The IMF is financed by member countries who contribute funds on joining. They can
also increase this throughout their membership. The IMF can also ask its member
countries for more money. IMF financial resources have risen from about $50 billion in
1950 to nearly $300 billion last year, sourced from contributions from its 183 members.
This initial amount depends on the size of the country’s economy. E.g. the US deposited
the largest amount with the IMF. The US currently has 16% of voting rights at the IMF, a
reflection of its quotas deposited with IMF. The UK has 4% of IMF Voting rights. Loans
are also available to developing countries to 'deal with poverty reduction.'
 7. Governance Structure of IMF

The IMF's mandate and governance have evolved along with changes in the global
economy, allowing the organization to retain a central role within the international
financial architecture. The diagram below provides a stylized view of the IMF's current
governance structure.
7.1 Board of Governors

The Board of Governors is the highest decision-making body of the IMF. It consists of
one governor and one alternate governor for each member country. The governor is
appointed by the member country and is usually the minister of finance or the head of the
central bank.

While the Board of Governors has delegated most of its powers to the IMF's Executive
Board, it retains the right to approve quota increases, special drawing right (SDR)
allocations, the admittance of new members, compulsory withdrawal of members, and
amendments to the Articles of Agreement and By-Laws.

The Board of Governors also elects or appoints executive directors and is the ultimate
arbiter on issues related to the interpretation of the IMF's Articles of Agreement. Voting
by the Board of Governors usually takes place by mail-in ballot.

The Boards of Governors of the IMF and the World Bank Group normally meet once a
year, during the IMF-World Bank Spring and Annual Meetings, to discuss the work of
their respective institutions. The Meetings, which take place in September or October,
have customarily been held in Washington for two consecutive years and in another
member country in the third year.

The Annual Meetings usually include two days of plenary sessions, during which
Governors consult with one another and present their countries' views on current issues in
international economics and finance. During the Meetings, the Boards of Governors also
make decisions on how current international monetary issues should be addressed and
approve corresponding resolutions.

7.2 Ministerial Committees

The IMF Board of Governors is advised by two ministerial committees, the International
Monetary and Financial Committee (IMFC) and the Development Committee.

The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors
that of the Executive Board and its 24 constituencies. As such, the IMFC represents all
the member countries of the Fund.

The IMFC meets twice a year, during the Spring and Annual Meetings. The Committee
discusses matters of common concern affecting the global economy and also advises the
IMF on the direction its work. At the end of the Meetings, the Committee issues a joint
communiqué summarizing its views. These communiqués provide guidance for the IMF's
work program during the six months leading up to the next Spring or Annual Meetings.
There is no formal voting at the IMFC, which operates by consensus.

7.3 The Executive Board

The IMF's 24-member Executive Board takes care of the daily business of the IMF.
Together, these 24 board members represent all 187 countries. Large economies, such as
the United States and China, have their own seat at the table but most countries are
grouped in constituencies representing 4 or more countries. The largest constituency
includes 24 countries.

The Board discusses everything from the IMF staff's annual health checks of member
countries' economies to economic policy issues relevant to the global economy. The
board normally makes decisions based on consensus but sometimes formal votes are
taken. At the end of most formal discussions, the Board issues what is known as a
summing up, which summarizes its views. Informal discussions may be held to discuss
complex policy issues still at a preliminary stage.
7.4 Country Representation

How countries are represented is key to the IMF's legitimacy as an international

organization representing the interests of its 187 member countries. Upon joining the
IMF, each country is allocated a quota based approximately on the relative size of its
economy. The quota determines the country's financial contribution to the IMF, its voting
power, and ability to access IMF financing.

Because of rapid changes in the global economy in recent years, the IMF's members
agreed that the existing quota allocations had become somewhat misaligned and needed
to be adjusted. However, any changes in quotas require approval by an 85 percent
majority. A broad-based consensus was therefore needed before any changes could be
implemented.

Two-year program

In 2006, the IMF launched a two-year program to reform the system of quota shares.
First-round changes included ad hoc quota increases for the four most underrepresented
countries: China, Korea, Mexico, and Turkey (see chart). Agreement to further increase
the voting share of emerging market and developing economies was reached in March
2008. This shift will be based on a new quota formula, replacing the old, complex system
of five formulas.

Under the reform, 135 countries will see increases in their voting power, with an
aggregate shift of 5.4 percentage points. A total of 54 countries will see increases in their
nominal quotas ranging from 12 to 106 percent, with aggregate quota shares for these
countries increasing by 4.9 percentage points (see chart). Consistent with the objectives
of the reform, some of the largest increases will go to dynamic emerging market
countries.

The Board of Governors also encouraged the Executive Board to recommend further
realignments as a means to raise the shares of underrepresented members in future
general quota reviews (conducted every five years). Such realignments would recognize
that member country representation should continue to adjust to changes in the global
economy.
Protecting voice of low-income countries

Enhancing the voice of low-income countries was another central element of the reform
package. A key mechanism for achieving this goal is through an increase in basic votes.
Basic votes reflect the principle of equality of states and give the smallest members of the
IMF (many of which are low-income countries), a greater voice in the organization's
deliberations.

The agreement reached endorsed a tripling of basic votes, the first such increase since the
IMF was established in 1945. This boost is crucial as it will more than compensate many
low-income countries that would have otherwise seemed their voting shares diminished
(see chart). Additionally, the Articles of Agreement will be amended so that the share of
basic votes in total voting power does not decline in the event of future quota increases.
 8. Achievements and Challenges of IMF

It would take an entire book to cover all the achievements of the IMF but here are some
that are worth recollecting:

 The IMF triggered Poland’s economic transition. The transition included

institution building, liberalization, and macro-economic management.
 Initiatives by the IMF initiatives triggered economic growth, liberalized prices and
the spread of democratic institutions in countries like the Czech Republic, the
Slovak Republic the Baltics and Hungary.
 In 2008, the Asia Pacific region made considerable progress in addressing
downside risks to economic growth.

Gaining sufficient political muscle to grapple with issues that affect economic prosperity,
offering speedy solutions to crises and ensuring economic transition for developing
nations are some of the challenges ahead for the IMF.

Critics of the IMF say that its policies often make economic crises worse because of the
severity of some of the austerity measures it imposes. As the global lender of last resort,
sovereign nations will normally try to find any other means they can of solving their own
problems before turning to the IMF. Whichever way you look at it, with the growing
risks in the global financial system, the Fund is going to be busy in the coming years, and
will continue its supporting role to help countries stabilize their commodity and oil
prices, pursue expansionary policies and reduce inflation.

To further enhance the participation of low-income countries, the amendment will also
enable the two Executive Directors representing African constituencies to appoint a
second Alternate Executive Director. 
 9. The IMF & the World Bank

o IMF and the World Bank, both were created at an international conference convened
in Bretton Woods

o IMF Promotes international monetary co-operation and provides policy advice and
technical assistance to maintain strong economies

o The World Bank promotes long-term economic development and poverty reduction to
help countries reform particular sectors or implement specific projects

o IMF and World Bank collaborate regularly and at many levels on assistance to
member countries and are involved in several joint assistances.
 10.Role of IMF in the Global Financial Crisis

The current global financial crisis, which began with the downturn of the U.S. subprime
housing market in 2007, is testing the ability of the International Monetary Fund (IMF),
in its role as the central international institution for oversight of the global monetary
system.

Though the IMF is unlikely to lend to the developed countries most affected by the crisis
and must compete with other international financial institutions as a source of ideas and
global macroeconomic policy coordination, the spillover effects of the crisis on emerging
and less-developed economies gives the IMF an opportunity to reassert its role in the
international economy on two key dimensions of the global financial crisis:
(1) Immediate crisis management and
(2) Long-term systemic reform of the international financial system.

The role of the IMF has changed significantly since its founding in July 1944. Late in
World War II, delegates from 44 nations gathered in Bretton Woods, New Hampshire to
discuss the postwar recovery of Europe and create a set of international institutions to
resolve many of the economic issues — such as protectionist trade policies and unstable
exchange rates — that had ravaged the international economy between the two world
wars. As the global financial system has evolved over the decades, so has the IMF. From
1946 to 1973, the main purpose of the IMF was to manage the fixed system of
international exchange rates agreed on at Bretton Woods. The U.S. dollar was fixed to
gold at $35 per ounce and all other member countries’ currencies were fixed to the dollar
at diferrent rates.

The IMF monitored the macroeconomic and exchange rate policies of member countries
and helped countries overcome balance of payments crises with short-term loans that
helped bring currencies back in line with their determined value. This system came to an
abrupt end in 1973 when the United States floated its currency and subsequently
introduced the modern system of floating exchange rates. Over the past three decades,
floating exchange rates and financial globalization have contributed to, in addition to
substantial wealth and high levels of growth for many countries, an international
economy marred by exchange rate volatility and semi-frequent financial crises. The IMF
adapted to the end of the fixed-exchange rate system by becoming the lender of last resort
for countries afflicted by such crises.

11.Criticisms against IMF

Over time, the IMF has been subject to a range of criticisms, generally focused on the
conditions of its loans. The IMF has also been criticized for its lack of accountability and
willingness to lend to countries with bad human rights record.

11.1 Many Criticisms of IMF include:

A) Conditions of Loans

On giving loans to countries, the IMF make the loan conditional on the implementation
of certain economic policies. These policies tend to involve:

 Reducing government borrowing - Higher taxes and lower spending

 Higher interest rates to stabilize the currency.
 Allow failing firms to go bankrupt.
 Structural adjustment. Privatization, deregulation, reducing corruption and
bureaucracy.

The problem is that these policies of structural adjustment and macro-economic

intervention make the situation worse.

 For example, in the Asian crisis of 1997, many countries such as Indonesia,
Malaysia and Thailand were required by IMF to pursue tight monetary policy
(higher interest rates) and tight fiscal policy to reduce the budget deficit and
strengthen exchange rates. However, these policies caused a minor slowdown to
turn into a serious recession with mass unemployment.
  In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a
decline in investment in public services which arguably damaged the economy.

B) Exchange Rate Reforms.

When the IMF intervened in Kenya in the 1990s, they made the Central bank remove
controls over flows of capital. The consensus was that this decision made it easier for
corrupt politicians to transfer money out of the economy (known as the Goldman
scandal). Critics argue this is another example of how the IMF failed to understand the
dynamics of the country that they were dealing with - insisting on blanket reforms.

C) Neo Liberal Criticisms

There is also criticism of neo liberal policies such as privatization. Arguably these free
market policies were not always suitable for the situation of the country. For example,
privatization can create lead to the creation of private monopolies who exploit
consumers.

D) Free Market Criticisms of IMF

As well as being criticized for implementing 'free market reforms' other criticize the IMF
for being too interventionist. Believers in free markets argue that it is better to let capital
markets operate without attempts at intervention. They argue attempts to influence
exchange rates only make things worse - it is better to allow currencies to reach their
market level.

E) Lack of Transparency and involvement

The IMF has been criticized for imposing policy with little or no consultation with
affected countries.

Jeffrey Sachs, the head of the Harvard Institute for International Development said:

"In Korea the IMF insisted that all presidential candidates immediately "endorse" an
agreement which they had no part in drafting or negotiating, and no time to understand.
The situation is out of hand...It defies logic to believe the small group of 1,000
economists on 19th Street in Washington should dictate the economic conditions of life
to 75 developing countries with around 1.4 billion people.
F) Supporting Military dictatorships.

The IMF have been criticized for supporting military dictatorships in Brazil and
Argentina, such as Castello Branco in 1960s received IMF funds denied to other
countries.

11.2 Response to Criticism of IMF

A) Crisis always lead to some Difficulties - Because the IMF deal with economic crisis,
whatever policy they offer, there is likely to be difficulties. It is not possible to deal with
a balance of payments without some painful readjustment.

B) IMF has had Some Successes. - The Failures of the IMF tend to be widely publicized.
But, its successes less so. Also criticism tends to focus on short term problems and
ignores longer term view

C) Confidence - The fact there is a lender of last resort provides an important confidence
boost for investors. This is important during current financial turmoil

D) Countries are not obliged to take an IMF loan - It is countries that approach the IMF
for a loan. The fact that so many take loans suggest there must be at least some benefits
of the IMF.

E) IMF is an easy target - Sometimes countries may want to undertake painful short term
adjustment but there is a lack of political will. An IMF intervention enables the
government to secure a loan and then pass the blame on to the IMF for the difficulties.
 12.Why Reform the IMF?

Why reform the IMF? The current international economic environment is more hopeful
than ever before. For the first time, the overwhelming majority of the world's population
lives in some form of market economy. The industrial world enjoys a rare combination of
growth and low inflation; the "Washington consensus," a model of economic
development that emphasizes macroeconomic discipline and open markets, is being
adopted by more countries. The IMF played crucial roles in the 1980s debt crisis and in
the transformation of former communist economies. Radical change, many might argue,
is neither necessary nor desirable.

Such complacency is misplaced. There is a gulf between the rhetoric and reality of the
IMF's role, a gulf that has been emerging since the fixed exchange rate system broke
down in the early 1970s but which is proving increasingly hazardous. The growth of
capital markets has rendered the organization impotent in industrialized countries; the
world's richest economies neither borrow from the IMF nor are they required to follow its
policy advice. Its role in the developing world is worrisomely unclear. The Mexican
crisis earlier this year is a case in point. The IMF proved wholly inadequate at crisis
prevention (it did not foresee the Mexican debacle), and its attempts at crisis resolution
were dangerously improvised (it pledged a disproportionate share of its liquid resources
to Mexico, breaking all existing rules on the limits of financial support).
 13.How to reform the IMF

The International Monetary Fund (IMF) is in eclipse as the preeminent institution

promoting international economic and financial stability. Successful reform of the IMF
must engage the full spectrum of its members. The IMF should not focus primarily on its
low-income members and the challenges of global poverty nor should it focus exclusively
on international financial crises affecting a small group of vulnerable emerging-market
economies. Instead, it must be engaged with each of its members potentially on the full
range of their economic and financial policies and play a central role in shaping global
economic performance.

It can be argued systemically that important countries, starting with the Group of Seven,
must support the IMF in this role. The reform measures should cover all key aspects of
IMF responsibilities and operations including:

o In the crucial area of governance, the membership of the IMF should promptly
address the reallocation of IMF shares (voting power) and the reallocation of chairs
(representation on the IMF executive board), and it is time to discard the old
conventions and to adopt a merit-based approach to the choice of the IMF’s
leadership.
o Mechanisms should be put in place to increase the IMF’s leverage over systemically
important members, and the IMF must act more forcefully in discharging its
responsibility to exercise firm surveillance over members’ exchange rate policies.
o The Fund’s central role in external financial crises should be reaffirmed.
o The IMF should narrow and refocus its involvement with its low-income members.
o The IMF’s activities should be updated with respect to members’ capital account
policies and financial sectors.
o The IMF should put in place procedures for borrowing from the market to guard
against the possibility that it will not receive timely increases in its quota resources.

References

o http://economics.about.com/cs/moffattentries/a/imf.htm
o http://www.imf.org/external/about/govstruct.htm
o http://www.economicshelp.org/dictionary/i/imf.html
o http://www.economicshelp.org/dictionary/i/imf-criticism.html
o http://www.scribd.com/doc/6721697/Imf
o http://en.wikipedia.org/wiki/International_Monetary_Fund
o http://www.economywatch.com/international-organizations/international-
monetary-fund-imf.html
o http://www.foreignaffairs.com/articles/50979/zanny-minton-beddoes/why-
the-imf-needs-reform
o http://bookstore.piie.com/book-store//3985.html