The IMF, or international monetary fund, was originally established in 1944 to promote financial stability in the post-World War II world. The fund’s primary purpose was to encourage international monetary cooperation, financial stability and global economic growth. While these goals still drive the IMF’s agenda today, a number of emerging challenges threaten to hurt the institution’s relevance and effectiveness. This paper will look at two of these challenges, regionalism and populism.
In the 1930s, the fund acted to support the Bretton Woods system of fixed exchange rates, as the competitive devaluation of currencies was a key source of instability in the international financial system. The fund was essentially an international credit union, with members contributing to pool of reserves from which countries could borrow to maintain fixed exchange rates. After the breakdown of the fixed exchange rate system, the IMF saw a shift in its role to economic surveillance and capacity development.
The IMF has over the years been responsible for coordinating a series of global responses over the past few decades: to relatively successful ones in response to the international debt crisis of the 1970s through to more disastrous policymaking in the late 1990s during the financial crisis in Asia. The IMF has had varied credibility and relevance over the past decades, yet it seems its darkest days are ahead of it. The IMF’s primary function is to “ensure the stability of the international monetary system” via direct and indirect intervention.
While the IMF has provided strong facilitation power to global economies to partake in regional trade agreements, when nations prioritise regional cooperation, they necessarily forego some efforts towards global economic governance. That is, if trading blocs raise trade barriers or are exclusive of other regional countries, this necessarily hurts multilateralism. There are a number of key examples of where the rise of regionalism has hurt the aims of multilateralism, like that of the IMF’s. The BRICS’, being Brazil, Russia, India, China and South Africa (BRICS), are a bloc of emerging economies, contributing 24% of global GDP, that have established a financial and trading bloc. In doing so they have established the $100 billion New Development Bank, believed to challenge the IMF. Regardless, the prioritisation of regional relations over global economic governance has observed the diversion of $100 billion in potential funding away from the IMF. This bank will offer loans to other neighbouring emerging economies, which again detracts from the IMF’s broader goal around global economic integration. Given the significant scale of the BRICS, the greater willingness of said countries to engage with the IMF is likely to decline, as the BRICS takes precedence.
In another example of a turn towards regionalism, the North American Free Trade Agreement (NAFTA) was signed in January 1994, and involves the United States, Canada and Mexico. The trilateral trade bloc NAFTA (now USMCA) aimed to eliminate tariffs, duties and quantitative restrictions, which would result in a smoother flow of trade between the three countries. However, again, the salient issue with regional agreements is that detract from the IMF’s broader goals of economic integration. In this sense, the relevance and effectiveness of the IMF is reduced. More specific to affected countries, economic growth can often be reduced where nations focus on bilateral (or in this case, trilateral) agreements. The IMF estimated that uncertainty surrounding the renegotiations for the NAFTA agreement (which saw is become USMCA) slowed Mexico’s economic growth to 1.9% in 2018 itself. In addition, the IMF has sounded its scepticism as they found that the USMCA would reduce economic integration in North America and decreasing trade among the three North American signatories by more than $4 billion. Moreover, as regional battles play-out, such as that of the trade war between China and the USA, the IMF might find it difficult to enforce its pro-trade. That is, to the extent that the major players in China and the USA are showing more preference towards regional agreements, there is likely little in the IMF’s power to prevent it. This is largely born of the funding structure of the IMF, in that said key players are also among the largest backers of IMF operations.
In turning to a more contemporary and rapidly rising issue, populism is a political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups. For instance, the rise of Trump in America, off the back of a populist appeal to the masses, signals a global shift into populist-dominated societies. In no other period, is the power of the majority deemed to be as great as it is now, and that has had profound effects on how people view liberal internationalism. Liberal internationalism necessarily follows a liberal democracy, as most international organisations are built upon the ideals of the stronger and more prominent governments in the world. Populism takes a direct stance against the proclamation of economic prosperity for all, but rather manifests itself into a prosperity for all of the domestic population of a single country.
There are many factors that have contributed to this fundamental scepticism, including national unrest, lost of competitive advantage due to the increased integration of world economies, and shifts in major industrial and labour demand. More frequently, the ideals that the IMF espouses, ones of global economic integration and cooperation, are coming under threat from competing forces of sovereignty and democracy.
The increasing movement towards changing voting patterns show people’s dissent at the inefficiencies of international economic institutions and how our ‘idealised society’ resulted in a shortfall of expectations. What is the role of the IMF, once the system is no longer politically sustaining? Theory suggested that open trade would generate prosperity for the majority of its participants, but reality has forced government bodies to rethink their ‘rosy picture’ and critically address unproductive sectors, skill drainage, and increased competition. Naturally, global economic integration produces winners and losers, yet the voices of the “losers” are getting louder. In this sense, tensions between bodies of interest has increasingly led to the identification of the people’s identity, that have brought waves of unrest to balance of trade, opinion of the masses, and global economic integration, all of which are the IMF’s primary objectives.
The IMF’s effectiveness in the future will depend on their ability to deal with development emergencies and global imbalances, lend to distressed countries, exert power over trade deals, and distribute voting power amongst its members. The biggest challenge yet, is to understand what policy outcomes should look like.
Will the effectiveness of the policy making in a hostile political environment ultimately lead to the failure of the IMF? Issues such as these are further highlighted by the political trilemma of the global economy: international cooperation, democracy, and sovereignty.
Can we ensure international cooperation? Are the IMF’s policies necessarily in line with the wishes of the voting population? These series of events have perhaps highlighted the inefficiencies international economic organisations, but also brings attention to the necessary and vital role that these organisations play as independent bodies. The future dynamic of the IMF is uncertain and ultimately, challenging.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.