Since the IMF birth in the Bretton-Woods context, governing international economic regimes and its core institutions in a neo-liberal theoretical framework is increasingly impossible. From its inception, the IMF was intended to be embedded in Keynesian interventionism. Floating currency rates and decolonization gave birth to a new set of problems in the seventies, and redemption through free market as well as conditionality fell under the scrutiny of critical theory. Its demise of social facts such as the rationality of numbers and the focus on shortages compel economic expertise within the fund to revise the ideology behind its policymaking. The perpetual Kantian peace ideal within which the Fund is conceived must include critical theory’s innovative perspectives to sustainably face current challenges of global economic governance.

The three post-WW2 economic regimes: embedded liberalism

General Background

Before discussing the IMF in and of itself, we must consider the three Bretton-Woods economic regimes within which it is conceived. This 1944 kept in mind the inter-war economic turmoil causing the Second World War. Its main goal was to create mechanisms to avoid another depression leading to a third World War, and provide an alternative to beggar-thy-neighbor policy. By devaluating its currency, a country aims at competing with its trading partners at their expense. While this policy may be successful when one country adopts it, its simultaneous application is mutually detrimental. A new economic order based on liberalism within the boundaries of Keynesianism is proposed. This notion of embedded liberalism suggests that while trade is opened and tariffs are reduced, these policies are subjected and secondary to state welfare and intervention to reduce the gap in wealth distribution. This concession, diluting the purity of self-regulating free market, falls in line with Paulanyi’s notion of “double movement” , in which market has to be managed externally otherwise it would lead to revolution. The three formal institutions at the core of the embedded liberal economic systems provide a light framework rendering market laws acceptable. Selective interventions permit the cycle to go on by correcting certain marginal aspects, while leaving the core up to self-regulation. The three institutions are the World Bank, the World Trade Organization and the International Monetary Fund. The World Bank is in charge of the development regime. The WTO deals with “support(ing) trade liberalization, since trade is the engine for growth and development” (Mingst, 380). The IMF was designed for monetary control: ensuring stability of exchange rates and providing short-term loans to countries experiencing balance-of-payment problems. The tripartite system provides three pillar regimes to perpetuate liberalism: development through the World Bank, free trade with the WTO, and monetary stability ensured by the IMF.

The International Monetary Fund

Based in Washington, its 184 member-countries director is traditionally European. The weighed voting system is proportional to contribution. Calculated in special drawing rights, a member’s quota determines its weight. The United States currently has 17.1% with a 45.2 billion contribution, the g-7 45% the European Union members also weights heavily, but they do not always act in united manner. Decisions require an 85% majority. This system reflects power distribution: “the only country which escapes the jurisdiction of the Fund is the United States”. (Schweitzer 210) Note also that for a country to increase its contribution - and consequently its decisional power - that increase must be agreed upon according to the current voting power distribution. In other words, only if the most powerful nations accept will a state be able to increase its voice.

Theoretical framework: from elasticity to absorption

The IMF outlook has always been macroeconomic in nature, but its theoretical vector moved from the elasticity to the absorption approach in dealing with balance of payments deficits. Before we resort to answer them, let us define the notion of balance of payments. When the total export/import ratio of a country is negative, its currency is devaluated or inflated, and has decreased capital. In an increasingly versatile global trading system, countries may punctually experience such difficulties termed balance-of-payments. The IMF provides short-term loans to adjust these aberrations.

While the elasticity approach suggests devaluating the currency to increase export, the absorption theory focuses on the spending and investment of a country. According to the latter, balance-of-payments issues occur when a country absorbs more product and investment than it creates. The logical remedy is then to limit public expenditure in the non-profitable public sector and open the country to foreign investment. This approach is commonly known as the shock therapy. Its negative effects on the poorer strata of the affected country are quite known, even by the IMF. In response to this fact embodied in Salvador and Argentina’s societal disruptions, the IMF has created the Social Adjustment Fund to limit the impacts of the shock therapy.

from parity to floating exchange rates

In 1971, a fundamental change occurred in the international monetary makeup of the economic regime. President Nixon unilaterally terminated the US dollar/gold parity assured by the American reserve. No more could countries peg their currency to the 35$ for an ounce standard. The increased global trade volume amplified insecurity about the ability of the US gold reserve to actually handle a crisis, and the convertibility then became floating despite central banks efforts to a compromised “managed float”. This fundamental change from fixed to floating currency had a direct effect on the IMF. Since its core expertise field is monetary regulation, the deregulation of the global market called for new strategies to resolve a new set of problems, like the Asian crisis in the nineties.

Developing countries

Further complicating the IMF role is the issue of development in the third world emerging from colonialism. After centuries of economic exploitation, Africa and Latin America’s economies based on primary material export were not competitive. Far from able to enter the global market, these economies were and are dealing with deeply rooted structural systemic problems, ranging from corruption to ideological differences. The IMF must devise new strategies to integrate the developing world into the global market and promote liberal democracy. We shall now examine what ideals guide the implementation of such a model.

The Neo-liberal Perspective

The Washington Consensus: conflicting views

Generally interpreted as “fiscal discipline; privatization of industry; liberalization of trade and foreign direct investment; government deregulation in favor of open competition” (Mingst, 360), some argue that the Washington consensus also entails “poverty reduction, (...) and environmental concerns” (Christopher L. Gilbert and David Vines, 17). Having said that, neo-liberals agree that while government spending reduction, privatization and higher interest rates create short-term recession, such measures stabilize the economy on a long-term basis. Recession is defined by a decline in Gross Domestic Product over two or three quarters. Ironically enough, this phenomenon may affect poverty and environment in a negative fashion. Therefore, the primary methods have a negative impact on the secondary goals of the Washington Consensus, the SAF (Social Adjustment Fund) being numerically irrelevant to reflect a strong commitment to reducing the impact of the shock therapy. The Washington consensus is a contentious notion, with inconsistencies such as that found between the shock therapy’s negative impact on poverty and the environment, and their priority as goals.

The Kantian triangle

In any case, the Washington consensus and neo-liberalism at large is based on the Kantian triangle. Democracy, international organizations and free trade work in concert to achieve peace. Because war is less likely in a democracy, nefarious for trade and International Organizations enhance trust and communication, nations will cooperate through IOs (International Organizations) for the reason that it will be in their common interest. IO’s like the IMF play a significant role in reducing uncertainty, a crucial factor in this theory based on the economic model of risk-calculation. Emmanuel Kant dreamed of perpetual peace through democracy, trade and international law, the latter embodied in formal entities like the IMF. It provides monetary stability to promote international trust in global trade, and actively encourages liberal-democrat ideology. Article five of Chapter one of the IMF agreement clearly demonstrates the link between trust and peace: “To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” Stemming out of this mission statement is the adjustment of self-regulating markets so as not to disrupt prosperity and peace. The destructive measures like the beggar-thy-neighbor policy are implicitly targeted as the cause of the escalation of conflict.

From Automaticity to Conditionality

The IMF can efficiently implement its vision through loan conditionality. Increasingly and controversially, the IMF has become proactive in states’ internal affairs. Because democracy is a pillar of the Kantian triangle, the IMF curbs states’ policy not only on the international arena but also in domestic affairs. The conjunction of the absorption approach and conditionality is responsible for the IMF ever-growing implication in a state’s internal policies. As the fund grows more confident in its expertise, it increasingly adds conditions to standby arrangements. Due to the fact that countries resorting to IMF lending are in a very bad bargaining position, they will agree to invasive conditions in order to restore their credit. The IMF “seal of approval” might be considered an adhesion contract, because there aren’t reciprocal negotiations in the stabilization programs. What is more, the lack of transparency of these agreements and their technical safeguard from formal international treaty law creates a “democratic deficit” (Barnett and Finnemore 383). The closed-door characteristic of conditionality agreements makes one suspect they would be unpopular. While we may praise the intention of sealing the fund from political pressure, we must keep in mind that it is only protected from critical pressure of one side. In that sense, conditionality cannot excuse its lack transparency in the name of independence, since the secrecy benefits only the neo-liberals in restraining evidence to support criticisms.

Moral hazard

While conditionality meets strong opposition from the left as being anti-democratic and perpetuating dependency, right-wing critics argue that they are infringing on a state’s absolute sovereignty (a realist statement). As the Meltzer Commission illustrates, there is strong resistance to the IMF interventionist loans, which are said to prevent market’s self-regulation. Emitted by US conservative streak, one must not underestimate the influence of such thinking. As demonstrated before, the Americans have a determinant say in IMF affairs. The Meltzer opinion that “the IMF should curtail its lending programs to developed countries and cease intervening in the politics of these countries” (Gilpin 389) as well as the heightened preoccupation of moral hazard as a result of the IMF guarantees do not go unheard. Moral hazard is a typically realist argument, according to which guaranties will lead to unsafe conduct. In this instance, countries will plan more adventurous budgets if they know the IMF will rescue them anyways.

Neo-liberals believe in the IMF because it embodies their ideal of peace and prosperity. However, clash between primary and secondary goals, as well as the weak argument of secrecy as mandatory for apoliticized decisions open the door to criticisms, which we shall now examine

Constructivist critics and downfalls

Redemption through free market

The IMF is an international institution, but it reflects Western values and imposes them on the rest of the world. Such would be the argument of constructivists, a theory according to which ideas, not just power and nation-states, rule the world. It follows that the IMF spreads its allegiance to the Kantian triangle, which it implements through loan conditionality. The neo-liberal model, based on individuality and competition, may not be fit for countries with a different heritage, be it animist African tribes affected by colonialism or Muslim non-secular countries where charity and community are primary. “As economic integration spread among many of and more diverse economies and also deepened, fundamental differences among national systems of political economic principles and legitimate policy have challenged Western Ideals.” (Gilpin 381).

Is the IMF is adjusting to reflect the increasing diversity, or is it internationalizing its mentality? While cultural relativism is a slippery terrain (it could lead to peculiar ideas like those found in Huntington’s Clash of Civilizations), it is nevertheless relevant to consider constructivist concerns. The IMF new economic proselytism, whereby redemption shall arrive through liberalism (Roland Paris), is a neo-colonial stance likely to create protectionist backlash and create a gap between cultures .

The power of numbers

Another issue is the rationality of numbers as an assertive, unquestionable method. GDP (Gross Domestic Product) measures growth. It reflects overall growth but does not incorporate the rich/poor disparity. The IMF therefore leaves poverty reduction at the periphery of its mandate. It is correct to assert that development is the World Bank’s department; but designing programs based on the GDP indicia may end up being counterproductive for the development regime. The Bretton-Woods conference clearly intended for the monetary and development regimes to be complementary, and the GDP indicia is nowhere close to promoting such partnership.

Further, growth is a culturally constructed manner of evaluating a nation’s well being; it leaves out quality of life, environment, and political empowerment out of the equation. As Mathew Kerby remarked in his guest lecture, the IMF evaluation is limited to economic concerns, and quantification makes suffering acceptable, reduces it to an error variable. But pragmatically speaking, there is no other way than numbers to deal with macro issues. Nevertheless, the myth around their objectivity needs to be deconstructed: what is included/left out, and the abstraction mechanism may poorly reflect a situation. Normatively speaking, one cannot escape the blatant obscenity of taking the drama out of destinies with a calculator.

Nevertheless, the IMF has grown very confident about its ever-deepening expertise based on numerical parameters. The Polack Model, based on variables, enables the IMF to target domestic policies. This view converges with Barnett and Finnemore’s point in “Objectivity and Quantification” where they state that “the form of knowledge, particularly its quantified and supposedly objective character, shaped the world’s view of the Fund” (Barnett and Finnemore 68).

I would argue that, inversely, it shaped the Fund’s view of the world. Deeper involvement in national economies comes from the methods of problem solving. In this case of equation-based strategy, the failure of a given program is best explained by missing factors. Accordingly, only greater involvement (taking in consideration extra variables) will lead to success. For instance, government spending on childcare, a factor traditionally beyond the IMF reach, will explain failure of a balance-of-payment correction program.

The Polak model is seldom questioned, debacles are instead explained by factors escaping data gathering because of jurisdiction issues. In this sense, the IMF decides to blame local factors, not its policy model, for failure. Protecting itself in a doctrinal bunker, the IMF shows little inventiveness and willingness to self-examination. Besides, the variables at stake in the Polack model are highly political, and so is their inclusion/exclusion. This reinforces the point that there is nothing objective about an equation, only the illusion of abstraction. As Tony Killick remarks, “ There will also be a good deal of to-ing and fro-ing about the accuracy of data, which often become bargaining chips in negotiations between the Fund staff and the Government” (Killick 131) Clearly then, the variables are questionable in their loyal representation of reality, since both parties seek to manipulate them in their own interest.

This hybrid argument, borrowing self-interest from realism and undermining rationalism as the critical theorist do, demonstrates the IMF is fooling few people with its apolitical liberal, number-based good intentions. Because of the de facto political role of the IMF, “There is the equally urgent issue of the political responsibility of international institutions, including the IMF. These institutions are too often portrayed as unaccountable technocracies. (Camdessus, 365)” The democratic deficit mentioned earlier comes into play here, as increased representation would alleviate civil society’s frustration, which is not reassured by the claimed objectivity of numbers.

Good things come to those who wait

While open trade and liberalization might be a good thing, many agree the timing has to be right. The IMF insistence on turning all economies into liberal ones is regarded as a “one size fits all” move, as ex World Bank president Joseph Stiglitz remarked. The dogmatic following of numerical supremacy embodied in the Polak model, logically lead to the assumption that neo-liberalism is the best option for all countries and must be adopted now. The transition to open markets has proven quite detrimental, like in the case of Argentina and Chili, which suffered from the volatility of world markets. “The premature capital and financial market liberalization that the IMF pushed” (Stiglitz 212) left many countries vulnerable to speculation and crisis. “Was the sequencing of liberalisation wrong?” (Bird 830, 2001). The orderly liberalization theory stipulates that a country should first open up to long-term investment, and then “to short term capital movements only when the macroeconomic and financial sector preconditions are met” (Fisher 115) The Asian crisis in the nineties, spreading to Russia and Brazil, is a prime example of the effects of speculation. The oil crisis in 1973 and 1979 deeply hurt emerging economies which had few mechanisms to protect themselves. Liberalization is accompanied by a dose of protectionism in developed economies, the United States being the best example. In addition, liberalization is a long process that can be traced back to 1850, with industrialization and the steam engine. The hurried transition from colonialist exploitation to open market is debatable. While the IMF goes beyond its monetary stability mandate to push the complementary open trade regime under the umbrella of the World Trade Organization, it is not only goal-proliferating, but also showing its assertiveness in knowing what’s right. Rushing underdeveloped countries into liberalization through conditionality has lead countries like Jamaica to worsen their economy. For instance, national agricultural production such as that of milk or chicken is superceded by American imports. The local production cannot compete: consequently balance of payment deficits increases because import exceeds export. Liberalization is adopted as conditionality on loans to address balance of payments, but the measures exacerbate balance-of-payments problems. It is urgent for the IMF to seriously address the vicious cycle of conditionality.

Critics of critical theories

Critical theory is often demeaned for its lack of concrete proposals and disparate body of work. However, it relevantly underlines the IMF dogmatic reliance on numbers, its patriarchal promotion of neo-liberalism, the failure to consider recognize and adapt to the specificity of post-colonial developing economies, as well as its poor self-criticism.

Perspectives for the future

The debate over the presidency of the Institution (Gilpin 385) underlines the power struggle and inherent politicized nature of the IMF. The clash not only between Americans and Europeans, but the raising voice of developing countries corroborates realist self-interested state behavior patterns. If the liberal Kantian triangle is to be sustained, macroeconomic theory needs to consider surpluses, not only shortages. Current economic regimes have focused on correcting negative aberrations while leaving the issue of surpluses untouched. Because the total of international transaction is finite, regulation has to act on both ends –shortage and surplus- to be efficient. Focusing on balance-of-payments issues, the IMF mainstream economic expertise is constructed in such a way that predetermines developing countries as the source of problems. The Tobin Tax proposes to take 0.5% of international trading and investing the 100-300 billion USD in global governance issues such as health, development and environment. Putting a check on short-term speculation, this initiative poses a new set of challenges in terms of management and accountability. Nevertheless, it is promising in that it considers monetary issues not only from the shortage side. Another fertile movement is that of the odious debt (Rajan 54). Pragmatically speaking, many countries are plainly incapable of paying their debt. The IMF must devise inventive ways of dealing with this deadlock, and be flexible enough to permit conciliation while maintaining a minimum order necessary for trust in international monetary stability. The case for odious debt seeks to suppress debts contracted under dictatorship. In acknowledging representativity and accountability, the IMF would increase its legitimacy and align itself towards the kantian triangle ideal. Conceiving of neo-liberalism within a critical framework falls in line with the Bretton-Woods vision of embedded liberalism for the economic regimes. The conceptual advancements of critical theory have however undermined the objectivity and apolitical nature of rational numbers, and pointed to the importance of the sequencing of liberalization for its sustainability. In this sense, it is the theory within which neo-liberalism must be embedded.