The International Monetary Fund
The International Monetary Fund (IMF) is an organization that strives to foster monetary cooperation, secure financial stability, facilitate trade, promote high employment and reduce poverty around the world. Cooperation is an interaction in which at least one actor is made better off relative to the status quo without making other actors worse off.
Transparent rules foster cooperation by advancing a better understanding of the IMF’s own role and operations. Regularly, staff members review the rules that govern members in hopes of increasing the effectiveness of the IMF. Recent reviews include the role of trade in the IMF’s work and how to improve IMF surveillance. Further, the IMF established an Independent Evaluation Office (IEO) that provides objective and independent reviews of IMF Rules and operations (Lamdany & Dhar, 2014). The IEO operates independently of IMF management. The most recent review by the IEO examined the IMF’s response to the global financial crisis and the quality of IMF economic predictions (Lamdany ; Dhar, 2014). In the ‘resolutions’ section of this review, the IMF admits rules, at the time of the crisis, exacerbated unfavorable economic conditions. (Lamdany ; Dhar, 2014). After receiving input from multiple members, the IMF committed to, among other things, improving country-level surveillance.
Country-level surveillance to verify compliance is achieved through the Fund’s Article IV Consultations with members (“IMF surveillance,” 2018). Article IV Consultations are reported annually on all members to the objective of economic liberalization is being met (“IMF Surveillance,” 2018). Further, the Fund advises prospective borrowers on the conditionality of loans (“IMF Surveillance,” 2018). Now, the IMF even invites members to publish IMF staff Article IV Consultations and staff reviews for the public (“IMF Surveillance,” 2018). In the coming weeks, the IMF will be sending staff members to Pakistan after the government requested emergency aid. Since the 1980s, Pakistan has received 13 bailouts from the IMF (Ahmed, 2018). Further, Pakistan has only successfully completed the economic reforms requested in the conditions of one of the bailouts (Ahmed, 2018). Now, Pakistan is requesting $8 billion in aid to address a rapidly growing balance of payments crisis (Ahmed, 2018). IMF Managing Director Christine Lagarde said, “the IMF needs to have a complete understanding and absolute transparency about the nature, size and terms of the debt that is bearing on a particular state” (Ahmed, 2018). Given the long history between the IMF and Pakistan, to facilitate cooperation, the IMF will likely stipulate tougher economic conditions on any aid given to Pakistan and highlight the possibility of reciprocal punishment if Pakistan is not compliant.
An opportunity for reciprocal punishment promotes cooperation by making defecting a less profitable option. Although the defector is able to achieve higher short-term gains by exploiting a cooperative partner, the cost of a punishment deters actors from choosing this strategy. the IMF has tried the “carrot and stick” concept to influence the Mugabe regime in Zimbabwe (“The Limitations,” 2018). Tension in the Zimbabwe-IMF relationship began in 1999 when the IMF withheld aid in response to the war with the Congo (“The Limitations,” 2018). Zimbabwe stopped paying on all foreign loans in 2001 (“The Limitations,” 2018). By 2003, Zimbabwe’s voting rights were suspended and expulsion proceedings from the IMF had begun (“The Limitations,” 2018). In response, Zimbabwe paid back more than $295 million in debt and developed a new monetary policy to slow inflation, delaying expulsion proceedings in the process (“The Limitations,” 2018). By 2005, Zimbabwe had paid $120 million to the IMF (“The Limitations,” 2018). When the IMF suspended Zimbabwe’s voting rights, this incentivized the Reserve Bank of Zimbabwe to adjust monetary policy (“The Limitations,” 2018). However, with the root of the problem not addressed, hyperinflation continued to negatively affect the economy (“The Limitations,” 2018). Although reforms in Zimbabwe were not incredibly successful, key contributors to the IMF, including the United States and the United Kingdom spoke in favor of reinstating voting rights to Zimbabwe contingent on further economic reforms (“The Limitations,” 2018). To receive full support from the IMF, Zimbabwe must cooperate and commit to implementing the requested economic reforms.
One shortcoming of the IMF is underscored When a state has a large short-term need for foreign currency beyond what the IMF is willing or able to provide. In a crisis, the debtor might visit private creditors to limit demands for repayment. In Brazil and Korea, economic policy programs supported by the IMF initially failed to restore creditor confidence (IMF Staff, 2001). The banks who had lent to Brazil and Korea were not reassured and requested immediate repayment (IMF Staff, 2001). As with domestic bankruptcy, contributing to the resolution of a crisis by exercising restraint in demands for debt repayment is in the best interest of creditors (IMF Staff, 2001). With an incentive to get out early or to block a proposed debt restructuring, one creditor benefits at the expense of other creditors (IMF Staff, 2001). The problem is often exacerbated since individuals never have perfect information (IMF Staff, 2001). When the IMF is unable to restore creditor confidence, fewer private creditors are willing or able to lend to a state with a large short-term need for foreign currency beyond what the IMF is willing or able to provide (IMF Staff, 2001). In turn, a state will default on the aid it received from the IMF (IMF Staff, 2001). Therefore, it is in the interest of the IMF to work with private creditors to prevent a state from having to default on aid it received from the IMF (IMF Staff, 2001).
The IMF fosters cooperation by developing transparent rules which advance a better understanding of the IMF’s own role and operations. By participating in Country-level surveillance, the IMF is able to verify compliance among members. As a result, the IMF and the public receive reports that examine how well the objective of economic liberalization is being met. another way the IMF fosters cooperation is through an opportunity for reciprocal punishment, making defecting a less profitable option. Although the IMF is often able to foster cooperation, one shortcoming is highlighted when a state has a large short-term need for foreign currency beyond what the IMF is willing to provide. Since it is not in the interest of creditors with low confidence to provide aid, it is in the interest of the IMF to work with private creditors to prevent a state from having to default on aid it received from the IMF. restatement of my thesis
