How does the IMF serve its member countries?

What does the International Monetary Fund do?

The IMF is the world's central organization for international monetary cooperation. It is an organization in which almost all countries in the world work together to promote the common good.

The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other. This is essential for sustainable economic growth and rising living standards.

To maintain stability and prevent crises in the international monetary system, the IMF reviews national, regional, and global economic and financial developments. It provides advice to its 184 member countries, encouraging them to adopt policies that foster economic stability, reduce their vulnerability to economic and financial crises, and raise living standards, and serves as a forum where they can discuss the national, regional, and global consequences of their policies.

The IMF also makes financing temporarily available to member countries to help them address balance of payments problems—that is, when they find themselves short of foreign exchange because their payments to other countries exceed their foreign exchange earnings.

And it provides technical assistance and training to help countries build the expertise and institutions they need for economic stability and growth.

Why was it created?

The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s.

During that decade, attempts by countries to shore up their failing economies—by limiting imports, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to buy goods abroad and to hold foreign exchange—proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries.

Seeking to restore order to international monetary relations, the IMF's founders charged the new institution with overseeing the international monetary system to ensure exchange rate stability and encouraging member countries to eliminate exchange restrictions that hindered trade. The IMF came into existence in December 1945, when its first 29 member countries signed its Articles of Agreement. Since then, the IMF has adapted itself as often as needed to keep up with the expansion of its membership—184 countries as of June 2006—and changes in the world economy.

The IMF's membership jumped sharply in the 1960s, when a large number of former colonial territories joined after gaining their independence, and again in the 1990s, when the IMF welcomed as members the countries of the former Soviet bloc upon the latter's dissolution. The needs of the new developing and transition country members were different from those of the IMF's founding members, calling for the IMF to adapt its instruments. Other major challenges to which it has adapted include the end of the par value system and emergence of generalized floating exchange rates among the major currencies following the United States' abandonment in 1971 of the convertibility of U.S. dollars to gold; the oil price shocks of the 1970s; the Latin American debt crisis of the 1980s; the crises in emerging financial markets, in Mexico and Asia, in the 1990s; and the Argentine debt default of 2001.

Despite the crises and challenges of the postwar years, real incomes have grown at an unprecedented rate worldwide, thanks in part to better economic policies that have spurred the growth of international trade—which has increased from about 8 percent of world GDP in 1948 to about 25 percent today—and smoothed boom-andbust cycles. But the benefits have not flowed equally to all countries or to all individuals within countries. Poverty has declined dramatically in many countries but remains entrenched in others, especially in Africa. The IMF works both independently and in collaboration with the World Bank to help its poorest member countries build the institutions and develop the policies they need to achieve sustainable economic growth and raise living standards.

The IMF has continued to develop new initiatives and to reform its policies and operations to help member countries meet new challenges and to enable them to benefit from globalization and to manage and mitigate the risks associated with it. Cross-border financial flows have increased sharply in recent decades, deepening the economic integration and interdependence of countries, which has been beneficial overall although it has increased the risk of financial crisis. The emerging market countries—countries whose financial markets are in an early stage of development and international integration—of Asia and Latin America are particularly vulnerable to volatile capital flows. And crises in emerging market countries can spill over to other countries, even the richest. Particularly since the mid-1990s, the IMF has made major efforts to help countries prevent crises and to manage and resolve those that occur.

In 2004, the year the IMF marked its 60th anniversary, its Managing Director initiated a broad strategic review of the organization's operations in light of the new macroeconomic challenges posed by 21st century globalization. The emergence of new economic powers, integrated financial markets, unprecedented capital flows, and new ideas to promote economic development required an updated interpretation of the mandate of the Fund as the steward of international financial cooperation and stability.

Globalization, poverty, the inevitability of occasional crises in a dynamic world economy—and, no doubt, future problems impossible to foresee—make it likely that the IMF will continue to play an important role in helping countries work together for their mutual benefit for many years to come.

How does the IMF serve its member countries?

The IMF performs three main activities:

monitoring national, global, and regional economic and financial developments and advising member countries on their economic policies ("surveillance");

lending members hard currencies to support policy programs designed to correct balance of payments problems; and offering technical assistance in its areas of expertise, as well as training for government and central bank officials.

When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. And it makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy.

The IMF's regular monitoring of economies and associated provision of policy advice—known as surveillance—is intended to identify weaknesses that are causing or could lead to trouble.

Country surveillance takes the form of regular (usually annual) comprehensive consultations with individual member countries, with interim discussions as needed. The consultations are referred to as "Article IV consultations" because they are required by Article IV of the IMF's Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to collect economic and financial data and to discuss the country's economic policies with government and central bank officials. IMF staff missions also often reach out beyond their official interlocutors for discussions with parliamentarians and representatives of business, labor unions, and civil society. The team reports its findings to IMF management and then presents them to the IMF's Executive Board, which represents all of the IMF's member countries, for discussion. A summary of the Board's views is transmitted to the country's government. In this way, the views of the global community and the lessons of international experience are brought to bear on national policies. Summaries of most discussions are released in Public Information Notices and are posted on the IMF's Web site, as are most of the country reports prepared by the staff.

Global surveillance entails reviews by the IMF's Executive Board of global economic trends and developments. The main reviews are based on World Economic Outlook reports and the Global Financial Stability Report, which covers developments, prospects, and policy issues in international financial markets; both reports are normally published twice a year. In addition, the Executive Board holds more frequent informal discussions on world economic and market developments.

In 2006, the IMF introduced a new tool, multilateral consultations, designed to bring small groups of countries together to discuss a specific international economic or financial problem that directly involves them and to settle on a course of action to address it.

Regional surveillance involves examination by the IMF of policies pursued under regional arrangements such as currency unions—for example, the euro area, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union.

The growing interdependence of national economies, and the potential impact of national economic policies on the world economy and vice versa, have prompted the IMF increasingly to integrate the three levels of surveillance. Through its Article IV consultations, the IMF pays close attention to the impact of the larger economies' policies on smaller economies. It also studies the impact of global economic and financial conditions on the economic performance of individual countries and the repercussions of national policies at the regional level.