11 - The role of the IMF in developing countries

Summary

Introduction

As originally envisaged, the International Monetary Fund (IMF) had three functions. It was an adjustment agency providing advice on balance of payments policy, a financing agency providing short-term liquidity to countries encountering balance of payments problems and finally an agent for managing the Bretton Woods international monetary system, which was based on an adjustable peg exchange rate regime. However, after the early 1970s, the Fund lost most of its systemic role. As flexible exchange rates replaced fixed ones, the Bretton Woods system as originally conceived broke down. Private capital markets began to provide balance of payments financing and regional monetary arrangements – particularly in Europe – began to shift attention away from the Fund. With these developments the dominant theme of the 1960s – the global adequacy of international reserves – diminished in significance and the Fund was effectively marginalised.

But at the same time as it was losing its systemic role, the Fund was gaining another one as it became heavily involved with lending to developing countries, and then countries in transition (CITs). Indeed, the Fund ceased lending to industrial countries altogether. Particular episodes saw it lending to highly indebted developing countries – especially those in Latin America – in the aftermath of the 1980s Third World debt crisis, to CITs as they embarked on the move to market-based systems at the beginning of the 1990s, to Latin America again during the Mexican peso crisis in 1994–5, and to Asian economies, Brazil and Russia during the financial crises of 1997–9.