Ann E. Chenier and Vincent Ferraro, "The Political Economy of the International Monetary Fund: The Politics of Adjustment," Prepared for delivery at the 1993 Annual Meeting of the International Studies Association, Hyatt Regency, Acapulco, Mexico, 23-27 March 1993. (1)

“Well, Barton, I’ll not gainsay ye. But Mr. Carson spoke to me after th’ fire, and says he, ‘I shall ha’ to retrench, and be very careful in my expenditure during these bad times, I assure ye’; so yo see th’ masters suffer too.”

“Han they ever seen a child o’ their’n die for want o’ food?” asked Barton, in a low, deep voice. (2)


Since its creation, the International Monetary Fund (IMF) has been charged with the responsibility of protecting and maintaining the integrity of the international monetary system. Its task was and remains extraordinarily difficult: states guard the value of their currencies jealously, and outside interference with the quintessential sovereign right of determining the value and distribution of money is often regarded as a symbol of profound political intrusion. Therefore, when the government of a state requests the economic assistance of an outsider, such as the IMF, to preserve the viability of its economy, the action is often viewed as a confession of political failure on the part of the state. In the years since 1944 the International Monetary Fund has never been successful in eliminating this inherent tension between its universalistic goal of enhancing economic interdependence and the individualistic goals of states to maximize their political independence and autonomy.

The compromise to bridge the gap between these two objectives, forged by Lord Maynard Keynes and Harry Dexter White in Bretton Woods, was a simple one, but also one which initially succeeded only because it obscured the conflict between economic and political objectives. (3) The International Monetary Fund would not “coerce” states into taking measures to correct exchange imbalances which negatively affect the global economy. The member states could request assistance from the IMF, but if these requests were too large (and “too large” was determined by how much the state had contributed initially to the IMF) or too frequent, the IMF would then attach conditions to the disbursement of the money. It was the responsibility of any member state, first, to decide whether to request assistance from the IMF, and, second, to accept or refuse the assistance based upon its own assessment of the appropriateness of the guidelines suggested by the IMF. Thus, these states would “voluntarily” implement the restrictions attached to the financial assistance. Political independence would not be threatened because choices were available to the states; economic interdependence would be assured because, of the choices available to states, cooperation with the IMF was the most beneficial.

This compromise—to be able to borrow money in exchange for implementing and following guidelines recommended by the IMF-- worked well as long as the nations involved were those concerned primarily with recovering from the economic distortions and stresses of World War II (4) For these nations, economic activity was directed primarily toward the reconstruction of shattered economies which were once stable, and money borrowed from the IMF flowed smoothly into investment patterns that had been established and built upon many years before the war. Moreover, the reconstructing states did not receive any advice from the IMF that called for profound deviations from their preferred economic strategy: all of these states were capitalist ones, and the advice offered by the IMF was consistent with the ideas that the economic ministers had already studied in school or had learned and previously implemented in their own markets.

The common historical experience and interest shared by the Europeans, the Americans, and the IMF was not equally shared by most other states. Some of the new states which emerged from the process of decolonization from European domination after World War II were quickly inducted into international and multilateral organizations such as the United Nations, the World Bank, and the IMP. The assumption behind this rapid assimilation of nations was quite straightforward: the principles of capitalism and representative democracy were universal, notwithstanding the counterexample of the Soviet Union, and no concessions to difference, whether it be cultural, social, political, or economic, would or should be allowed. The economic vitality of the 1960s was so robust that this assumption seemed to be correct, and the heady atmosphere of the period led to many different attempts to promote liberal ideals through programs such as the Alliance for Progress and the Peace Corps. (5) This apparent convergence of interests between the developed and developing countries, however, began to break down in the late-1960s and early 1970s as many newer nations confronted economic questions for which there was no long historical experience or even theoretical understanding upon which to draw. First, many began to understand that the unprecedented economic growth of the 1960s was due to the balance of payments deficits of the United States, a systematic practice which undermined the Bretton Woods system of fixed exchange rates, leading to its demise in 1971. Second, the failure of the United States to achieve victory in Vietnam persuaded many that the attractiveness of representative democracy could, in fact, be limited and contingent upon a host of other factors. Third, the oil price crisis of 1973-74 raised questions about the viability of the economic system of free-market capitalism itself, and forced many nations to abandon liberal principles of trade and finance in order to maintain current levels of consumption within their borders.

Thus, the historical experience of the IMF is not necessarily an appropriate or useful guide for policies which deal with the current financial crisis affecting the developing world: its experience is really limited to the problems of developed countries under a rather specific set of conditions. The IMF must broaden its scope to address the specific and unique circumstances facing the developing world. While the current debt crisis is the most recent example of the massive economic difficulties facing poorer countries, the debt crisis itself is a manifestation of deeper and more profound problems in the political economy of the developing world.

The Evolution of the Most Recent Debt Crisis

The situation facing the developing world in 1993 is quite serious even though it does not now receive a great deal of coverage in the media of developed countries. It is a situation which has been developing for a very long period of time, however, and the debt crisis should be more properly viewed as an effect of systematic global poverty rather than the cause. This section of the essay will be divided into three parts: 1) the historical context of debt crises; 2) the breakdown of the economic system in the 1970s; and 3) the responses of the IMF to the debt crisis between 1982 and 1989.

The Historical Context of Debt Crises

Other debt crises have occurred in the past, and, as Barry Eichengreen and Peter H. Lindert have noted, “(N)ot only is default recurrent, but the countries that default tend to be the same ones, generation after generation.” (6) The timing of these cycles of default--the 1820s, 1880s, 1900-14, 1920s, and 1980s— is revealing: debt crises tend to occur when sovereign governments try to finance patterns of current consumption established during periods of high demand for primary products through periods of very depressed demand for those primary products. (7) The pattern suggests two problems. First, current consumption patterns in poorer countries seem to be politically important for the governments of those countries, which may itself be an index of the fragility of the political economy of poorer states. Second, the pattern suggests that poorer countries tend to rely heavily on exogenous influences for the vitality of their economies (measured most directly by terms-of-trade indices or the values of real interest rates). Indeed, both these propositions can be confirmed in a number of different ways and do not seem to be very controversial.

If these propositions are correct, then it follows that debt crises are symptoms of a malfunctioning economic system: to address the debt problems as ones merely of temporary illiquidity within a particular country at a particular time is to miss the significance of the historicity of debt crises. The IMF programs of structural adjustment do have as their fundamental basis the assumption that the debt crisis is only a symptom of deep-seated problems in a domestic economy. Unfortunately, it is not only the economies of the developing world that are not working properly; the global economic system itself has serious flaws and is in need of repair.

The Breakdown of the Economic System in the 1970s

The central features of the Bretton Woods system were fixed exchange rates monitored by the IMF and free trade. Fixed exchange rates under the dollar system ceased to exist after 1971, and the institutions of free trade have proven to be remarkably tolerant of wide variations in state practice for many years. The reasons for this dramatic transformation of the system are complex and not immediately relevant to the main focus of this paper. What is relevant is the response of the IMF to these changes, and the extent to which the IMF has modified its practices in order to adapt to them. In brief, the IMF has proven itself to be remarkably flexible in making arrangements to accommodate significant change in the practices of states.

Indeed, looking at the decade of the 1970s, one cannot help but wonder how the international monetary system survived at all. The crisis of the dollar overhang in the early part of the decade and the oil price increases of 1973-74 and 1979-80 all served to shake the underpinnings of the system. The IMF responded to each crisis by offering new programs or facilities to developing countries. Starting in 1974 the IMF has added the following arrangements: the extended facility, the supplementary facility, the compensatory financing facility, the buffer stock financing facility, the oil facilities, the trust fund, the structural adjustment program, and the extended structural adjustment program. Each of these programs was designed to address a “new” problem in the international economy, and addressed each in what can only be described as a temporary, ad hoc manner.

Some have called the post-Bretton Woods system a “composite” and have extolled the virtues of a system which has proven to be extremely flexible. (8) This is perhaps a correct assessment, but one could reasonably ask whether a system which had to resort so frequently to stop-gap measures was really addressing the central problems.

The Responses of the IMF to the Current Debt Crisis. 1982-89

A great deal has been written about the current debt crisis in the developing world, and most of those analyses begin with the oil price increases in 1973-74. (9) This starting point is a logical one if it is not misinterpreted to imply that developing countries borrowed only to pay for their imported oil--most of these countries had been borrowing for many years prior to 1973. The oil price shocks were certainly a major cause of the tremendous expansion of sovereign debt, but only as the immediate catalyst for a sequence of events which had at its roots a much longer-term desire to alleviate the desperate poverty in most developing countries. Richer countries responded to the oil price increases by restricting imports, aggressively promoting exports, and by raising interest rates in order to restrain the inflationary impulses of the price increases: in short, richer countries made the macroeconomic adjustments to the exogenous price changes.

All these measures had serious effects upon poorer countries which saw their export earnings decline and the prices of imported goods steadily increase. These countries, however, did not have the ability to implement the macroeconomic adjustments pursued by the industrialized countries and instead sought to borrow money to finance the serious trade deficits which resulted from the oil price increases. Lendable capital was readily available because many of the oil exporting countries could not effectively use all their revenues on domestic projects and found the major commercial banks convenient places to invest the income they were unable to absorb. In turn, the banks which received these “petrodollars” found the non-oil exporting states willing to borrow these monies in order to pay for the higher prices of oil. Thus the external debt of the poorer countries grew dramatically (See Table 1).

Table 1
Developing Countries, External Debt Outstanding
(in billions of U.S. Dollars)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
329.3 398.2 472.0 559.9 646.5 724.8 925.5 972.2 1059.2 1172.8 1310.5 1331.7 1368.7 1466.4 1493.7 1529.8

Source: International Monetary Fund, World Economic Outlook, 1984 and 1991 (Washington, D.C.: International Monetary Fund, 1984 and 1991), Table 35 of the 1984 Report, p. 205 and Table A45 of the 1991 Report, p. 146.


The macroeconomic responses of the advanced industrialized states to the oil price crisis played a critical role in aggravating the short term significance of the debt burden, thereby locking the developing countries into a cycle of borrowing in order to repay earlier loans. As long as real, not nominal, interest rates were low (because of the very high rate of inflation at the time), borrowing was viewed as a reasonable method of addressing budget and trade deficits. It was this cycle that ultimately proved unsustainable, leading to the “crisis” in 1982. Real interest rates increased from around 1% in 1980 to as much as 8.50% in 1984 largely because of decisions made in the U.S. which took little or no account of their effects on developing countries.(10) Thus, for the second time in a decade, poorer countries found themselves scrambling to adjust to external changes over which they had no control whatsoever.

In retrospect, the decision of the developing countries to increase their debt burden so dramatically was a serious mistake, and not simply because real interest rates soared and the world entered a very sharp recession in 198 1-82. The mistake was borrowing money for current consumption and not for productive investments for future growth. Similarly, the commercial banks which lent out the money were guilty of serious misjudgments, and glibly accepted the proposition that sovereign countries would not default on their loans. (11) Finally, the developed countries were derelict in pursuing economic policies with little or no regard for the effect of these policies on poor countries.

The “debt crisis” grabbed the front pages of the newspapers in the advanced industrialized countries in 1982 when Mexico announced that it might not be able to honor its payment obligations on its $62 billion debt. Given the size of the Mexican debt and the overexposure of the major commercial banks in the overall debt owed by developing countries, there was a genuine concern that some banks might collapse, precipitating a cascading effect among all major commercial banks. In order to avoid this serious disaster, the United States Government and the International Monetary Fund intervened to quiet the fears of those who might pull their money out of banking stocks thereby bringing about the very collapse that they feared. Commercial bank lending stopped precipitously, leaving the debtor countries and the U.S. and the IMF to work out arrangements to guarantee the repayment of the loans.

The intervention was successful, but at this point the role of the International Monetary Fund changed quite dramatically from what it had been in the past, although there is no direct evidence that this policy change was anything more than an ad hoc response to an admittedly dangerous situation. The IMF was now put in the position of mediating between the debtor countries and the commercial banks, a role quite different from its original mandate. This “credit officer” role was a central feature of what was later called the Baker Plan (after U.S. Secretary of the Treasury, James Baker). Those countries which wanted to reschedule their debt repayments would submit a plan (in the form of a letter of intent) to the IMF outlining changes in their economies so that future repayments would have a reasonable chance of being honored. The IMF would respond to this plan and, where it deemed necessary, recommend changes in the form of an adjustment program it believed would enhance the likelihood of repayment. Once agreement was reached on these economic policies, a revised loan repayment schedule would be approved. One of the thrusts of the Baker Plan was an attempt to open up the range of possible ways to address the debt burden. During this time, a very large number of schemes was proposed, including some very innovative ones such as debt-for-nature swaps. In recognition of the special burdens placed upon debtor countries by the crisis, the IMF added two new programs: the Structural Adjustment Facility (SAF) and the Enhanced Structural Adjustment Facility (ESAF). These two facilities are designed to provide financial assistance to countries making the economic changes suggested by the JMF. In effect, the IMF takes on responsibility for some of the debt burden previously held by commercial banks; in exchange, the IMF gets a very strong voice in determining the economic policy of the debtor countries which ask for this assistance, a voice which was inaccessible, appropriately so, to the commercial lending institutions.

In some sense, these arrangements do not constitute a radical departure from previous IMF practice. The IMF requires all states to pay into the Fund in order to become a member: this initial payment constitutes the member’s quota and its amount is loosely determined by the member’s share of world trade. This quota also determines the voting rights of the member. All members have the right to tap into this reserve tranche to help finance a temporary balance of payments problem. Very few questions are asked, and no real policy changes demanded, if a nation wishes to use this money. Quite obviously, the reserve tranche, while important, does not have any necessary connection to the needs of a particular country--indeed, the relationship between the money available and the money needed is perhaps inverse.

There are several other funds to which members have access, and the IMF has always demanded that these funds can only be supplied if the member state agrees to and satisfies certain conditions—specified in a stand-by arrangement—which are believed to aid the state in overcoming the systemic causes of the shortfall in balance of payments problems. Nations can borrow from a wide variety of facilities: the Regular Facilities (credit tranches, extended arrangements, and enlarged access policies); Special Facilities (compensatory and contingency financing, and buffer stock financing); Emergency Assistance; and Facilities for Low-Income Countries (structural adjustment and enhanced structural adjustment). (12) States which wish to use any of these facilities must make a request to the IMF and agree to negotiate about economic policy changes which the IMF considers essential for sustained economic growth. If agreement is reached on these conditions, then the money will be disbursed to the national government.

In the case of the two newer programs, Structural Adjustment and Enhanced Structural Adjustment, there are some important policy differences from previous practices. First, these funds are specifically targeted toward influencing policy changes in low-income countries. Although the IMF was initially set up to assist nations through temporary periods of balance of payments troubles, these new facilities make no pretense about the very explicit aim of reorganizing the domestic economic affairs of states: there is a frank acknowledgment that the debt crisis is both a symptom and a cause of a permanent problem in developing countries. Second, these facilities are keyed directly toward the resolution of debt-induced problems. As such, they represent an effort to finance both the public interests of the debtor nations and the private interests of the commercial banks with outstanding loans. Third, since 1989 most creditors have recognized that debt forgiveness is an inherent part of any viable program to help the developing countries. The new approach, which was called the Brady Plan after U.S. Secretary of the Treasury, Nicholas Brady, promised significant debt reductions, depending on the countries involved. Several states, including Mexico and Brazil, have renegotiated their debt under terms of debt reduction.

Finally, these programs are directed principally toward “structural policies that contribute directly to macroeconomic stability.” (13) This very clear policy orientation is crucial to understanding the political economy of the International Monetary Fund. While the general policy is clear, the actual operational meaning and implementation of its supporting guidelines is less so. Certain patterns emerge in most of these programs. The IMF supported limits on credit expansion (adopted in more than 90 percent of the countries studied, interest rate increases (about 50 percent of the countries), restraints of central government expenditures (more than 80 percent), reduction of personal income tax (less than 10 percent), increased excise tax rates (about 60 percent), and reduced subsidies on basic goods (more than 50 percent).(14) Such policies are directed toward suppressing internal demand and freeing up investment capital, and, as such, are useful instruments for slowing down an overheated, industrialized economy. In the context of the heavily-indebted countries, however, the freed-up capital was expected to go abroad to pay off the commercial banks and, increasingly, the IMF itself.

The IMF and Its Conception of a Healthy Economy

A stable macroeconomic environment is one which is characterized by low rates of inflation, sustained economic growth, and openness to external economic influences. In a speech before the Opening Session of the Inter-American Development Bank/United Nations Development Programme Forum on Social Reform and Poverty in Washington, D.C. on 10 February 1993, the Managing Director of the IMF, Mr. Michel Camdessus specified more precisely what constitutes macroeconomic stability in his “Seven Pillars:”

1. “Fiscal consolidation and governments’ efficient use of their scarce resources”;
2. “In monetary matters, a firm anti-inflationary policy, liberalization of the fmancial sector, and a realistic exchange rate”;
3. “Opening up the economy to international trade and foreign capital”;
4. “Price liberalization”;
5. “The reform of public enterprises”;
6. “A creative adaptation of social policies, to improve the working of labor markets and enhance the effectiveness of social safety nets”; and
7. “Good governance” which means “accountable governments, which not only respect human rights but also endeavor to establish adequate institutional conditions for the participation of all sectors of society, decentralization, and the free development of productive activities with appropriately allocated government support.” (15)

Some of these conditions are somewhat obvious; others are more obscure. The relevant point is that the IMF does have a clear model of the type of economy which in the opinion of its Directors would be most successful. Not surprisingly, these conditions correspond almost exactly to the economic and political preferences of most of the liberal, western states.

The IMF denies, however, that it follows a “model” for economic growth, even though its representatives must have a structure upon which decisions are based. In a study entitled IMF Conditionality, 1980-1991, a group calling itself the IMF Assessment Project, sponsored by the Alexis de Tocqueville Institution, reviewed the policies of the IMF over the twelve year period. In the beginning of its study, the group noted that “(o)fficials at the IMF historically have taken great pains to emphasize that the Fund does not demand, or even necessarily promote, a particular, comprehensive design for member states who ask its help in improving their economic performance.” (16) A review of the various stand-by arrangements and structural adjustment programs does confirm that the IMF recommends a wide variety of options for nations which request assistance. Nonetheless, as the IMF Assessment Project notes, “...there are definite patterns to the conditionality terms of Fund-supported restructuring programs.” (17) Generally speaking, the IMF almost consistently recommends that budget deficits, market controls, marginal tax rates, and state ownership be reduced. While there may be different ways to induce changes in these broad directions, it does seem evident that the IMF has a very explicit understanding of what constitutes a stable macroeconomic environment.

The Political Economy of the IMF Model

It is not surprising that the IMF consistently recommends policies which reflect its biases toward market capitalism and representative democracy. Indeed, given its background and the source of most of its funding, it would be surprising if its recommended policies deviated significantly from those liberal principles or from the interests of its major donors. The voting rules of the Fund are not arbitrary: all IMF policies must be approved by 85 percent of the votes. The United States has been quite careful to maintain its share above 15 percent of total votes in order to retain a veto power over IMF policies. The IMF refusal to admit openly that its policies have strong political content is understandable given its interest in wishing to appear fair to all members, regardless of their political stance. Nonetheless, a clear pattern of being more explicit about desirability of the free market and liberal human rights has been evident in IMF statements since the fall of the socialist regimes in the former Soviet Union and Eastern Europe. The lack of a clear or viable alternative to the capitalist states enables the 1MF to promote its point of view with less fear of appearing less sympathetic to non-capitalist economies.


(1) We wish to express our thanks to Divia Biddapa and Diane Yelinek for their invaluable assistance in the writing of this essay.

(2) Elizabeth Gaskell, Mary Barton: A Tale of Manchester Life, edited with an introduction by Stephen Gill (Harmondsworth: Penguin Books, Ltd. 1970), pp. 104-5.

(3) Fred Block, The Origins of International Economic Disorder A Study of United States International Monetary Policy from World War II to the Present (Berkeley: University of California Press, 1977), p. 50.

(4) ”Working well” is, of course, a relative judgment. Immediately after the war, the United States made conditional loans to the British, French, and Italian governments--indeed, the British government made their ratification of the IMF conditional on a loan from the U.S. The conditions on these loans were controversial and deeply resented by many in the recipient counthes. See Robert A. Pollard, Economic Security and the Origins of the Cold War, 1945-50 (New York: Columbia University Press, 1985), Chapter 2. See also Robert Soloman, The International Monetary System, 1945-81 (New York: Harper & Row, 1982), Chapter 2.

(5) The best study on the influence of liberal principles on American foreign relations still remains Robert A. Packenham, Liberal America and the Third World Political Development Ideas in Foreign Aid and Social Science (Princeton: Princeton University Press, 1973).

(6) ”Overview,” in The International Debt Crisis in Historical Perspective, edited by Barry Eichengreen and Peter H. Lindert (Cambridge: The MIT Press, 1989), p.4.

(7) There are numerous explanations for the periodicity of debt crises, and this is only one possible interpretation. For an explanation based primarily on the economic and political dynamism of the lenders, see Charles Lipson, “International Debt and National Security: Comparing Victorian Britain and Postwar America,” in The International Debt Crisis in Historical Perspective, edited by Eichengreen and Lindert, pp. 189-226.

(8) See, for example, Norman S. Fieleke, “The International Monetary System: Out of Order?” in International Political Economy: Perspectives on Global Power and Wealth, 2nd edition, edited by Jeffrey A. Frieden and David A. Lake (New York: St. Martin’s Press, 1991), pp. 277-295.

(9) The literature on the debt crisis is truly voluminous. Some of the better works include Debt and Democracy in Latin America, edited by Barbara Stallings and Robert Kaufman (Boulder Westview Press, 1989); Development and External Debt in Latin America, edited by Richard E. Feinberg and Ricardo Ffrench-Davis (Notre Dame: University of Notre Dame Press, 1988); Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World, edited by Joan M. Nelson (Princeton: Princeton University Press, 1990); William R. Clime, International Debt and the Stability of the World Economy, Policy Analyses in International Economics, No.4 (Washington, D.C.: Institute for International Economics, 1983); Developing Country Debt and the World Economy, edited by Jeffrey D. Sachs, A National Bureau of Economic Research Project Report (Chicago: The University of Chicago Press, 1989.

(10) James R. Barth, Michael D. Bradley, and Paul C. Panayotacos, “Understanding International Debt Crisis,“ Case Western Reserve Journal of International Law, Vol. 19, no. 1 (Winter 1987), pp. 31-52, footnote 4, as quoted in Current Readings on Money, Banking, and Financial Markets, 1990 edition, edited by James A. Wilcox and Frederic S. Mishkin (Glenview, IL Scott, Foresman/Little Brown Higher Education, 1990), p. 306.

(11) For an analysis of how these decisions were made, see Vincent Ferraro and Melissa Rosser, “Global Debt and Third World Development,” in World Security at Century’s End (New York: St. Martin’s Press, 1993).

(12) For a description of these facilities and the terms for their uses, see International Monetary Fund, 1992 Annual Report (Washington, D.C.: International Monetary Fund), pp. 50-51. For a more analytical view of some of these facilities (the book was published before the establishment of the Structural Adjustment and Enhanced Structural Adjustment Programs), and others which have expired over the years, see Tony Killick “An Introduction to the International Monetary Fund,” in The Quest for Economic Stabilization. The IMF and the Third World, directed and edited by Tony Killick (New York: St. Martin’s Press, 1984), pp. 133-136.

(13) lnternational Monetary Fund, 1992 Annual Report, p. 55.

(14) IMF Assessment Project, IMF Conditionality, 1980-91 (Arlington, VA: Alexis de Tocqueville Institution, 1992), p. 18.

(15) lnternational Monetary Fund, IMF Survey, Vol. 22, No.5 (March 8, 1993), p. 72.

(16) IMF Assessment Project, IMF Conditionality, 1980-1991, p. 15

(17) Ibid, p. 17.