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Earlier this month, the International Monetary Fund (IMF) conducted its fall meetings in Bali, Indonesia. The economic outlook released as background for the occasion was titled "Challenges to Steady Growth." The report highlighted "mounting uncertainties—not only over economic policies, but also over the global framework of international relations within which policies are made."
Uncertainty is also mounting around the IMF itself. Rising nationalism around the world has fostered suspicion about the motives and actions of multilateral organizations. Using domestic funds to benefit other countries, or allowing an outside body to dictate domestic policy, runs counter to the broadening desire to put home country first.
The interconnectedness of world markets makes the IMF's work especially important. Without the full support of its sponsors, the Fund will not be able to prevent the next crisis, whenever it arises, from escalating. The resulting economic dysfunction could lead to civilian and military consequences that the postwar order was constructed to avoid.
The IMF was conceived at the historic Bretton Woods meeting in 1944, two months after the war in Europe had ended. There was an abiding belief among those gathered that economic instability invites political instability. During the first half of the twentieth century, this combination had provided fertile ground for the rise of regimes that took up arms against one another. It was felt that if international economic cooperation could be re-established, commercial ties would reduce the risk of renewed aggression.
The IMF is chartered to foster economic development and assist troubled countries during periods of duress. It also promotes principles of sound economic management for emerging and developed markets alike. The adoption of these principles is often a condition for the receipt of emergency aid.
Funding for the IMF comes from its 189 members, with allocations based on a complicated formula that considers the member's gross domestic product (GDP), its trade flows and the size of its government reserves. Those resources are denominated in special drawing rights (SDR); the value of an SDR is a weighted composite of the top five world currencies. Today, the IMF can call on total resources of nearly $1 trillion.
The IMF is the lender of last resort to sovereigns. Countries that struggle with their finances are often shut out of international funding markets and experience capital flight that accelerates their decline. By providing monetary support and assurances to markets, the IMF can stabilize situations that threaten to spiral out of control.
A leading recent example of the IMF's engagement was the Greek financial crisis, where the IMF partnered with European authorities to deliver assistance. The Greek situation was especially delicate, given its size, the country's financial condition, and the potential for contagion in the event of a default. Many hail the IMF for heading off a worst case outcome.
But the Fund has its detractors. To return national finances to a sustainable path, debt is restructured and extended. This often requires the owners of that debt to accept losses. And countries receiving IMF assistance are placed under strict budgetary requirements, which can deepen a country's economic hardship in the short term. No matter how even-handedly the IMF tries to structure its assistance, creditors and citizens can emerge displeased.