This volume--the fifth in a series of histories of the International Monetary Fund--examines the 1990s, a tumultuous decade in which the IMF faced difficult challenges and took on new and expanded roles. Among these were assisting countries that had long operated under central planning to manage transitions toward market economies, helping countries in financial crisis after sudden loss of support from private financial markets, adapting surveillance to reflect the growing acceptance of international standards for economic and financial policies, helping low-income countries grow and begin to eradicate poverty while staying within its mandate as a monetary institution, and providing adequate financial assistance to members in an age of limited official resources. The IMF's successes and setbacks in facing these challenges provide valuable lessons for an uncertain future.

Title Page

Tearing Down Walls

The International Monetary Fund 1990–1999


©2012 International Monetary Fund

Jacket design: Luisa Menjivar and Kenneth Grubby, IMF Multimedia Services Division

Joint Bank-Fund Library Cataloging-in-Publication Data

Boughton, James M.

  • Tearing down walls : the International Monetary Fund, 1990–1999 / James M.

  • Boughton. – Washington, D.C. : International Monetary Fund, 2012. p. ; cm.

  • Includes bibliographical references.

  • ISBN 978-1-61635-084-0

  • 1. International Monetary Fund—History. 2. International finance—History. I. Title. II. Title.

HG3881.5.I58 B68 2012

Disclaimer: The views expressed in this book are those of the author and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.

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Before I built a wall I’d ask to know

What I was walling in or walling out,

And to whom I was like to give offence.

Something there is that doesn’t love a wall,

That wants it down.

Robert Frost, “Mending Wall” (1914)


  • Foreword

  • Preface

  • Abbreviations and Acronyms

  • Prologue: The IMF and the Force of History

  • I. The Evolving Global Role of the IMF

  • 1. World Without Walls: The Global Economy and the IMF, 1990–1999

    • The Global Economy in the 1990s

    • The IMF in the 1990s

    • Financial Architecture in the 1990s

    • Appendix: Chronology, 1990–1999

    • References

  • 2. Becoming a Universal Institution: Expansion of Membership

    • Universalization of the IMF

    • The Soviet Union and Its Successor States

    • The Breakup of Yugoslavia

    • The Major Remaining Nonmembers

    • Appendix: Country Name Changes, 1990–99

    • References

  • 3. Working Well with Others? The IMF as Team Player

    • No Agency Is an Island

    • The IMF and the “G’s”

    • Transparency and External Relations

    • References

  • 4. Global Oversight: Strengthening and Broadening IMF Surveillance

    • The Practice of Surveillance in the 1990s

    • Issues in Surveillance

    • Surveillance over Major Economies

    • Lessons Learned

    • References

  • 5. Many Borrowers; How Many Sizes? IMF Lending and Program Design

    • Overview

    • New Special Facilities

    • Use and Modification of Earlier Special Facilities

    • Other Specialized Lending Programs

    • Technical Assistance, Training, and Resident Missions

    • Appendix: Credits and Loans, 1990–99

    • References

  • II. The IMF and the Transition from Central Planning

  • 6. The Death of Central Planning and the Birth of Markets

    • The Challenge and the Strategy of Transition

    • The Transition in Existing Member States

    • The Transition in New Members

    • References

  • 7. Russia: From Rebirth to Crisis to Recovery

    • First Steps

    • The Initial Transition: Support from the IMF

    • The Second Stage: Fiscal Reform and the Strong Ruble

    • The Crisis of 1997–98

    • Lessons from History

    • References

  • 8. After the Fall: Building Nations out of the Soviet Union

    • Regional Issues

    • The Baltic Countries

    • Other Middle-Income Countries

    • Low-Income Countries

    • References

  • III. The IMF and Emerging Markets

  • 9. Five Fat Years: Recovery from the Debt Crisis, 1990–94

    • Resolution of the Debt Crisis

    • Crisis and Transformation in India

    • References

  • 10. Tequila Hangover: The Mexican Peso Crisis and Its Aftermath

    • Mexico as Star Student

    • The Peso Crisis Hits

    • What Role for the IMF?

    • How Much to Lend?

    • The Crisis Is Resolved

    • Quarantining the Crisis

    • References

  • 11. Asian Flu: Financial Crisis in the Pacific

    • Onset of the Crisis: Thailand in July

    • The Crisis Spreads to Indonesia

    • The Debt Also Rises: The Republic of Korea

    • References

  • 12. Boats Against the Current: Coping with a Global Tide

    • East Asia

    • Europe

    • Latin America

    • Lessons Learned

    • References

  • IV. The IMF and Low-Income Countries

  • 13. Policies for Development: From Structural Adjustment to Poverty Reduction and Growth

    • Evolution of Concessional Lending

    • Heavily Indebted Poor Countries Initiative

    • Financing the Facilities

    • References

  • 14. Looking to the Future: The IMF in Africa

    • A Growth Strategy for Africa?

    • Large-Scale Lending

    • The East African Community

    • Other Lending to Low-Income Countries

    • Postscript

    • References

  • V. Institutional Evolution

  • 15. Money Has to Grow: How the Fund Was Financed

    • The Financial Evolution of the IMF

    • Members’ Quotas

    • Borrowing by the IMF

    • Appendix: A Primer on the SDR

    • References

  • 16. Carrots and Sticks: Safeguarding the Fund’s Resources

    • Payments Arrears to the Fund: Containing the Problem

    • Other Policies to Safeguard IMF Resources

    • References

  • 17. Coping with Stress: How the Fund Was Run

    • The Institution

    • Governors’ Meetings

    • The Executive Board

    • Management

    • The Staff

    • A Retrospective on the Camdessus Era

    • Appendix I: Organization of the IMF in the 1990s

    • Appendix II: Executive Directors and Their Alternates, 1990–99

    • References

  • Index

  • Figures

    • 1.1. World Inflation and Output Growth, 1971–2000

    • 2.1. The Baltic Countries, the Russian Federation, and Other Countries of the Former Soviet Union

    • 2.2. Successors to the Socialist Federal Republic of Yugoslavia

    • 4.1. Coverage of Article IV Consultations, 1979–99

    • 4.2. Acceptance of Article VIII Status, 1946–99

    • 5.1. IMF Lending, 1947–2000

    • 5.2. IMF Lending by Facility, 1990–99

    • 5.3. Prolonged Users of Fund Resources, 1980–99

    • 5.4. Structural Conditionality in Stand-By Arrangements

    • 5.5. Resident Representative Posts, 1990–99

    • 6.1. Poland, Hungary, and Romania: Use of Fund Credit, 1990–99

    • 6.2. Czech and Slovak Republics: Use of Fund Credit, 1990–99

    • 6.3. Successors to Yugoslavia: Use of Fund Credit, 1993–99

    • 6.4. Albania: Use of Fund Credit, 1992–99

    • 6.5. Bulgaria: Use of Fund Credit, 1991–99

    • 6.6. Mongolia: Use of Fund Credit, 1991–99

    • 7.1. Russia: Use of Fund Credit, 1992–99

    • 7.2. Russia: Exchange Rates, 1992–99

    • 8.1. Baltic Countries: Use of Fund Credit, 1992–99

    • 8.2. Ukraine: Use of Fund Credit, 1994–99

    • 8.3. Belarus: Use of Fund Credit, 1993–99

    • 8.4. Kazakhstan: Use of Fund Credit, 1993–99

    • 8.5. Moldova: Use of Fund Credit, 1993–99

    • 8.6. Low-Income Countries in the Caucusus Region: Use of Fund Credit, 1993–99

    • 8.7. Low-Income Countries in Central Asia: Use of Fund Credit, 1993–99

    • 9.1. India: Use of Fund Credit, 1990–99

    • 10.1. Mexico: Exchange Rate, 1994–95

    • 10.2. Mexico: Use of Fund Credit, 1989–2000

    • 10.3. Argentina: Use of Fund Credit, 1989–99

    • 11.1. Thailand: Exchange Rates, 1995–99

    • 11.2. Thailand: Use of Fund Credit, 1997–99

    • 11.3. Indonesia: Exchange Rates, 1997–99

    • 11.4. Indonesia: Use of Fund Credit, 1997–99

    • 11.5. The Republic of Korea: Exchange Rates, 1997–99

    • 11.6. The Republic of Korea: Use of Fund Credit, 1997–99

    • 12.1. The Philippines: Use of Fund Credit, 1989–2000

    • 12.2. Cambodia, Lao PDR, and Vietnam: Use of Fund Credit, 1990–99

    • 12.3. Turkey: Use of Fund Credit, 1990–99

    • 12.4. Brazil: Inflation and Exchange Rates, 1989–99

    • 12.5. Brazil: Use of Fund Credit, 1989–99

    • 12.6. Ecuador: Use of Fund Credit, 1989–2000

    • 13.1. Total SAF and ESAF Lending

    • 13.2. SAF, ESAF, PRGF, and HIPC Resources and Loans Outstanding

    • 14.1. Africa: Use of Fund Credit, 1950–99

    • 14.2. Algeria: Use of Fund Credit, 1989–99

    • 14.3. CFA Franc Zone: Use of Fund Credit, 1990–99

    • 14.4. East Africa: Use of Fund Credit, 1980–99

    • 14.5. Malawi: Use of Fund Credit, 1975–99

    • 14.6. Malawi: Conditions on IMF-Supported Programs, 1979–95

    • 14.7. Mozambique: Use of Fund Credit, 1987–99

    • 15.1. IMF Usable Resources, 1989–99

    • 15.2. IMF Gold Stock, 1990–2000

    • 15.3. SDR Interest Rate and Rates of Charge and Remuneration, 1990–2000

    • 15.4. Weights in the Valuation of the SDR, 1981–99

    • 16.1. Protracted Arrears to the Fund, 1984–99

    • 16.2. Guyana: Use of Fund Credit, 1983–99

    • 16.3. Honduras: Use of Fund Credit, 1987–99

    • 16.4. Panama: Use of Fund Credit, 1987–99

    • 16.5. Peru: Use of Fund Credit, 1985–99

    • 16.6. Cambodia: Use of Fund Credit, 1972–99

    • 16.7. Vietnam: Use of Fund Credit, 1983–99

    • 16.8. Sierra Leone: Use of Fund Credit, 1984–99

    • 16.9. Zambia: Use of Fund Credit, 1986–99

    • 16.10. Liberia: Use of Fund Credit, 1984–99

    • 16.11. Sudan: Use of Fund Credit, 1984–99

    • 16.12. Somalia: Use of Fund Credit, 1984–99

    • 16.13. Dominican Republic: Use of Fund Credit, 1989–99

    • 16.14. Haiti: Use of Fund Credit, 1986–99

    • 16.15. Central African Republic: Use of Fund Credit, 1989–99

    • 16.16. Democratic Republic of the Congo: Use of Fund Credit, 1988–99

    • 17.1. Real Fund Salaries, 1970–99

  • Tables

    • 2.1. Changes in IMF Membership, 1990–99

    • 2.2. Russia, the Baltic Countries, and Other Countries of the Former Soviet Union: Entry into Membership, Representation, and Initial Quota Shares

    • 3.1. Major Country Groups in the 1990s

    • 5.1. STF Loans and Associated Arrangements, 1993–95

    • 5.2. CCFF Drawings, 1990–99

    • 5.3. Extended Arrangements in Effect, 1990–99

    • 5.4. Emergency Loans for Natural Disaster Relief, 1990–99

    • 5.5. Emergency Postconflict Assistance, 1995–99

    • 5.6. Top Recipients of Fund Technical Assistance by Region, FY1990–99

    • 6.1. Technical Assistance to Transition Countries, 1990–2000

    • 6.2. Introduction of New Currencies in the Former Yugoslavia

    • 8.1. Per Capita GDP in the Baltic Countries, the Russian Federation, and Other Countries of the Former Soviet Union, 1991–2000

    • 8.2. Dissolution of the Ruble Area, 1992–95

    • 9.1. IMF Assistance to Selected Heavily Indebted Countries, 1980s and 1990s

    • 12.1. IMF Lending to European Countries Other Than the Former Soviet Union, 1990–99

    • 13.1. Low-Income Countries: Members Eligible for ESAF Loans in the 1990s

    • 13.2. Top 10 SAF and ESAF Borrowers

    • 13.3. Debt Relief for Heavily Indebted Poor Countries, 1996–99

    • 13.4. Financing of the PRGF-HIPC (formerly ESAF-HIPC) Trust, 1999

    • 13.5. Contributions to the PRGF Trust (as of April 30, 2000)

    • 13.6. PRGF-HIPC Trust: Cumulative Contributions (as of April 30, 2000

    • 13.7. Off-Market Gold Transactions, December 1999–April 2000

    • 13.8. PRGF Trust and SDA: Combined Balance Sheet (as of April 30, 2000)

    • 13.9. PRGF-HIPC Trust and Related Accounts: Combined Balance Sheet (as of April 30, 2000)

    • 14.1. CFA Franc Zone: Lending Arrangements, 1990–99

    • 15.1. Balance Sheet of the General Department

    • 15.2. Countries with Currencies in the Financial Transactions Plan, 1989 and 1999

    • 15.3. Exceptional Access Under Fund Arrangements, 1990–99

    • 15.4. Income Statement of the IMF General Department, Financial Years 1991–2000

    • 15.5. Balance Sheet of the SDR Department

    • 15.6. Composition of the SDR, 1969–2000

    • 15.7. Leading Holders and Users of SDRs, 1990–99

    • 15.8. General Reviews of Quotas, 1950–99

    • 15.9. Actual and Calculated Quota Shares of the Five Largest Economies in 1987

    • 15.10. Largest Percentage Quota Increases, 1992 and 1999

    • 15.11. Borrowing Arrangements in Effect, 1998–99

    • 16.1. Countries with Protracted Arrears to the IMF, 1990–99

    • 16.2. Misreporting of Data by Member Countries, 1990–99

    • 17.1. Chairmen of the Annual Meetings and the Interim Committee, 1990–99

  • Illustrations

  • Michel Camdessus and Mikhail Gorbachev shake hands, October 1991

  • Cartoon: Air Drop

  • Mexican Finance Minister Pedro Aspe speaking in Madrid, September 1994

  • The Mexican rescue team at the IMF; 7:30 a.m., January 31

  • President Suharto greets Camdessus at his home in Jakarta, January 14, 1998

  • Camdessus observes Suharto signing the Letter of Intent, January 15, 1998

  • Fischer and Chand-Yuel Lim photographed during Fischer’s “secret” trip to Seoul

  • Cartoon from the Economist in 1998

  • Nelson Mandela greets Michel Camdessus in Washington, September 1993

  • Michel Camdessus and Philippe Maystadt meet the press, October 2, 1994

  • IMF headquarters before and after construction of Phase III

  • The Executive Board and senior management of the IMF in 1999

  • Alexandre Kafka being honored in 1999

  • Michel Camdessus, Managing Director (1987–2000)

  • The original troika of Deputy Managing Directors

  • Deputy Managing Directors Shigemitsu Sugisaki and Eduardo Aninat

  • Web documents available at http://www.imf.org/external/pubs/fft/history/2011/index.htm

    • 2.A: Special Association Agreement with the Soviet Union

    • 3.A: Report on Bank-Fund Collaboration (1998)

    • 3.B: Agreement between the IMF and the WTO (1996)

    • 4.A: Principles and Procedures of IMF Surveillance

    • 4.B: Operational Guidance to the Staff

    • 4.C: The “Eleven Commandments”

    • 4.D: Code of Good Practices on Fiscal Transparency—Declaration on Principles

    • 4.E: Liberalization of Capital Movements under an Amendment of the Articles

    • 5.A: Systemic Transformation Facility

    • 5.B: Emergency Financing Mechanism

    • 5.C: Supplemental Reserve Facility

    • 5.D: Contingent Credit Lines

    • 5.E: Year 2000 Facility

    • 5.F: Oil Import Window in the CCFF

    • 5.G: Emergency Post-Conflict Assistance

    • 5.H: Currency Stabilization Funds

    • 13.A: Establishment of the HIPC Trust

    • 13.B: Approval of Off-Market Gold Transactions

    • 15.A: The Fourth Amendment

    • 15.B: IMF Quotas, 1990–99

    • 15.C: The New Arrangements to Borrow

    • 16.A: The Rights Approach

    • 16.B: The Third Amendment

    • 16.C: The 1993 Gold Pledge to Protect the ESAF Trust


The International Monetary Fund was created in 1944 to be the world’s premier financial institution. It is the locus of international monetary cooperation among nearly all of the world’s countries. In periods of relative calm, it regularly analyzes and reviews the economies of more than 180 countries and encourages cooperative and multilateral solutions to problems. In times of crisis, it is the first and foremost institution to respond with policy advice and financial assistance. The IMF is rightfully proud of its history, which I am eagerly learning as I begin my tenure as Managing Director. It is a history that should be shared more widely with the world community.

This volume is the fifth in a series of Histories published by the IMF. It continues the tradition of making each History more open and frank than those written earlier. The mandate of the Fund Historian is to write the History candidly and without bias, to approach the subject as an objective scholar and not as an advocate for the institution. This book presents the author’s personal views, not those of the IMF, and he takes full responsibility for them. He has had full access to the Fund’s archives and its senior officers. Many of the political leaders and finance officials who played crucial roles in the events of the 1990s have shared their own recollections with him to inform and enrich the account. My hope and expectation is that this commitment to openness and transparency will encourage readers to reflect on the challenges that confronted the IMF and to draw their own conclusions about how well the institution did and how we might improve in the future.

The 10 years covered in this volume—1990 through 1999—were years of upheaval, marked by large shocks: financial, economic, social, and political crises that spread around the world without regard for borders or distances. But they were also years of renewal, at the end of which many countries that had long been isolated were enjoying the fruits of international trade and cooperation. As this book emphasizes, it was a time when the political and economic walls that had separated east from west and north from south began to be dismantled. Adjusting to the upheavals was not easy, but few people today would want to rebuild the walls. The central lesson of this book is much the same as what I have concluded from my own experience before I came to the IMF: while the challenges of an open global economy are great, the alternative is not viable. To move forward, to build on the progress of the past two decades and put the stresses of the adjustment behind us, we need multilateralism and cooperation more than ever.

December 2011

Christine Lagarde

Managing Director

International Monetary Fund



For my generation—those born during or shortly after the Second World War—the breaching of the Berlin Wall was one of those rare events that divide our lives into the time before and the time that followed. For all of our conscious lives, we had known only a world divided geographically, politically, intellectually, spiritually, and economically by the Cold War. We lived on one side or the other of the wall, and we viewed the other side, if at all, through an Iron Curtain.

That world vanished with astonishing speed and with astonishingly peaceful force in a few weeks before and after November 9, 1989. On that day, the wall that separated East from West Berlin and that had symbolized the isolation of the people of East Germany was breached, and the process of tearing it down began. A wave of liberalization movements spread throughout Central and Eastern Europe, from Estonia in the north to Albania, some 2,000 kilometers to the south.

A craving for political freedom provided the greatest impetus for these movements, but a yearning for economic freedom, participation, and comfort was scarcely less important. Within four years, more than two dozen countries that had long been suppressed from participating fully in the world economy were accepted as members of the International Monetary Fund, a surge that finally realized the 60-year-old dream of the IMF’s founders to create a universal institution linking virtually all states in a global financial system.

This book is a history of many separate and often loosely connected events, but in its essence it is a history of the first modern decade without a first, a second, and a third world. It is a history of the beginnings of a world in which events in Mexico could have profound effects on Indonesia, events in Indonesia could have profound effects on the Russian Federation, and events in Russia could have profound effects on Brazil. But it is also a history of the decade that preceded September 11, 2001, when attacks on western civilization forced a pullback behind new divisions defined by culture and religion rather than geography, politics, or economics.

The world without walls born in 1989 was crippled first by a series of financial crises from 1994 to 2001, then by the shock of global terrorism, and finally by the global economic crisis that began in 2008. Whether the 1990s will turn out to have been a unique and tragically brief experiment with openness or the first giant step toward a noticeably open and stable world economy cannot yet be judged. Clearly, however, it differed radically from the decades that preceded and followed it. It was a decade during which “globalization” exploded in many directions and rose to the forefront of a newly globalized consciousness: first as a beacon of hope and then, all too quickly, as a focus of fear and protest.

This book is the fifth in a series of Histories of the IMF and the second by the present author. The series opened with a chronicle of the institution’s origins and first 20 years, written by J. Keith Horsefield, who served as the Fund’s first official Historian at the end of a career as its Chief Editor. A companion volume, analyzing several key aspects of the way the Fund’s policies evolved through the mid-1960s, was edited by Horsefield and Margaret Garritsen de Vries, with contributions by some of the Fund’s most prominent staff members during those formative years. A third volume for that first History collected the official documents that had brought the IMF into being and guided its early development. De Vries, the first woman to reach the level of Division Chief in the Fund, went on to write the next two Histories. Those volumes covered the first and second amendments to the IMF’s Articles of Agreement: the amendment that created the special drawing right (SDR) as an international reserve asset in 1969 and the amendment adopted in 1978 that redesigned the Fund’s role for an era without monetary gold as an anchor for a system of fixed exchange rates among currencies.

When I was handed the baton to continue this series, I also received a mandate to modernize the treatment of the Fund’s history. The IMF, having begun life largely as a club of central banks, had long been cloaked in secrecy. Horsefield’s History opened a window onto the Fund, primarily by describing and discussing the critical decisions made by the Executive Board, year by year, through 1965. De Vries continued that practice and expanded it by discussing more fully the role of the staff in developing and carrying out the Fund’s policies. My goals in writing the fourth of the Fund’s Histories—published in 2001 as Silent Revolution: The International Monetary Fund 1979–1989—were twofold: to make the story more scholarly and transparent by documenting the internal records that were my primary source material, and to make it more interesting and understandable by relating the work of the IMF more closely to the political, social, and intellectual developments in the world at large. The history of an institution can be understood only in relation to the world in which it operates. This book aims to continue that quest.

This sequential construction of the institutional history has the advantage of thoroughness, but it poses a challenge for the reader. With the completion of this volume, the official history now runs close to 7,000 pages, bound in 10 volumes. To piece together the evolution of just one type of lending by the Fund might require dipping into all or most of those volumes. At present, only the last two Histories—this one and its predecessor—are in digital form and available online.

In Silent Revolution, I included a great many footnotes referring to the earlier volumes as an aid to reconstructing the longer history. I have continued that practice in this work, despite my misgivings about the large number of references to my own earlier work. As a further introduction to the long sweep of the Fund’s history, the Prologue to this book reviews the central events and ideas that led to the creation and subsequent evolution of the institution.

Readers interested primarily in the Fund’s handling of financial crises may wish to focus on Chapters 7 (Russia), 10 (Mexico), and 11 (East Asia). Those looking for a more general introduction to the history of the institution might want to read the final part of the book (Chapters 1517) before delving into the more specific issues taken up earlier. Each chapter is intended to be a self-contained treatment of a single topic but also to serve as a portal for those in search of a fuller understanding. Throughout the text, I have included many cross-references to related material in other chapters and references to discussions of earlier developments in the preceding Fund Histories.

A Note on “Fundese”

English is the working language of the IMF, but one could be excused for doubting it. John Maynard Keynes famously (and insensitively) referred to the language of the draft Articles as “Cherokee,” by which he meant a language that was as incomprehensible as it was impressive.1 The tradition has been carried on by the staff. It is not uncommon at the Fund to hear sentences in which almost none of the nouns is a real word, and even the translation needs to be translated. “The MD is asking the DR to purchase SDRs for the first tranche of their PRGF.” This hypothetical example may be translated as, “The Managing Director is asking the Dominican Republic to purchase special drawings rights for the first tranche of their arrangement under the terms of the Poverty Reduction and Growth Facility.”2 In that form, the sentence would still make sense only to the cognoscenti. A more straightforward rendering into vernacular English would be, “The boss is asking the Dominican Republic to take the first disbursement of our low-interest loan in the form of a special asset that can only be held here at the Fund or exchanged with another government or central bank.” That version, however, would look very odd to an insider. The highly specialized language of the IMF (often called “Fundese”) therefore poses particular problems for anyone writing a book on the institution for a general readership.

In addressing this book to readers both inside and outside the IMF (or “the Fund,” which is used interchangeably with “the IMF” throughout the book), I have tried to strike a balance between adhering to terminology familiar and clear to insiders and translating this often arcane language for everyone else. The following are common examples of internal argot and technical language that I have retained here.

  • The “authorities” of a country are the senior officials with whom the Fund staff and management discuss economic policies and conditions and who are responsible for formulating and implementing macroeconomic policies. In this context, the term is shorthand for “monetary authorities.” The reader might usefully think of them as “the government,” but the term applies primarily to treasury or finance ministry officials and to central bank officials who, in some countries, are independent of the government. Executive Directors at the Fund also use the phrase “my authorities” to refer to the officials to whom they report in the countries belonging to their constituencies.

  • The “management” of the IMF refers collectively to the Managing Director and the Deputy Managing Directors. The expression is common within the Fund. For example, “management” clears staff documents for circulation to the Executive Board. Use of the term in this History is generally limited to cases in which a Deputy acted on behalf of the Managing Director, two or more individuals were both actively involved, or the record is not clear about which individual was involved.

  • The Executive Board is the main decision-making body in the Fund, sitting in “continuous session” (normally meeting two or three days each week). The 22 to 24 Executive Directors who composed the Board in the 1990s represented “constituencies” of from 1 to 24 countries. Executive Directors are officers of the Fund who either are appointed by their governments for an indefinite period (in the largest countries) or are elected by one or more countries for fixed terms of two years. This book refers to Directors by their nationality, which by tradition is almost always within the constituency.3 Each Executive Director may be represented at Board meetings by his or her Alternate or by an Advisor or Assistant who has been designated as a Temporary Alternate. In such cases, a vote or a viewpoint expressed at a Board meeting might be described as by the “chair” of the country of the Executive Director.4

  • The Fund’s charter, drafted at Bretton Woods, New Hampshire, in July 1944, is its “Articles of Agreement.” This book discusses the third and fourth amendments to the Articles. The two earlier amendments may be summarized as follows:

    • The First Amendment, which took effect in 1969, introduced the SDR both as the unit of account of the Fund and as an unconditional line of credit for participating countries. Since that time, the Fund’s lending commitments have been specified in SDRs, and disbursements may be made either in SDRs or in convertible currencies.5 Initially, the SDR was defined as the equivalent of the gold value of one U.S. dollar. In 1974, it was redefined as a basket of 16 currencies. In 1981, the basket was reduced to five. For a further introduction to the SDR, see the Appendix to Chapter 15.

    • The Second Amendment, which took effect in 1978, ratified what is commonly known as the “floating exchange rate system.” Instead of specifying and maintaining a par value in terms of gold or the U.S. dollar, as before the amendment, each country specifies its own exchange rate policies, which may range from independent floating to pegging against the dollar or another currency (or group of currencies). The Second Amendment aims to promote a “stable system of exchange rates” (as distinguished in an undefined manner from stable exchange rates) through the exercise of “firm surveillance” by the IMF over each member’s exchange rate policies. Article IV, completely rewritten for this purpose, is frequently used as a metaphor for surveillance (see Chapter 4).

    • Each member country is assigned a “quota” that determines both voting rights and borrowing (or “access”) limits. (On this and the following points, see Chapter 15.) Originally, access to Fund resources was limited to 25 percent of quota in any 12-month period and 100 percent of quota cumulatively. Those limits were expanded over time and were always subject to exceptions, but the principle of basing each country’s limit on its quota was retained. When a country becomes a member or receives a quota increase, it pays in 25 percent (the “reserve tranche”; see below) of its quota or quota increase in internationally traded (convertible) currencies or SDRs. The remainder is credited as a bookkeeping entry to the country’s balance in the General Resources Account (GRA) at the Fund. Therefore, at the moment a country joins, the Fund’s “holdings of the member’s currency” equal 75 percent of the member’s quota. If a country has fully drawn its reserve tranche and has not borrowed from the Fund, and if no other members have made net use of that currency in outstanding transactions with the Fund, then the Fund’s holdings of the country’s currency will equal 100 percent of quota.

    • Starting in 1952, the IMF began referring to “tranches” of access to the resources of the Fund. Each country had potential access to its “gold tranche” (the portion of its quota that it had paid in gold) and four “credit tranches,” each equivalent to 25 percent of quota.6 The only tranche mentioned in the Articles was the gold tranche, which was defined and given operational significance in the First Amendment. The credit tranches were defined and made operational only through Executive Board policy decisions on access to Fund resources. With the Second Amendment, the gold tranche was redefined as the “reserve tranche.”

    • Each member country has unconditional access to its reserve tranche, easy access to its first credit tranche, and access to higher levels of credit subject to increasingly strict “conditionality”—requirements to adjust economic policies. By the 1970s, when countries’ indebtedness to the Fund frequently exceeded 100 percent of quota, the individual tranches beyond the first lost operational significance, and most subsequent references distinguished only between the first credit tranche and the open-ended “upper credit tranches.” “Stand-by arrangements” (Fund commitments to lend specified amounts of money to member countries at specified intervals, subject to agreed-on conditions), drawings under which would raise the Fund’s holdings of a member’s currency above 125 percent, are referred to as upper-tranche arrangements.

    • Indebtedness to the Fund is generally measured by the Fund’s holdings of the member’s currency in excess of 100 percent of quota. Exceptions arise when a country chooses not to draw on its reserve tranche before borrowing or draws on one of the Fund’s specialized “facilities” in circumstances when such drawings are permitted to “float” relative to the standard tranches.7 For example, until 1992, if a country borrowed the equivalent of 25 percent of its quota through the Compensatory Financing Facility (CFF), it could borrow another 25 percent under the general tranche policies and still be considered to have drawn only on its first credit tranche.

I generally have eschewed expressions in common usage only at the IMF whenever perfectly good substitutes are more widely understood. A problem arises with regard to the Fund’s financial operations, which are uniquely structured. When a member country borrows from the general accounts of the Fund, the amount borrowed is technically a “purchase” of foreign exchange or SDRs in exchange for the country’s own currency. The subsequent repayment of the principal is a “repurchase.” In legal terminology, this type of financing is technically distinct from a conventional loan contract (and does not involve a contract between lender and borrower), but the economic effects are indistinguishable from a loan.8 In the 10 years that have passed since Silent Revolution went to press, the IMF has become more open to the use of vernacular language to describe its activities. Most notably, the use of “loan” is no longer taboo as a description of the Fund’s financial assistance. Earlier Histories described such assistance as a purchase or a credit rather than a loan, but in most instances this book adopts the more common terminology. I generally refer to the purchase either as a drawing (on a stand-by or similar arrangement) or as a disbursement, and to the repurchase as a repayment.9

In another nod to generally understood usage, I have expressed the amounts of most loans in U.S. dollars rather than in the Fund’s unit of account, SDRs. The loans are denominated in SDRs and thus vary over time with the dollar/SDR exchange rate. In responding to the financial crises of the 1990s, wherein the financial goal was to assemble an overall package of financial support from the IMF and other lenders, the share of the IMF in the package was usually set in terms of U.S. dollars and then translated into the SDR equivalent. Accordingly, I have usually relegated the SDR values to parenthetical references.10


The primary written source materials for this book are the documents housed in the archives of the IMF. I was granted unlimited access to the archives, as were Horsefield and de Vries before me. Since 1996, the archives have been open for external researchers upon application to the Archivist. With some exceptions, the Executive Board documents and minutes of Executive Board meetings cited herein are available to the public, given that they were issued more than 10 years ago. Internal documents such as staff memorandums are subject to a 20-year rule. Those cited here are expected to be released on that schedule.11

Some documents in the IMF archives were classified “strictly confidential” or “secret” when initially circulated. Documents with those classifications are not available to external researchers, nor to IMF staff without special permission. Whenever I sought to use such material for this History, I requested that they be declassified. Under the rules in effect at the time of these requests, most staff papers and internal memorandums could be declassified upon approval by the issuing department in the Fund. Executive Board minutes and certain other country-related documents such as technical assistance reports required the approval of the country authorities. Most of those requests were granted, but in a few cases the authorities declined to permit declassification. In those cases, I deleted the references and modified the text accordingly. The only significant alterations were to Chapter 11 (on the Asian financial crisis), where the country authorities declined to approve declassification of the minutes of restricted meetings of the Executive Board.

To understand and to convey the context in which relations between the IMF and its member countries evolved, I interviewed officials and former officials from some 30 countries. Most of those interviews were conducted between 2004 and 2009, in the officials’ countries. I also interviewed or had informal discussions with more than 100 of my colleagues in the Fund. All of those discussions and interviews were conducted on a background basis, with no recording device and consequently no transcript. Where necessary for clarity, I have inserted footnotes referring to interviews as the source of specific information, though without identifying the individual concerned unless a quotation is given. A complete list of interviewees appears below.

The source material for Chapter 10 (covering the Mexican peso crisis) included interviews, conversations, and direct observations as events unfolded in the first quarter of 1995. At that time, I interviewed most of the senior staff of the IMF involved in the response to the crisis, on the understanding that information from those interviews would not be used before the preparation of this History and that individuals would not be quoted without prior clearance. Interviews with Mexican, U.S., and other country officials were conducted approximately a decade later on similar terms.

All quotations are from printed records unless specifically noted otherwise. Apart from cited documents, the most common sources are the minutes of Board meetings and final texts of speeches. Oral remarks may have departed from the text, but in most cases no record exists of what was actually said. Executive Directors typically prepare statements (known as “grays” in reference to the color of paper on which they were once printed) that they circulate in advance of a Board meeting. The minutes reproduce those statements, introducing them with a sentence stating that the individual “made the following statement.” Grays, however, are not read during the meeting. The minutes thus are a mixture of written statements and oral remarks. The latter are rendered into indirect speech and are edited into a consistent style. By convention, the minute writer excises much of the stylistic flavor of the discussion, such as humorous or parenthetical remarks, so that the official record focuses as clearly as possible on the substance of the meeting. In addition, each speaker is given an opportunity to review and edit the text of his or her own remarks before it is made final. The resulting product accurately reflects what each speaker intended to say, but not necessarily what was said during the meeting.12

A particularly important source document is the “Chairman’s Summing Up” of an Executive Board meeting. This document, the official record of the sense of the meeting, reflects the input of the staff, the Board, and the Managing Director (or a Deputy Managing Director, in which case the document will be attributed to the “Acting Chairman”). Normally, the staff prepared a draft Summing Up before the meeting, based on anticipation of what Directors were likely to say, and management might have offered revisions at that time. As the meeting progressed, either the Chairman or the staff, or perhaps both, would redraft as necessary, often making major alterations to the substance of the document to reflect the views being expressed around the table. The final draft typically would include careful but vague attributions to the views of groups such as “a few,” “some,” “several,” or “most” Directors.

In general, in each Summing Up, 2–4 Directors are “a few”; 5–6 are “some”; 6–9 are “a number”; 10–15 are “many”; 15 or more are “most”; and 20 or more are “nearly all.” An additional qualifier, “several” Directors, lies vaguely between “some” and “a number.” A special problem arises with references to the views of the United States, given that U.S. voting power is much larger than that of any other. Occasionally, when the U.S. chair expressed a view different from the others, that view was described as that of “some” Directors, but on other occasions the problem was avoided by use of the passive voice (“the view was held that …”). This quantification custom (generally attributed to Leo Van Houtven, the long-serving Secretary of the Fund) was long kept unpublicized by the Fund, although it was first enunciated by the Managing Director in 1983 and was quoted in a footnote in the preface to Silent Revolution (Boughton, 2001, p. xxi). It was added to the external website in 2010.13

At the end of a Board meeting or—exceptionally—at the beginning of the next meeting, the Chairman would read aloud the draft of the Summing Up. Directors then had an opportunity to comment and to suggest revisions. (Occasionally, further revisions would be suggested a day or two later.) A final text was then circulated and incorporated into the minutes of the meeting. Rarely was any record retained of the various drafts or the comments made upon them. The document therefore must be interpreted as representing the views of Executive Directors, albeit with some reservations.

An additional difficulty arises in attributing the work of the Fund to individuals. The staff works in teams under the direction of the Managing Director. Decisions are made by the Executive Board, and Executive Directors exert additional guidance and oversight through their interventions during Board meetings. References to the decisions and policies of the Fund are, by implication, references to the Executive Board. The Managing Director is selected by and accountable to the Executive Board. Executive Directors are accountable to their authorities. Collectively, the Fund is accountable to its membership. Nonetheless, the work of the Fund is conducted by individuals on the staff, and a history of the institution would be much poorer for ignoring or slighting their role.

This book makes frequent reference to staff members, especially to the chiefs of staff missions to member countries. The reader should understand that views and arguments attributed to individuals were to some extent developed, conditioned, and tempered by their colleagues, both on the mission teams and at headquarters. As a rule, I have respected the international (not just multinational) character of the institution by not identifying staff members’ nationalities, except in the profiles of senior staff and management in the final chapter.14 By stressing staff contributions while limiting references to personalities and backgrounds, I have tried to strike a balance between portraying the Fund as a monolithic institution driven by rational but disembodied analysis and depicting its policies as shifting by personal predilection. Either extreme would mislead, and I hope that the case studies throughout this book convey a sense of constant tension in the development and application of Fund policies. Mission chiefs and other managers are not interchangeable cogs, but neither are they completely free agents.


An institution’s written record cannot by itself bring its history to life. I could not have begun to write this book without the help of my colleagues at the Fund who spoke to me about their work and who read and critiqued early drafts of my chapters, and of the many distinguished officials and other individuals from around the world who agreed to be interviewed for this project. Of those, the most important were Michel Camdessus and Stan Fischer, who encouraged me to undertake this work and who generously shared their time, their thoughts, and their memories to make it possible. I would also like to thank the following individuals for agreeing to be interviewed for this book or just for sharing their recollections and insights.15

IMF Staff16

Charles Adams, Max Alier, Mark Allen, Akira Ariyoshi, Athanasios Arvanitis, Lynn Aylward, Thomas Baunsgaard, Tamim Bayoumi, Andrew Berg, Jack Boorman, Tony Boote, Scott Brown, Jeremy Carter, Adrienne Cheasty, Olga Chmola, Ajai Chopra, Daniel Citrin, Christopher Clarke, David Coe, Charles Collyns, Sharmini Coorey, Carlo Cottarelli, Milan Cuc, Pierre Dhonte, Donal Donovan, Michael Dooley, Thomas Dorsey, Charles Enoch, Ulric Erickson von Allmen, José Fajgenbaum, Tubagus Feridhanusetyawan, C. David Finch, Matthew Fisher, Hans Flickenschild, Kenneth Friedman, Przemek Gajdeczka, Gaston Gelos, Henri Ghesquiere, Atish Rex Ghosh, François Gianviti, Martin Gilman, James Gordon, Michael Hadjimichael, Sean Hagan, Elliott Harris, Heikki Hatanpää, Ernesto Hernández-Catá, John Hicklin, Peter Hole, Yusuke Horiguchi, Balázs Horváth, Simon Johnson, Meral Karasulu, Mohsin Khan, Deena Khatkhate, Kalpana Kochhar, Desmond Lachman, Kate Langdon, Leslie Lipschitz, Claudio Loser, Alan MacArthur, Walter Mahler, Paul Mathieu, Anne McGuirk, Reza Moghadam, Alex Mourmouras, P.R. Narvekar, Sean Nolan, Roger Nord, Jorge Márquez-Ruarte, John McLenaghan, Hunter Monroe, William Murray, Hubert Neiss, David Nellor, Sean Nolan, John Odling-Smee, Anton Op de Beke, Rolando Ossowski, Mahmood Pradhan, David J. Robinson, David O. Robinson, Franek Rozwadowski, Bassirou Sarr, Ruth Saunders, Garry Schinasi, Stephen Schwartz, Michaela Schrader, Abebe Selassie, Vasuki Shastry, Amor Tahari, Shamsuddin Tareq, Teresa Ter-Minassian, Subhash Thakur, John Thornton, Harry Trines, Wanda Tseng, Patrizia Tumbarello, Tessa van der Willigen, Rachel van Elkan, Leo Van Houtven, Orasa Vongthieres, Jian-Ye Wang, Max Watson, Nissanke Weerasinghe, David Williams, Thomas Wolf, Barry Yuen, Iqbal Zaidi, Alessandro Zanello, and Jeromin Zettelmeyer


Domingo F. Cavallo—Minister of the Economy; Chairman, DFC Associates

Roque B. Fernández—President of the Central Bank of Argentina; Minister of the Economy; Professor, Universidad del CEMA

Pablo Guidotti—Secretary of Finance, Ministry of the Economy; Professor, Universidad Torcuato Di Tella

Miguel A. Kiguel—Under Secretary of Finance, Ministry of the Economy; Executive Director, EconViews

Ricardo López Murphy—Chief Economist, FIEL; Minister of Defense; President, Fundación Civico Republicana

Héctor R. Torres—Secretary of International Economic Relations, Ministry of Foreign Affairs; IMF Alternate Executive Director


Ric Battellino—Assistant Governor, Reserve Bank of Australia

Margaret Callan—Director for Indonesia, AusAID

Peter Callan—Assistant Director General, Asia Region, AusAID

Ric Deverell—Chief Manager of the International Department, Reserve Bank of Australia

Ted Evans—IMF Executive Director; Treasury Secretary

Stephen Grenville—Deputy Governor, Reserve Bank of Australia

Ken Henry—Treasury Secretary

Ian MacFarlane—Governor, Reserve Bank of Australia

Martin Parkinson—Executive Director, Macroeconomic Group, Department of the Treasury

Tony Richards—Head of the Economic Analysis Department, Reserve Bank of Australia

Glenn Stevens—Deputy Governor, Reserve Bank of Australia

Gregory Taylor—IMF Executive Director


Jacques de Groote—IMF and World Bank Executive Director; President, Appian Group

Willy Kiekens—IMF Executive Director

Philippe Maystadt—Deputy Prime Minister and Minister of Finance and Foreign Trade; President, European Investment Bank


Abdoulaye Bio-Tchané—Minister of Finance; Director, IMF African Department


Amaury Bier—Deputy Minister of Finance; Partner, Gávea Investimentos

His Excellency Mr. Fernando Henrique Cardoso—President of Brazil; President, Instituto Fernando Henrique Cardoso

Arminio Fraga—President, Central Bank of Brazil; Partner, Gávea Investimentos

Gustavo Franco—President, Central Bank of Brazil; Partner and Executive Director, Rio Bravo

Francisco Lopes—President, Central Bank of Brazil; President, Macrométrica

Gustavo Loyola—President, Central Bank of Brazil; Partner, Tendências Consultoria Integrada

Pedro Malan—Minister of Finance; Chairman of the Board of Governors, Unibanco

Maílson da Nóbrega—Minister of Finance; Partner, Tendências Consultoria Integrada


C. Scott Clark—IMF Executive Director; Group of Seven (G7) Finance Deputy; European Bank for Reconstruction and Development (EBRD) Executive Director

Douglas Smee—IMF Executive Director; Senior Vice President, Citigroup

Côte d’Ivoire

Alassane Ouattara—Governor, Central Bank of West African States; Prime Minister; IMF Deputy Managing Director

Arab Republic of Egypt

Shakour Shaalan—IMF Executive Director


Ardo Hansson—Advisor to the Prime Minister; Lead Economist, Europe and Central Asia Region, World Bank

Aare Järvan—Member of the Board, Bank of Estonia; Advisor to the Prime Minister

Siim Kallas—Governor, Bank of Estonia; Minister of Finance; Prime Minister; Member, European Commission

Mart Laar—Prime Minister

Maris Leemets—Advisor to the IMF Executive Director

Andres Sutt—Deputy Governor, Bank of Estonia


Marc-Antoine Autheman—IMF and World Bank Executive Director; Chief Executive, Crédit Agricole Indosuez

Michel Camdessus—IMF Managing Director; Personal Representative of the French President to the New Partnership for Africa’s Development (NEPAD)

Jacques de Larosière—Governor, Banque de France; President, EBRD; Advisor to the Chairman, BNP Paribas

Jean-Pierre Landau—IMF and World Bank Executive Director; EBRD Executive Director

Jean Lemierre—Director of the French Treasury and Chairman of the Paris Club; President, EBRD

Jean-Claude Milleron—Assistant Secretary General, United Nations; IMF and World Bank Executive Director

Christian Noyer—G7 Finance Deputy; Chairman of the Paris Club; Governor, Banque de France

Jean-Claude Trichet—Director of the French Treasury and Chairman of the Paris Club; Governor, Banque de France; President, European Central Bank


Guenter Grosche—IMF Executive Director; Director of the Secretariat of the Economic and Financial Committee, European Commission

Prof. Dr. Horst Köhler—G7 Finance Deputy and summit sherpa; President, EBRD; IMF Managing Director; President of the Federal Republic of Germany

Klaus Regling—Director-General for European and International Financial Relations, Ministry of Finance; Director-General for Economic and Financial Affairs, European Commission

Stefan Schoenberg—IMF Executive Director; Head of International Relations Department, Deutsche Bundesbank

Jürgen Stark—G7 Finance Deputy and summit sherpa; Vice President, Deutsche Bundesbank


Shankar Acharya—Chief Economic Advisor, Ministry of Finance; Reserve Bank Chair Professor at the Indian Council for Research on International Economic Relations

Montek Singh Ahluwalia—Finance Secretary, Ministry of Finance; Deputy Chairman, Planning Commission

Gopi K. Arora—Finance Secretary, Ministry of Finance; IMF Executive Director; Chairman, Noida Toll Bridge Co. Ltd.

Suman Bery—Special Consultant, Reserve Bank of India; Director-General, National Council of Applied Economic Research

Bimal Jalan—Finance Secretary, Ministry of Finance; Governor, Reserve Bank of India

Ashok Lahiri—Chief Economic Advisor, Ministry of Finance


Soedradjad Djiwandono—Governor, Bank Indonesia; Professor of Economics, Nanyang Technological University (Singapore)

Kwik Kian Gie—Coordinating Minister for Economy, Finance, and Industry

Miranda Goeltom—Senior Deputy Governor, Bank Indonesia

Cyrillus Harinowo—IMF Alternate Executive Director; Independent Commissioner, Bank Central Asia

Ginandjar Kartasasmita—State Coordinating Minister for Economy, Finance, and Industry; Chairman, House of Regional Representatives

Widjojo Nitisastro—Senior Advisor to the President

Syahril Sabirin—Governor, Bank Indonesia

Sofyan Wanandi—President, Indonesia Manufacturers Association


Stanley Fischer—IMF First Deputy Managing Director; Vice Chairman, Citigroup; Governor, Bank of Israel


Nobiru Adachi—Director, Office of the Vice Minister for International Affairs, Ministry of Finance; Senior Managing Director, Planning Department, Jasdaq Securities Exchange, Inc.

Kenji Aramaki—Executive Vice President, Policy Research Institute, Ministry of Finance

Hiroo Fukui—IMF Executive Director

Kiyoto Ido—Deputy Vice Minister of Finance for International Affairs; Executive Director, Bank of Japan

Shigeo Kashiwagi—Director, International Organizations Division, Ministry of Finance; Executive Director, Asian Development Bank; IMF Executive Director

Takatoshi Kato—Vice Minister of Finance; IMF Deputy Managing Director

Masato Miyazaki—Director, International Organizations Division, Ministry of Finance

Eisuke Sakakibara—Vice Minister of Finance; Professor, Waseda University

Shigemitsu Sugisaki—Deputy Vice Minister of Finance for International Affairs; IMF Deputy Managing Director; Chairman, Sompo Japan Research Institute, Inc.

Rintaro Tamaki—Senior Deputy Director-General, International Bureau, Ministry of Finance

Makoto Utsumi—Vice Minister of Finance; President and CEO, Japan Credit Rating Agency, Ltd.

Koji Yamazaki—IMF Executive Director; President, Small Group

Yukio Yoshimura—IMF Executive Director; World Bank Vice President and Special Representative in Japan


Musalia Mudavadi—Minister of Finance; Minister for Agriculture

S. Simeon Nyachae—Minister of Finance

George Saitoti—Vice President of the Republic; Minister for Planning and National Development

Republic of Korea

Duck-Koo Chung—Vice Minister of Finance and Economy; Member of the National Assembly

Nyum Jin—Minister of Planning and Budget; Professor of Economics, Sogang University

Bong-Kyun Kang—Senior Secretary for Economic Affairs, Presidential Secretariat; Policy Committee Chairman of Uri Party and Member of the National Assembly

Kyong Shik Kang—Deputy Prime Minister and Minister of Finance and Economy; Executive Advisor to the Chairman, Dongbu Financial Group, and Chairman of the National Strategy Institute

The Honorable Kim Dae-Jung—President, Republic of Korea (1998–2003)

Kihwan Kim—Ambassador at Large for International Economic Affairs; International Advisor, Goldman Sachs (Seoul), and Chairman, Seoul Financial Forum

Tae Dong Kim—Senior Secretary for Economic Affairs, Presidential Secretariat; Professor of Economics, Sungkyunkwan University

Kyu-Sung Lee—Minister of Finance and Economy; Chairman, Koramco REITs Management and Trust Co. Ltd.

Kyung Shik Lee—Governor, Bank of Korea


Einars Repše—President, Bank of Latvia; Prime Minister


Goodall E. Gondwe—Director, IMF African Department; Minister of Finance

Justin C. Malewezi—Vice President of Malawi and Minister of Finance; Member of Parliament

Francis Pelekamoyo—Governor, Reserve Bank of Malawi; Chairman, Opportunity International Bank of Malawi


Anwar Ibrahim—Deputy Prime Minister and Minister of Finance; Distinguished Visiting Professor, Georgetown University (Washington, DC)

Clifford Francis Herbert—Secretary General, Ministry of Finance; Vice President, Federation of Malaysian Manufacturers

Fong Weng Phak—Deputy Governor, Bank Negara Malaysia; Member of the Board of Directors, Great Eastern Life Assurance (Malaysia)

Andrew Sheng—Deputy Chief Executive, Hong Kong Monetary Authority; Chairman, Hong Kong Securities and Futures Commission

Nor Mohamed Yakcop—Special Economic Advisor to the Prime Minister; Second Minister of Finance

Zeti Akhtar Aziz—Governor, Bank Negara Malaysia


Miguel Mancera—Governor, Bank of Mexico

Guillermo Ortiz—Secretary of Finance; Governor, Bank of Mexico

Carlos Pérez-Verdia—IMF Alternate Executive Director

Luis Téllez—Chief of Staff to the President; Co-Director, The Carlyle Group

Martin Werner—Under Secretary of Finance; Managing Director of the Investment Banking Division, Goldman Sachs Mexico


Jacques J. Polak—IMF Executive Director; President, Per Jacobsson Foundation

J. de Beaufort (Onno) Wijnholds—IMF Executive Director; Representative of the European Central Bank to the IMF

Russian Federation

Sergei Dubinin—Governor, Central Bank of Russia; Deputy CEO of United Energy Systems

Yegor Gaidar—Acting Prime Minister; Director, Institute for the Economy in Transition

Viktor Gerashchenko—Governor, Central Bank of Russia; Chairman, Yukos Oil

Sergei Ignatiev—Deputy Minister of Finance; Governor, Central Bank of Russia

Andrei Illarionov—Economic Advisor to the Prime Minister; Economic Advisor to the President

Konstantin Kagalovsky—IMF Executive Director

Andrei Vavilov—Acting Minister of Finance; Senator, Federation Council

Oleg Vyugin—First Deputy Minister of Finance; Head of the Federal Financial Markets Service

Yevgeny Yasin—Minister of the Economy; Academic Supervisor, State University Higher School of Economics


Teh Kok Peng—Deputy Managing Director, Monetary Authority of Singapore; President, GIC Special Investments

South Africa

Goolam Aboobaker—Director, Cabinet Research, Office of the President; Senior Advisor to the IMF Executive Director

Derek L. Keys—Minister of Finance; Minister of Trade and Industry

François le Roux—IMF Principal Resident Representative; Deputy Director-General, National Treasury

Ismail Momoniat—Deputy Director-General for Economic Policy and International Financial Relations, National Treasury

Maria Ramos—Director General, National Treasury; Group Chief Executive Officer, Transnet Group

Cyrus Rustomjee—IMF Executive Director; Director, Economic Affairs Section, Commonwealth Secretariat

Chris Stals—Governor, Reserve Bank of South Africa; Member, Panel of Eminent Persons for the African Peer Review Mechanism

Danel van Rensburg—Director, International Finance, National Treasury


Simon M. Mbilinyi—Minister of Finance; Chairman, Tanzania Investment Centre Peter E.M. Noni—Director of Strategic Planning and Performance Review, Bank of Tanzania


Amnuay Viravan—Deputy Prime Minister and Minister of Finance; Chairman, Saha-Union Public Co. Ltd.

Bandid Nijathaworn—Deputy Governor, Bank of Thailand

Nukul Prachuabmoh—Governor, Bank of Thailand; Chairman, First Asia Securities Public Co., Ltd.

Pisit Leeahtam—Deputy Minister of Finance; Country Chairman for Thailand, Jardine Matheson Ltd.

Thanong Bidaya—Minister of Finance


Nikolai Azarov—First Vice-Prime Minister and Minister of Finance

Anatoly Halchynsky—Economic Advisor to President Kuchma

Oleh Havrylyshyn—Deputy Minister of Finance; IMF Executive Director; Research Scholar, University of Toronto

Petro Hermanchuk—Minister of Finance

Natalia I. Hrebenyk—Director of the Monetary Policy Department, National Bank of Ukraine

His Excellency Mr. Leonid Kuchma—President of Ukraine

Ihor Mityukov—Minister of Finance

Vasily Rogovyi—Vice-Prime Minister and Minister of Economy

Oleh Rybachuk—Chief of Presidential Secretariat

Oleksandr Shlapak—Minister of Economy; First Deputy Chief of Presidential Secretariat

Ihor Shumylo—Deputy Minister of the Economy; Executive Director on Economic Issues, National Bank of Ukraine

United Kingdom

Andrew D. Crockett—Bank of England Executive Director; Managing Director of the Bank for International Settlements; President, J.P. Morgan Chase International

Gus O’Donnell—Press Secretary to the Prime Minister; IMF Executive Director; Permanent Secretary, H.M. Treasury

David Peretz—IMF and World Bank Executive Director; Senior Advisor, World Bank

Stephen Pickford—IMF and World Bank Executive Director; Director for International Finance, H.M. Treasury

Nigel Wicks—Second Permanent Secretary, H.M. Treasury

United States

Sam Y. Cross—IMF Executive Director

Richard D. Erb—IMF Deputy Managing Director; IMF Executive Director

Timothy Geithner—Under Secretary for International Affairs, U.S. Treasury; President, Federal Reserve Bank of New York

Denis Lamb—U.S. Ambassador to the Organization for Economic Cooperation and Development

David A. Lipton—Under Secretary for International Affairs, U.S. Treasury; Managing Director of Global Country Risk Management, Citigroup

Jeffrey R. Shafer—Under Secretary for International Affairs, U.S. Treasury; Vice Chairman for Global Banking, Citigroup

Lawrence H. Summers—Secretary of the U.S. Treasury; Charles W. Eliot University Professor, Harvard University

Edwin M. Truman—Director, International Finance Division, Board of Governors of the Federal Reserve System; Assistant Secretary for International Affairs, U.S. Treasury; Senior Fellow, Peterson Institute for International Economics

Other Individuals

Mohamed Ariff—Executive Director, Malaysian Institute of Economic Research

Dennis de Tray—Country Director for Indonesia, World Bank; Vice President, Center for Global Development

Robert Feldman—Managing Director, Morgan Stanley Japan, Ltd.

Ross Garnaut—Professor of Economics, Australian National University

Hal Hill—Professor of Economics, Australian National University

Vijay Joshi—Fellow of Merton College, University of Oxford

Peter B. Kenen—Walker Professor of Economics and International Finance, Princeton University

Lloyd Kenward—World Bank

Ross McLeod—Professor of Economics, Australian National University

T.C.A. Srinivasa-Raghavan—Columnist, Business Standard (India)

Marcelo Selowsky—World Bank

Alexander Shakow—World Bank

Sweder van Wijnbergen—Professor of Economics, University of Amsterdam

Ngaire Woods—Professor of International Political Economy, University College, University of Oxford

An external review panel of leading experts on the main topics covered in this History provided generously detailed comments on the draft manuscript. For their reports, which led to a significant sharpening of the text, I am very grateful to Forrest Capie, Oleh Havrylyshyn, and Andrew Sheng.

Most of all, I am delighted to thank those who worked with me at the IMF on the six-year project to create this book and made the days in the office both productive and fun. Mark Allen (Director, Policy Development and Review Department) and Reza Moghadam (Director of the successor to the Policy Development and Review Department, the Strategy, Policy, and Review Department) oversaw the project and made sure I had the resources to carry it out. Bogna Jezierska and Sandrine Ourigou provided a great variety of excellent administrative assistance. Suchitra Kumarapathy, Manuk Ghazanchyan, Kirsten Fitchett, Ioana Niculcea, and Emanuel Hife provided the research assistance that produced all the tables and charts to enliven the book and that gave me confidence that facts are indeed facts. Premela Isaac’s infinite patience brought me together with thousands of the archived documents cited throughout the pages that follow. Sherrie Brown skillfully edited the manuscript and greatly sharpened my prose. Luisa Menjivar and Kenneth Grubby beautifully designed the layout and the dust jacket, and Joanne Blake and Sean Culhane expertly guided the editing and production of the book through to publication. Too many more to name—in my department, around headquarters, and in the many overseas offices that I visited in the course of my research—also deserve much thanks.

Even more “most of all,” I thank Lesley Anne Simmons, with whom I have shared so many dinnertime conversations about this work as it progressed, and so much more. And now we move on.

  • Boughton, James, 2001, Silent Revolution: The International Monetary Fund 1979–1989 (Washington: International Monetary Fund).

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  • de Vries, Margaret Garritsen, 1985, The International Monetary Fund 1972–1978: Cooperation on Trial (Washington: International Monetary Fund).

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  • Horsefield, J. Keith, 1969, The International Monetary Fund, 1945–1965. Vol. I: Chronicle; Vol. II: Analysis; Vol. III: Documents (Washington: International Monetary Fund).

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  • International Monetary Fund, Treasurer’s Office, 2001, Financial Organization and Operations of the IMF. IMF Pamphlet Series No. 45, 6th Edition (Washington: International Monetary Fund). Accessed at http://www.imf.org/external/pubs/ft/pam/pam45/contents.htm.

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Abbreviations and Acronyms

A. IMF facilities and operations


Buffer Stock Financing Facility (1969–2000)


Compensatory and Contingency Financing Facility (1988–2000)


Contingent Credit Line (1999–2003)


Compensatory Financing Facility (1963–88, 2000–09)


Currency Stabilization Fund (1995–2000)


Enlarged Access to the Fund’s Resources (1981–92)


External Contingency Mechanism (of the CCFF) (1988–2000)


Extended Fund Facility (1974–)


Emergency Financing Mechanism (1995–)


Emergency Post-Conflict Assistance (1995–2000)


Enhanced Structural Adjustment Facility (1987–99)


Financial Sector Assessment Program (1999–)


General Resources Account


Poverty Reduction and Growth Facility (1999–)


Rights Accumulation Program (1990–)


Report on Observance of Standards and Codes (1999–)


Structural Adjustment Facility (1985–95)


stand-by arrangement1


Special Contingent Account


Special Disbursement Account


Supplemental Reserve Facility (1997–2009)


Systemic Transformation Facility (1993–95)

B. Organization of the IMF2


Administration Department (1964–99)


Asia and Pacific Department (1997–)


Asian Department (1953–91)


Central Banking Department (1980–92)


Central Asia Department (1991–97)


Exchange and Trade Relations Department (1965–92)


European I Department (1992–2003)


European II Department (1992–2003)


European Department (1953–91; 2003–)


Fiscal Affairs Department (1964–)


Human Resources Department (1999–)


Independent Evaluation Office (2001–)


International Monetary and Financial Committee (1999–)


Monetary and Exchange Affairs Department (1992–2003)


Middle Eastern Department (1953–2003)


Regional Office for Asia and the Pacific (1997–)


Office of Budget and Planning (1992–)


Policy Development and Review Department (1992–2008)


Southeast Asia and Pacific Department (1991–97)


Technology and General Services Department (1999–)


Western Hemisphere Department (1953–)

C. Types of IMF documents cited in this History


statement submitted by a participant in an Executive Board meeting


Development Committee document


Executive Board administrative paper


document for the Executive Board’s Committee on Liaison with Contracting Parties to the GATT


document for the Executive Board’s Committee of the Whole on Review of Quotas


minutes of the Executive Board’s committee on quotas


document for the Executive Board’s Committee of the Whole for the Development Committee


document for the Executive Board’s Committee of the Whole on Membership


Executive Board document


Executive Board minutes


Executive Board special3


Front Office [document for] Informal Distribution


Interim Committee document


minutes of Informal Session of the Executive Board


minutes of Informal Session of the Executive Board


speech by the Managing Director


News Brief


Press Release


Secretary’s Circular




Staff Memorandum4


Surveillance – Summing Up or Chairman’s Remarks


undocumented paper

D. Other terms specific to the IMF


debt sustainability analysis


Emergency Financing Mechanism (1995–)


First Deputy Managing Director (1994–)


General Arrangements to Borrow


General Data Dissemination System (1997–)


International Financial Statistics


Letter of Intent


Memorandum on Economic and Financial Policies5


Memorandum on Economic Policies


New Arrangements to Borrow


Office of the Managing Director


performance criterion (as a condition for Fund lending)


Policy Framework Paper


Public Information Notice (1997–)6


Poverty Reduction Strategy Paper (1999–)


Special Data Dissemination Standard (1996–)


special drawing right


World Economic and Market Developments


World Economic Outlook

E. Other international organizations and groups, and related terms


African Development Bank


Asian Monetary Fund (as proposed in 1997)


Asia-Pacific Economic Cooperation


Asian Development Bank


Association of South-East Asian Nations


Central Bank of West African States7


Bank of Central African States7


Bank for International Settlements


Commonwealth of Independent States (1991–)


Council on Mutual Economic Assistance


East African Community


Enterprise for the Americas Initiative


European Bank for Reconstruction and Development (1991–)


European Communities (forerunner of EU, 1957–93)


European Central Bank (1998–)


Eastern Caribbean Currency Union


Economic and Social Council of the UN


European currency unit (1979–98)


European Economic Community (component of EC)


European Monetary Institute (1994–97)


European Monetary System


Economic and Monetary Union (program of EC, 1990–99)


Exchange Rate Mechanism (of the EMS)


European Union (1993–)


Financial Stability Forum (1999–2009)8


Former Yugoslav Republic (of Macedonia)


General Agreement on Tariffs and Trade (1948–94)


Group of Seven (major industrial countries)


Group of Eight (G7 plus the Russian Federation) (1998–)


Group of Ten (industrial countries)


Group of 20 (advanced and emerging-market economies) (1999–)


Group of 22 (advanced and emerging-market economies) (1997–99)


Group of 24 (developing countries)


Heavily Indebted Poor Countries


International Bank for Reconstruction and Development (part of the World Bank Group)


Interbank Coordinating Council of the Heads of National Banks


International Development Association (part of the World Bank Group)


Inter-American Development Bank


International Labor Organization


Joint Vienna Institute (1992–)


Southern Common Market (in South America) (1991–)


Manila Framework Group (1997–2004)


North Atlantic Treaty Organization


North American Free Trade Agreement


Organization of American States


Organization for Economic Cooperation and Development


Socialist Federal Republic (of Yugoslavia)


United Nations


UN Conference on Trade and Development


UN Development Programme


World Trade Organization (1995–)

F. General terms9


gross domestic product


gross national product


London interbank offered (interest) rate


nongovernmental organization


official development assistance


private sector involvement (in the resolution of financial crises)


This overview of the full history of the IMF was developed through a series of lectures and conference presentations from 2003 to 2009. A preliminary version was circulated as an IMF Working Paper in 2004 (WP/04/75). The revised version presented here provides a broader context for the discussion of the Fund in the 1990s that is the subject of this book.

The IMF and the Force of History: 10 Events and 10 Ideas That Shaped the Institution

[Point] III. The removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.

Woodrow Wilson

President of the United States

Address to a Joint Session of

Congress on the Conditions of Peace

[Fourteen Points]

January 8, 1918

The International Monetary Fund was forged from failure.

When the heads of government of the great powers met in Paris at the end of 1918, they had before them a blueprint for restoring prosperity and world peace, in the form of U.S. President Woodrow Wilson’s Fourteen Points. Six months later, they agreed on the terms of what would become known as the Treaty of Versailles, but key parts of the blueprint had been cast aside. Within a decade, prosperity was lost. In another decade, peace was gone as well. The most famous failure was Wilson’s inability to convince the U.S. Senate to confirm the country’s membership in the League of Nations. The most disastrous, however, was arguably the failure to lay the groundwork for economic cooperation among the world’s great trading nations. Whether U.S. membership in the League would have slowed the slide toward war in the 1930s is debatable. The effect of the autarkic policies of the 1920s on the collapse of trade and output in the 1930s, however, is well established (Crucini and Kahn, 1996; Irwin, 1998).

When delegations from 44 countries met at Bretton Woods, New Hampshire (United States), in July 1944 to establish institutions to govern international economic relations in the aftermath of the Second World War, avoiding a repetition of the failings of the Paris peace conference was very much on their minds. Creation of an International Bank for Reconstruction and Development would help restore economic activity, while creation of an International Monetary Fund would help restore currency convertibility and multilateral trade. Removing the barriers to trade, as envisaged by Wilson a quarter-century earlier, was not enough. More active and institutionalized cooperation was now understood to be needed.

The failure of Paris was only the first of a series of historical events and ideological transformations to influence the design and work of the IMF and the postwar international monetary system. This prologue surveys critical events of the past century and the shifts in economic theory that had the greatest influence on the Fund, to draw some general conclusions about the force of history on the international monetary system.

Ten Events

The first three key events—the Paris peace conference, the Great Depression, and the Second World War—made the creation of a multilateral financial institution possible and largely determined the form it would take. Subsequent events caused the IMF to alter its practices in various ways to stay relevant in a changing world.

1. The Paris Peace Conference

Economics was not a high priority at the Paris peace conference in 1919. The borders of Europe had to be redrawn one by one, and that task alone took up most of the six months of high-level meetings. Some way had to be found to pay the costs of the war and the costs of rebuilding, and solving that problem was about all the economics that any of the leaders had the patience for. They created the League of Nations, but its economic functions were poorly defined and never solidified into an effective role.1 They created the International Labor Organization, but its role was specialized and limited.

The conference’s neglect of economics did not result from a failure to understand the importance of international trade for prosperity and thus for maintaining the peace. As the quotation at the head of this prologue shows, Woodrow Wilson had made this relationship clear in his “fourteen points” speech to the U.S. Congress in January 1918. Instead, the neglect of economics occurred mainly because the limitations of the invisible hand were not well understood. For a generation or more, the international gold standard had provided a measure of stability with little need for overt cooperation. The challenge seemed to be simply to avoid imposing barriers to trade or otherwise interfering with markets.

In the economic turmoil following the war, that passive approach was not nearly enough. Some countries remained on the gold standard, but others did not. Without clear guidance or any institutional check on behavior, competitive devaluations and punitive tariffs became a common temptation for a quick fix to economic ills. Margaret MacMillan (2001) is surely right in arguing that the Versailles treaty cannot be held solely responsible for these and other ills of the twentieth century, but neither can it be absolved from blame.

What does this experience have to do with the IMF? A quarter-century afterward, it was very much on the minds of those who were drawing up the designs for the new institution. In the view of John Maynard Keynes (the head of the British delegation to the Bretton Woods conference), the “contractionist pressure on world trade” brought on by the “special protective expedients which were developed between the two wars” resulted in large measure from futile efforts “to protect an unbalanced position of a country’s overseas payments.” Creation of an “international clearing union” would obviate the need for such “forced and undesired dodges.”2 Without the clearing union (which eventually metamorphosed into the IMF), the expected persistent creditor position of the United States would depress world economic growth and drive the world back into protectionist policies, regardless of how quickly or how well production and trade could be reconstructed after the war.

Harry Dexter White, the chief drafter of the IMF charter for the U.S. delegation, was equally impressed by the need to avoid the passive errors of Versailles. His initial plan noted that during “the last twenty years” (that is, throughout the interwar period), countries had often imposed protectionist policies because they lacked adequate gold reserves, and the plan warned that the same problems would arise and would constitute a major barrier to the growth of trade after the war. An international monetary fund would enable countries in that position to economize on their gold reserves and thus avoid recourse to trade barriers, payments barriers, and bilateral clearing schemes.3 As early as 1935, when France and Great Britain were contemplating currency devaluations aimed at improving their competitive positions but that threatened to spark a vicious cycle of retaliatory actions, White argued that the U.S. Treasury should intervene by encouraging an international agreement to stabilize exchange rates (Boughton, 2002). That led to the Tripartite Agreement of 1936 and set the stage for more comprehensive and institutionalized agreements later on. When the Articles of Agreement for the IMF were adopted at Bretton Woods in 1944, they specified that one purpose of the institution was “to avoid competitive exchange depreciation.”4

It is important to note that for both Keynes and White, the motivating principle for creating the IMF was to engender postwar economic growth by establishing an institution that would prevent a relapse into autarky and protectionism, not just to avoid a recurrence of the Depression. The impetus was less the Depression than the necessity of rebuilding and engendering economic growth after the war.

2. The Great Depression

Although the Great Depression may not have been the “defining moment” for the international monetary system (as Bordo and Eichengreen, 1998, claimed it to be), it influenced strongly the initial design of the IMF. The Depression amplified the negative consequences of Versailles, as an implosion of international trade interacted with domestic policy errors to deflate both output and prices around the world. It severely tested the confidence of analysts and voters in the efficacy of free markets and strengthened belief in an activist role for the public sector in economic life. It thus became easier and more natural to start discussions on a postwar framework from the assumption that an intergovernmental agency with substantive powers would be beneficial and even essential for the international financial system.

The combined effects of Versailles (the absence of a stabilizing system in international finance) and the Depression were an important influence on the IMF’s mandate as adopted at Bretton Woods in 1944. Article I of the Articles of Agreement, which sets out the purposes of the Fund, includes the objective of using IMF lending to provide member countries “with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” Article IV set out a system for achieving that purpose by establishing a system of fixed but adjustable exchange rates through agreements to be reached under the auspices of the Fund. U.S. Treasury staff made the case for such a system by evoking the specter of what had occurred throughout the interwar period: “Long before the war, the necessary monetary and financial basis for international prosperity had been weakened by competitive currency depreciation, by exchange restriction, by multiple currency devices,” and the like.5 The new institution would obviate the need for such unilateral and destructive actions.

3. The Second World War

The third major historical influence on the IMF was the Second World War, which provided both the impetus and the context for reforming the international system. When the United States entered the war in response to the bombing of Pearl Harbor in December 1941, Treasury Secretary Henry Morgenthau Jr. put Harry White in charge of international economic and financial policy and asked him to come up with a plan for remaking the system once the war was over. As it happened, White had already sketched out a rough plan for an international stabilization fund, and he was able to produce a first draft within a couple of months. On the other side of the Atlantic, Keynes was developing a plan for an international clearing union to be run jointly by Britain and the United States as “founder-States.”6 Though less overtly multilateral than White’s scheme, and based on the British overdraft system rather than on White’s rather complicated proposal for currency swaps (Boughton, 2002, 2003a), Keynes’s clearing union was similar in its essence to White’s stabilization fund. Over the next two years of discussion and negotiation, the two plans would meld into a draft for the IMF charter.

The IMF was created in the midst of the war, at the United Nations Monetary and Financial Conference, which convened 44 country delegations at Bretton Woods in July 1944. Keynes had tried to limit the involvement of countries other than Britain and the United States, fearing that a “most monstrous monkey house” would result if all the wartime allies were invited.7 White, however, insisted on a multilateral conference, partly because he seems to have sensed that the project would otherwise fail and partly because he doubtless wanted to neutralize the force of Keynes’s intellect and personality.

The importance of Bretton Woods as a wartime event was that it took advantage of a window of opportunity to create a multilateral financial system. Both before and after the war, the levels of suspicion and national self-interest were too great for such a sweeping agreement to be possible. Even in 1945, when the U.S. Congress and the U.K. Parliament were to ratify the Articles of Agreement, passage was far from easy (Gardner, 1980). Again, White invoked the specter of Versailles. Asked in a House of Representatives hearing what would happen if Congress refused to ratify the agreement, White replied, “I think history will look back and indict those who fail to vote the approval of the Bretton Woods proposals in the same way that we now look back and indict certain groups in 1921 who prevented our adherence to an international organization designed for the purpose of preventing wars.”8 Such arguments carried the day in 1945. Within three years, however, when negotiators tried to complete the system by creating an International Trade Organization, the multilateralists were outmanned, and the proposal failed.9

The other major influence of the war on the IMF was that it left the United States in virtual control of the world economy. With Britain heavily dependent on American largesse, Keynes had few cards to play in his efforts to shape the postwar system to his country’s advantage. Of the other major allies, France was equally powerless and the Soviet Union was politically isolated and intellectually detached. As a consequence, the financial structure of the IMF would be based on the U.S. dollar, rather than on an international currency of the Fund’s own making. Its lending power would be limited in size and scope, and the Fund would lack most of the powers of a central bank. Its headquarters would be neither in London nor even in New York, but in Washington where the U.S. Treasury could exert a strong gravitational pull. For the next three decades, the IMF would be a dollar-centric institution, with the United States providing most of its lendable resources and effectively controlling most of its lending decisions.

4. The Rise of Multiple Economic Centers

With the war over and the world economy—and world trade—beginning to recover, U.S. economic hegemony gradually eroded. The first region to rise from the ashes was western Europe. Through a combination of national drive, international support—from the U.S. Marshall Plan, the World Bank, and eventually the IMF—and a home-grown multilateralism in the form of the Common Market and the European Payments Union, by the late 1950s, much of Europe was growing rapidly and becoming increasingly open to multilateral trade and currency exchange. The Federal Republic of Germany joined the IMF in 1952 and quickly became one of the world’s leading economies. Next came Asia. Japan also joined the Fund in 1952, and by the 1960s it was on its way to joining the United States and Germany on the top rung of the economic ladder. Then the 1970s saw the rise of economic power in Saudi Arabia and other oil-exporting countries of the Middle East. In 30 years, the U.S. share of world exports had fallen to 12 percent from 22 percent, while its share of official international reserves dropped even more dramatically, from 54 percent in 1948 to 12 percent in 1978.

As the balance of economic and financial power became more widely dispersed, more and more currencies became fully convertible for current account and even capital transactions. Trading partners grew at different rates and with different mixes of financial policies. Pressures on fixed exchange rates and on the limited supply of gold and U.S. dollars became increasingly frequent and more severe. The IMF responded in 1969 by amending its Articles and creating special drawing rights (SDRs) as a supplement to existing reserve assets, but that action was too limited to deal with the underlying problem of differential pressures. As a result, even before the first oil shock in 1973, the original Bretton Woods system of fixed but adjustable exchange rates had become unviable. The Second Amendment, adopted in 1978, acknowledged that exchange rates among key currencies were likely to float or at least be allowed to adjust more frequently than the old system could have handled.

5. The Cold War

Harry White had worked hard in 1944 to persuade the Soviet Union to join the IMF, in the belief that economic cooperation between the Soviet Union and the United States would be the key to postwar peace and prosperity. The Soviet delegation to Bretton Woods signed the Articles ad referendum, but Joseph Stalin eventually refused to ratify the agreement, apparently because he feared (not without justification) that Fund policies would be largely controlled by the west (James and James, 1994). When that tension segued into the Cold War, White’s vision of universal membership was dashed. Poland withdrew from membership in 1950. Four years later, Czechoslovakia was forced to withdraw. Shortly after taking power in 1959, Fidel Castro removed Cuba. For more than three decades after Mao Zedong took control of China, the U.S. government blocked efforts by the People’s Republic to be seated as China’s representative on the IMF Executive Board. Most other countries in the Soviet or Chinese spheres of influence simply did not join. Not until the 1980s would the trend be reversed with the seating of China and renewed membership for Poland (Boughton, 2001b, Chapter 19).

The obvious effect of the Cold War on the IMF was this limitation on membership. In the terminology of the period, membership included the first world and much of the third, but the second was missing from the table. The IMF became largely a capitalist club that helped stabilize market-oriented economies.10 The more subtle and difficult question concerns the effect on the IMF staff and the staff’s analytical work. The bulk of IMF analysis has always been mainstream and centrist, viewed from the perspective of the dominant strain of Anglo-Saxon economics. The leading universities of North America, the United Kingdom, and Australia have been the main training grounds for much of its professional staff. Martha Finnemore, a political scientist who has studied a number of large organizations, has even claimed that the Pentagon displays more intellectual diversity than the IMF.11

Would this centrist dominance have been weaker, with a broader range of views on economic policy being represented (perhaps at some cost of efficiency and effectiveness), if the Fund’s membership had been universal from the outset? That seems unlikely. The shift to universal membership in the 1990s and the corresponding geographic broadening of the staff12—in Finnemore’s terminology, an increase in “passport diversity”—had little analytical impact. Moreover, the influence of Latin American economic thought—exemplified by the dependencia theories of Raúl Prebisch (1971) and others at the UN Economic Commission on Latin America13—was never strong in the IMF despite the presence of large numbers of economists from the region on the Fund staff from the outset. Much the same could be said regarding the lack of influence of Austrian and German institutional economics. Analytical diversity and internal dissent have been more prominent in the World Bank (with the same membership) than in the IMF, albeit less so than in the nearly universal United Nations secretariat. The influence of mainstream western thinking at the IMF—an influence that the staff itself would regard with some justification as reflecting best practices in the economics profession—is a more deeply seated phenomenon than can be explained by Cold War politics.

6. African Independence

As discussed in Chapter 14 of this volume, the presence and role of African countries in the IMF increased greatly from the late 1950s through the end of the 1960s as a result of a generalized movement toward independence from colonial rule. The emergence of Africa as a continent of independent nations joining the IMF had a major effect on the size and diversity of the institution, and it required a substantial intensification of the Fund’s involvement with and oversight of its borrowers. Most of these countries, especially in sub-Saharan Africa, had and continued to have very low per capita incomes and were among the least economically developed countries in the world. Their economic problems tended to be structural even more than macroeconomic; rooted in the need for improvements in education, health, infrastructure, and governance rather than finance; and more deeply ingrained and persistent than in other regions. When the Fund began providing financial assistance to large numbers of low-income countries in the 1970s, it had to find ways to subsidize its lending, coordinate its assistance with other official agencies, and develop more extensive and structural policy–reform conditions on its lending. In addition, the Fund sharply increased and broadened its provision of technical assistance to member countries, thereby expanding its work further beyond its original boundaries.

Lending to low-income countries also raised the riskiness of the IMF’s portfolio of sovereign claims. By the mid-1980s, several African countries had fallen into protracted arrears on their borrowings from the Fund, which forced the institution to further reexamine its conditionality as well as its finances. Several countries with protracted arrears—mostly in Africa—were subject to “remedial” measures leading up to the suspension of voting rights. The IMF shifted its lending to low-income countries primarily to separately funded and subsidized trusts, and it coordinated that assistance closely with the World Bank. To qualify for those loans, countries had to develop their own strategies for generating economic growth and reducing poverty. The IMF still emphasized the need for countries to maintain sound macroeconomic policies, but that traditional focus was only the starting point for most of its work in Africa.

7. The Vietnam War

The intensification of U.S. involvement in the Vietnam War in the 1960s and early 1970s would not by itself have had substantial effects on the IMF, other than the direct effect on Vietnam’s membership. When the government of South Vietnam was about to fall in April 1975, its officials tried desperately to borrow as much as they could from the IMF. The Fund refused to go along, and within a few months it recognized the Socialist Republic of Viet Nam as the successor government (Boughton, 2001b, pp. 766–67). The larger effect, however, was on the U.S. economy and its external payments position. In combination with a sizeable increase in domestic spending on President Lyndon Johnson’s Great Society programs, the rise in external military spending gradually worsened the overvaluation of the U.S. dollar under the Bretton Woods system of fixed exchange rates. In a series of spasms, the system dissolved between 1968 and 1973. With the dollar no longer convertible into gold, the precious metal could no longer serve a central or even a useful function in the international monetary system. The Vietnam War was by no means the sole culprit in this decline, but its catalytic role was substantial (James, 1996, Chapter 8).

8. Globalization of Financial Markets

Private sector financial flows were of limited scope and importance when the IMF was founded. Trade flows were financed largely by trade credits, and most economists considered cross-border portfolio flows to be as much a potential destabilizing nuisance as a potential source of investment capital. Keynes and White, therefore, agreed that the IMF should be given the power to restrict capital flows in situations in which they seemed to be destabilizing. Article VI of the IMF charter prohibited member countries from borrowing from the Fund “to meet a large or sustained outflow of capital,” and it empowered the IMF to “request a member to exercise controls to prevent such use” and to declare the member ineligible to use the Fund’s resources if it failed to comply. More generally, it recognized countries’ rights to impose capital controls as long as the controls did not restrict payments for transactions on the current account.

The range and importance of capital flows began to increase in the 1950s as European countries gradually reestablished convertibility. The first big increase, however, came in the 1970s, with the emergence of the Eurodollar and other offshore financial markets. It was driven further by the accumulation of “petrodollars” by oil-exporting countries in the 1970s and the recycling of those assets to oil-importing sovereign borrowers through large international banks. By the 1990s, cross-border flows had become an essential source of finance for both industrial and emerging-market economies around the world, and the structure of international financial markets had become so complex that their effective size could no longer be measured, much less controlled.

Largely in implicit recognition of these developments, the IMF has never invoked the provisions of Article VI enabling it to encourage the imposition of capital controls. Nor has the prohibition on lending to finance a large or sustained capital outflow ever prevented the Fund from acting, simply because it can always be argued that an unchecked capital outflow will eventually cause problems for the current account. That justification was first made in 1956, when the United Kingdom borrowed to stop a speculative attack on the pound sterling in the wake of the Suez crisis (Boughton, 2001a), and it has been taken for granted ever since.

A second and more important effect of financial globalization was that IMF financing became quantitatively marginalized, in the aggregate and for many potential borrowers. In the early days of the IMF, countries facing a financing gap in their balance of payments could often close it solely by borrowing from the Fund. By the 1980s, the object was more often to “catalyze” other capital inflows by borrowing relatively small amounts from the Fund in support of an agreed-on package of policy reforms, thereby hoping to convince other creditors that the country was a good prospect. What mattered was not so much the quantity of money as the quality of the reforms. Globalization thus fundamentally altered the relationship between the IMF and its borrowing members and between the IMF and other official and private creditors.

Globalization’s third effect was to weaken the “credit union” character of the IMF as a membership institution. The original idea was that most countries would probably undergo periods as creditors and other periods as debtors. In the 1950s and 1960s, most of the large industrial countries fit that description. Of the seven largest economies, only Germany and the United States consistently maintained creditor positions in the Fund. By the 1980s, however, all the more advanced economies were able to finance their external payments with private flows, and the IMF’s membership became divided into persistent creditor and debtor groups. The presumed commonality of interests among members was correspondingly diminished.

9. Two Decades of Debt and Capital Crises

In August 1982, a two-year gradual worsening of conditions in international debt markets suddenly accelerated, precipitating a major economic and financial crisis. A smattering of countries, including Hungary, Morocco, Poland, and Yugoslavia, had already seen their bank creditors turn their backs in 1981 and the first half of 1982. When the banks suddenly pulled out of Mexico, the crisis took on systemic proportions. Within a few months, Argentina, Brazil, and Chile were also in trouble, and the crisis was continuing to spread. Not until 1990, when world interest rates settled down and the bank debts of the most heavily indebted developing countries were being replaced by Brady Bonds, would it be possible to declare the crisis over (Boughton, 2001b, Part II).

The debt crisis had a transforming impact on the IMF, catapulting it into the role of international crisis manager. Previous international crises—Suez in 1956, the breakdown of the official gold market in 1968, the oil shocks of the 1970s—had intensified the demand for IMF lending without fundamentally changing the way the IMF worked (Boughton, 2000). The 1982 crisis was different because the range and diversity of creditors involved made it unlikely that it could be resolved without the active participation of an outside agent. The Fund’s Managing Director, Jacques de Larosière, intervened personally by refusing to approve stand-by arrangements for the crisis-hit countries until he received written assurances from bank creditors that they would share the burden by increasing their lending exposure. This “concerted lending” tactic was the first instance of what later became known as “private sector involvement” in debt workout procedures.

Over time, the Fund’s specific tactics changed in response to evolving circumstances, but its role as the central agency for coordinating the resolution of financial crises remained. For better or worse, the Mexican peso crisis of 1994–95, the East Asian crises of 1997, and those that hit Argentina, Brazil, Russia, and Turkey in the next few years all brought the IMF to the forefront of efforts to coordinate temporary official financing, reform macroeconomic and structural policies in the affected countries, and attempt to restore confidence and commitment on the part of creditors and investors. The frequency and the increasing scope and intensity of these crises eventually induced the IMF to reconsider aspects of its strategic analysis, especially regarding the institutional preconditions for a country to enjoy the benefits of a liberal policy toward private capital flows.

10. Collapse of Communism

The fall of the Berlin Wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF at last to become a (nearly) universal institution (Chapter 2 of this volume). In three years, membership increased from 152 countries to 172, the most rapid increase since the influx of African members in the 1960s. Many of the new members needed to borrow from the Fund, and all of them needed technical assistance and regular consultations. Consequently, the size of the IMF staff increased by nearly 30 percent in six years, with staff members coming from 15 of the new countries. The Executive Board expanded from 22 seats to 24 to accommodate Directors from Russia and Switzerland, and some existing Directors saw their constituencies expand by several countries. As discussed above, this development had little impact on the philosophical underpinnings of the Fund’s work. It did, however, broaden the range of issues with which the staff had to struggle. How could formerly centrally planned economies best be transformed and integrated into the world market economy? Should those countries try to reform as fast as possible, or more gradually? What structural reforms were needed, and in what sequence? How could price levels be stabilized when individual prices were still so far out of equilibrium and large excess money balances were still outstanding? How important for stabilization was the independence of the central bank from government control? For the Fund to stay reasonably within its mandate of stabilizing economies and strengthening macroeconomic policies while meeting the genuine needs of its expanding membership required a balancing act that became harder and harder to sustain.

Ten Ideas

While these events were shaping the IMF and in some cases forcing it to adapt to changing circumstances, economic theories were also evolving. Events and ideas often overlapped in their effects on the IMF and the international monetary system.

From the outset, three economic concepts have formed the bedrock of thought at the IMF and have been the basis for much of the Fund’s operations: Keynesian macroeconomics, the monetary approach to the balance of payments, and the open-economy macro model. Two of Milton Friedman’s great ideas from the 1950s—monetarism and the case for floating exchange rates—were impossible to ignore and had some influence on the IMF as well. Later, several developments shifted the economics profession and the Fund away from a Keynesian fixation on demand management as a means of stabilizing and strengthening national economies.

Some strains of thought influential elsewhere in the profession never took hold at the Fund or seeped in only slowly and hesitantly. Marxism is the obvious example, but there are many others. As noted above, these included the dependencia theories influential in Latin America and the institutional economic thought pioneered in Austria and Germany. Models emphasizing the importance and potential weaknesses of financial institutions (associated in particular with the American economist Hyman Minsky) did not gain much traction either, at least until Ponzi schemes and other threats to financial stability began appearing more frequently in the course of the 1990s.

1. Keynesian Macroeconomics

The IMF was conceived basically as a Keynesian institution. This link should not be surprising, given that Keynes was one of its founding fathers and the other (White) was a New Deal economist who had championed the use of countercyclical monetary and fiscal policy as early as 1932 (Laidler and Sandilands, 2002). The U.S. Treasury’s case for creating the Fund stressed that the goal was to use and coordinate macroeconomic policies to prevent recessions and unemployment. “Only through international cooperation,” they wrote, “will it be possible for countries successfully to apply measures directed toward attaining and maintaining a high level of employment and real income which must be the primary objective of economic policy.”14 These objectives were accordingly included in Article I, along with world economic growth (“development of the productive resources of all members”) and avoidance of contractionary policies (“measures destructive of national or international prosperity”).

The Fund staff made a major contribution to Keynesian macroeconomics in the late 1940s by developing the “absorption approach” to the balance of payments. Earlier analyses of the effect of a currency devaluation on the balance of trade stressed the “elasticities” or “expenditure switching” channel, through which a devaluation would make imports relatively more expensive and thus less in demand. In response to a devaluation of the Mexican peso in 1948, Jacques J. Polak (then Deputy Director of the IMF Department of Research and Statistics) prepared a study that set out the conditions under which a devaluation could strengthen the trade balance by raising output relative to expenditure (absorption). Subsequently, Sidney Alexander (1952) fleshed out the underlying theory and gave it its now familiar name.15

Some critics of IMF policies have argued that the Fund drifted away from Keynesian principles, particularly in the 1990s, by seeming to emphasize fiscal and monetary discipline over growth. Joseph Stiglitz (2002, p. 38) put this argument starkly, writing that the IMF “has taken on the pre-Keynesian position of fiscal austerity in the face of a downturn, doling out funds only if the borrowing country conforms to the IMF’s views about appropriate economic policy, which almost always entail contractionary policies leading to recessions or worse.”

This argument is based on a fundamental misconception of both Keynesian macroeconomics and IMF policy advice (Rogoff, 2003). Countries that are unable to finance their external payments position on affordable terms, regardless of whether the initial source of the difficulty was fiscal excess, an adverse terms of trade shock, or other developments, have to restore balance if they are to maintain full employment and growth. Keynes himself acknowledged in his General Theory (1936, p. 332) that the early stages of Roosevelt’s New Deal, involving “curtailment of current output” through a reduction in unwanted inventories, were “a phase which had to be endured. … Only when it had been completed was the way prepared for substantial recovery.”

The IMF, or any institution acting in real time to solve economic crises, often gets the required extent of adjustment wrong, and a case could be made that the Fund is biased on the side of caution (Independent Evaluation Office, 2003). The case is probably most persuasive in the context of the Fund’s handling of the East Asian crises of 1997, as discussed in Chapter 11 of this volume. But arguing that the Fund’s advice is biased is different from asserting that the Fund has the basic idea wrong.

2. The Monetary Approach to the Balance of Payments

A long-standing building block of IMF policy advice is the version of the monetary approach to the balance of payments developed by Jacques Polak in the 1950s. Polak’s model emphasized the effects of fiscal policies and credit creation on the balance of payments, working primarily through a Keynesian multiplier process. This exposition contrasted with the “Chicago” version of the monetary approach developed by Harry Johnson about the same time, which emphasized the “essential” role of monetary policy (Polak, 2001). In the classic situation, a country with a fixed or managed exchange rate and an external payments deficit can resolve the imbalance by reducing the domestic credit of the banking system by either fiscal or monetary means. This simple model became the basis for the specification of macroeconomic policy advice and conditionality by the IMF staff. To some extent, it is still an important building block, though in today’s world program design extends well beyond its confines (IMF, 1987; Polak, 1998).

3. The Open-Economy Macro Model

Within a few years of the introduction of the Polak model, two members of Polak’s staff—Marcus Fleming and Robert Mundell—separately developed the strands of what Rudi Dornbusch would later weave together into the Mundell-Fleming or (perhaps more properly) Fleming-Mundell model (Boughton, 2003b). In the early 1960s, Fleming was a Division Chief in the Research Department (he later became its Deputy Director); Mundell, in a two-year hiatus from his ascending academic career, was an economist in Fleming’s division. Fleming extended the Keynesian framework into an open-economy model capable of explaining the distinct effects of fiscal and monetary policies under either fixed or flexible exchange rates. Mundell developed a simpler alternative version of the model and focused on sorting out the dynamic effects of macroeconomic policies under varying conditions.

The Fleming-Mundell model had a great intellectual impact from the time the seminal articles were published. Its emphasis on the effects of capital mobility clearly undermined the intellectual basis for Article VI, which treated the capital account and current account as independent phenomena. The model’s practical implications became increasingly apparent after the advent of generalized floating and the growth of capital mobility a decade later. Monetary and fiscal policies were no longer seen as alternative and roughly equivalent means of stabilizing income, as they had been in the Keynesian analyses of the 1950s. Their effects were now known to be distinct and to depend crucially on the exchange rate regime and the degree of capital mobility. Largely as a consequence of this insight, IMF policy advice gradually expanded to incorporate a broader range of macroeconomic policy actions. The “twin deficits” arguments that the IMF used in the 1980s to criticize the United States for its explosion of fiscal and external deficits derived from this line of reasoning. More generally, the econometric forecasting models developed in the Fund’s Research Department in the 1980s were essentially sophisticated variants of the Fleming-Mundell model, including the rational-expectations elements introduced by Dornbusch (1976).

4. Monetarism

The emergence of monetarism as a theory of aggregate demand (Friedman, 1956; and Brunner, 1968) probably had less impact on the IMF than on the economics profession at large, and its influence was felt primarily in efforts made to examine and ultimately to reject it. In its crudest form, as contrasted with the more nuanced versions discussed in Gordon (1974), the theory stated that the velocity of money was so stable that policy-induced changes in the money supply would be reliably transmitted to changes in the price level, and that other influences on aggregate prices could be safely ignored. To economists steeped in an open-economy Keynesian tradition and accustomed to looking for patterns in cross-country analyses, none of the elements of this syllogism seemed particularly persuasive. Studies at the IMF tended to show that for most countries one could estimate a fairly stable equation linking some measure of the money stock to prices in a form that was reasonably consistent with the theoretical construct of a demand function. Those equations, however, were functions of interest rates and additional variables subject to influences other than monetary policy, and they displayed few properties that were consistent across countries or over time (e.g., Argy, 1970; Crockett and Evans, 1980; and Boughton, 1991). Similarly, the money supply could not be assumed to be completely controlled by policy, particularly when the exchange rate was fixed or actively managed.

Despite these limitations and misgivings, monetarist theory had a forceful pull when high inflation became a nearly global phenomenon in the late 1970s. Even if the sources of that inflation extended beyond excessive monetary growth, controlling inflation would require reining in monetary growth through a tightening of monetary policy. Heterodox alternatives such as incomes policies had little appeal in the Fund, and even fiscal policy was generally seen as insufficiently forceful and constrained under the circumstances. When Paul Volcker, as chairman of the U.S. Federal Reserve System, imposed a seemingly monetarist discipline on U.S. monetary policy starting in late 1979, with dramatic effects on inflation, it was hard to resist being swept along. Nonetheless, the staff persisted with the view that inflation could be controlled through either fiscal or monetary means—preferably both—and that rigidities in the former meant that “monetary policy has borne a disproportionate share of the burden of such restraint” (IMF, 1983, p. 27).

In a more recent and more nuanced incarnation of monetarism, inflation targeting has had a significant effect on the IMF (discussed further in Chapter 1). The use of monetary policy to pursue price stability (meaning a low rate of inflation) as a single target instead of as part of a broader strategy to balance inflation and employment objectives, and the direct targeting of inflation rather than relying on intermediate indicators such as interest rates or monetary aggregates, captured the imagination of central bankers and economists in the 1990s. The trend began in New Zealand in 1989, was picked up in Canada a year later, and by the end of the 1990s had spread to at least a dozen more countries (Schaechter, Stone, and Zelmer, 2000).

The spread of inflation targeting as a monetary policy strategy provided new opportunities and challenges for the IMF. The opportunity was to try to use this strategy to encourage countries to adopt more-stable monetary policies. In general, the Fund did so, though with the caveat that the right conditions—well-developed financial markets, sound fiscal policies, and an overall stable macroeconomic environment—should be in place before inflation targeting can be expected to contribute to economic performance. In the several years starting in 1995, IMF staff published some two dozen working papers on inflation targeting, most of which focused to some extent on establishing the preconditions for successful implementation either generally or in specific countries.

The operational challenge for the Fund was to adapt program design and conditionality when borrowing countries were targeting inflation rather than using conventional monetary policy instruments. In these cases, variables that were usually the subject of IMF policy conditions, particularly floors on net international reserves and ceilings on domestic credit expansion, were not separately controllable by the central bank. Setting conditions on the inflation rate itself would weaken the Fund’s ability to monitor policy implementation because of the lag between policy changes and inflation effects (Blejer and others, 2002). The Fund tried to steer a middle course, adhering to its conventional instruments while monitoring inflation and other indicators as a further check on implementation and consistency.

5. The Case for Floating Exchange Rates

Long before the collapse of the par value system in 1973, economists began to examine whether exchange rates had to be fixed to contribute to economic stability and the growth of international trade. Until the early 1950s, “convertibility” was generally interpreted to mean that a currency could be converted into something else (often, gold) at a fixed price. Milton Friedman (1953), Gottfried Haberler (1954), Friedrich Lutz (1954), and James Meade (1955) challenged that view and established an intellectual position that floating and convertibility could be consistent and that floating need not be destabilizing. Friedman’s argument was directed specifically at the Bretton Woods par value system, which he argued was “ill suited to current … conditions.” Floating, in his view, was “absolutely essential for … unrestricted multilateral trade” (Friedman, 1953, p. 157).

The case for floating took a long time to influence thinking in the IMF. As long as the major industrial countries were committed to maintaining a system of fixed rates anchored on a gold-convertible U.S. dollar, the priority in the Fund was to make that system work as well as possible. Canada’s decision in 1950 to float its currency was viewed with concern in the Fund as a possible threat to systemic stability (Horsefield, 1969, Vol. I, pp. 272–75). Even after the fixed-rate system collapsed, the committee of IMF Governors known as the Committee of Twenty spent two futile years trying to formulate a viable replacement system. Only when that exercise failed did interest shift toward examining how a stable system could emerge in a world without stable exchange rates. That effort led to the idea of IMF surveillance over countries’ exchange rate policies, carried out through regular consultations and supplemented by periodic World Economic Outlook (WEO) reports. From that point on, the Fund took an eclectic case-by-case view of what constituted an appropriate exchange rate regime for any particular country (Mussa and others, 2000, Appendix IV). Along with the rest of the economics profession, the Fund staff continued to debate and reflect on whether any general principles could be applied in practice (Rogoff and others, 2004).

6. Supply-Side Macroeconomics

The term supply-side economics took on a variety of meanings over the last quarter of the twentieth century. In the 1970s, it referred to efforts to model the supply side of the economy as an adjunct to Keynesian analysis of the demand side. That line of reasoning, exemplified by the stagflation model developed by Michael Bruno and Jeffrey Sachs (1981, 1985), was influential in the Fund and was reflected in the WEO and other studies as well as in the Fund’s policy advice and conditionality. In the 1980s, the term was hijacked by tax-cut advocates who argued either that lowering tax rates would raise tax revenues by stimulating economic activity (Canto, Joines, and Laffer, 1983) or that a shift from taxes to deficit financing would have no real effects (“Ricardian equivalence”; Barro, 1974). By the 1990s, it branched out to encompass advocates of low interest rates and monetary expansion, on the grounds that inflation would be held in check by productivity growth stimulated by easy money (Kemp, 2001). These radical views never took hold in the Fund.

7. New Classical Economics

The theoretical development with perhaps the biggest post-Keynes impact on the IMF was the reformulation of the micro foundations of macroeconomics in the 1970s and early 1980s. Rational expectations theory seemed to undermine the basis for countercyclical demand-management policy. In its place came the case for stable policies and nominal anchors to underpin stable expectations. The economics of information was being independently developed about the same time, and that work would eventually lead to a synthesis in which the countercyclical effects of monetary and fiscal policies could be more clearly understood. In the meantime, the new classical concepts held the floor.

The Fund did not develop a doctrine on this issue, but its surveillance activities (both in the WEO and in consultations with individual countries) shifted toward putting greater stress on the desirability of a medium-term policy framework and toward skepticism about the efficacy of countercyclical policies. In the early 1980s, it was still possible for the staff working on Japan to advise the government to take expansionary fiscal action to counter a slowdown, while their colleagues working on the United States were endorsing the eschewal of such policies by the Reagan administration (Boughton, 2001b, Chapter 3). The clearest example of the shift in thinking, however, was in the annual consultations with Germany, where the staff gradually abandoned the view that persistently high unemployment was due to weak demand and focused increasingly on rigid labor markets and other supply-side issues as the source of the problem (Boughton, 2001b, Chapter 3).

8. The Silent Revolution

Until the late 1980s, state socialism—government control over economic activity—played a dominant role in driving economic development in many parts of the developing world, in economies as diverse as India, Mexico, and Tanzania. After Julius Nyerere stepped down as president of Tanzania in 1985, his successors gradually liberalized the economy and moved away from policies such as the “villagization” of agriculture and the nationalization of banks. Mexico began liberalizing its international trade policies in the mid-1980s, a move that led to membership in the General Agreement on Tariffs and Trade in 1986 and prepared the way for more comprehensive economic reforms in the following decade. Under Prime Minister Rajiv Gandhi, India also initiated a major liberalization process in the second half of the 1980s. By the end of the decade, economic liberalization had become a seemingly universal and unstoppable force.

The major effect on the IMF of this “silent revolution”—as the Fund’s Managing Director, Michel Camdessus, called it—was to help ease long-standing tensions between the institution and many of its borrowing members and to make it easier to negotiate adjustment and reform programs the Fund could support. By the early 1990s, agreement about the broad features of desirable economic policies was strong enough that the Fund’s high-level governing body, the Interim Committee, could unanimously adopt a series of resolutions embodying principles of economic liberalism (Chapter 4 of this volume). The Committee’s “Madrid Declaration,” for example, noted that the “recent success of many developing countries illustrates … the validity of a strategy based on steadfast implementation of strong programs of macroeconomic adjustment and structural reform. The Committee urges other countries to follow a similar bold strategy.”16 That appeal, however, was issued just a few months before the Mexican peso crisis led off a series of financial crises that would eventually force a reevaluation of such policy advice, particularly regarding the liberalization of international capital flows.

9. The Washington Consensus

In 1990, John Williamson labeled the type of policy advice meted out by the IMF and the World Bank—supposedly with the encouragement of the U.S. Treasury—as the “Washington Consensus.” Much of what Williamson included in that rubric was similar to the indigenous revolution or evolution in thinking in developing and developed countries around the world. His terminology was, therefore, more a catchy phrase than an accurate pinpointing of the source of these ideas, as he himself later acknowledged (Williamson, 2000, 2003). Nonetheless, it caught on, and after the flurry of financial crises in the second half of the 1990s it became a lightning rod for criticism of globalization in general and the IMF in particular. Although liberalization of capital flows was not on Williamson’s consensus list, that controversial aspect of policy reform gradually became popularly associated with the label in a pejorative way. The same countries that had benefited from inflows after the debt crisis faded away now were reeling from the effects of sudden losses of confidence and corresponding withdrawals of capital. By the turn of the century, “Washington Consensus” had become a synonym for a narrow-minded and excessive zeal for laissez-faire market economics.

It is certainly true that the IMF—both officially and in the individual views of most of its professional staff—embraced the policies that Williamson collected under the umbrella of the Washington Consensus. As Stanley Fischer (the Fund’s First Deputy Managing Director from 1994 to 2001) put it shortly after he left the Fund, the Washington Consensus was “a useful shorthand description of a desirable basic policy orientation” (Fischer, 2003, p. 6). It is also true that the Fund went through a phase in the 1990s in which the free mobility of capital was seen as an essential ingredient in economic policy, though staff and management were always careful to acknowledge the principle that liberalization had to be underpinned by sound financial systems and prudential supervision of markets. After the East Asian crises, enthusiasm for unfettered capital mobility gradually dissipated.

10. Behavioral Economics and the New Political Economy

The lifeblood of the IMF is its ability to persuade policymakers to take appropriate actions to improve economic outcomes. Throughout the Fund’s history, the staff has relied primarily on the power of its economic analysis to bring about welfare-enhancing policy changes. Whether the context is the annual consultation with each member country, the global analysis presented in periodic publications such as the World Economic Outlook, or the negotiation of policy reforms to be supported by financial assistance from the Fund, the emphasis has always been on the logic of macroeconomic analysis contained in the models and paradigms discussed above. Beginning in the 1990s, however, the Fund also paid increasing attention to the lessons from a broader range of related disciplines in an effort to improve its success at persuading country authorities to accept and implement its advice.

Several theoretical developments helped impel this evolution in approach. One strand is what George Akerlof (2001) termed “behavioral macroeconomics,” which sets out to explain a variety of market imperfections and suboptimal policy regimes based on fundamental principles of human behavior. Another strand was the emergence of a variety of models based on a synthesis of economics and political science, dubbed the political economy of macroeconomics (Drazen, 2000). Developments in game theory and experimental economics further informed these analyses. Relevant applications include principal-agent and public-choice models, both of which provide insights into the circumstances under which Fund policy advice might or might not lead to improvements in global welfare.

The clearest example of the influence of this new political economy on the work of the IMF was the adoption of new conditionality guidelines in 2002. The previous guidelines, adopted in 1979, set limits on the policy changes the Fund could specify as conditions for its lending to a member country. The new guidelines updated those limits to better focus and streamline conditionality, but they also broke new ground by specifying the processes that should guide the staff in its discussions with national authorities and other major stakeholders. The explicit goal of this extension was to promote national ownership of policy reforms and increase the prospects that those reforms could and would be carried out successfully. Much of the staff analysis underpinning the exercise that led to the new guidelines was based on political economy models (Mayer and Mourmouras, 2002; and Boughton and Mourmouras, 2004).

Conclusions: How Has History Shaped the IMF?

The IMF was created at a particular time in world history—during the Second World War—and was given a structure and mandate that reflected that time and those circumstances. The institution changed greatly in the six decades after Bretton Woods. Much of its lending became crisis-driven, and the Fund’s involvement in crisis prevention and resolution correspondingly intensified. To a large extent, the Fund became divided into groups of creditor and debtor countries whose membership changed slowly over long periods. The Fund’s membership became much larger, more diverse, and nearly universal, and its responsibilities in global governance increased likewise. The breadth of its involvement in policymaking in member countries, especially borrowing countries, vastly increased, though a concerted effort was eventually made to circumscribe that role.

If the events and ideas chronicled here had not affected the IMF along these lines, the institution would have become marginalized and even irrelevant. The motivation for the evolution of the IMF has been the need to meet shifts in demand—shifts in world economic and political conditions—not to satisfy forces from within seeking to reinvent the institution to hang on to a role once the original purpose had faded away. The challenge for the IMF has always been to maintain its vital center—to promote orderly payments adjustment and global financial stability—while adapting its activities to new circumstances and new ideas. Meeting that challenge became increasingly difficult in the 1970s and 1980s, when the advent of generalized currency floating, financial globalization, the need for multilateral crisis management, and financial demands from low-income countries all pressed new functions and responsibilities onto the Fund. By the 1990s, when the Fund had to deal with all those issues plus the need for rapid structural reforms in formerly centrally planned economies—including Russia, with its great geopolitical importance—“mission creep” may have been inevitable.

Even accepting that most of the changes in the Fund occurred for good reasons and probably could not have been avoided in any case, the argument for adhering to a consistent mandate and mission is not diminished. Institutions have limited resources and employ staff with specific skills and experience, and diffusing those resources imposes substantial costs. The commitments by the Fund at the beginning of the twenty-first century (IMF, 2001, 2002) to streamline and refocus its policy conditions, strengthen its cooperation with the World Bank, and initiate a comprehensive review of its structure and practices, were taken in recognition of that imperative. As much as the world had changed, the raison d’être for the IMF—compensating for the limited global reach of the invisible hand, the goal that first led Keynes and White to create institutions to promote multilateral cooperation—remained as vital as ever.


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The International Monetary Fund 1990-1999