The Austrian

The IMF’s Global Tug-of-War

Christine Lagarde

It seems like every other news story about the International Monetary Fund (IMF) reflects (at least in passing on the Fund’s uneven treatment of developed and developing countries. Established at the Bretton Woods conference to oversee the system of fixed exchange rates prevailing in 1944, the Fund’s mission has gradually expanded to promoting economic growth, macro-economic stability, and poverty reduction.

Yet no one seems convinced anymore that the Fund can actually accomplish these goals. To the contrary, many now argue the IMF is a highly politicized organization, biased in its choice of whom to help, how, and how much. For instance, critics argue that Christine Lagarde (current managing director of the IMF) is keen on denying African countries agricultural subsidies as part of the IMF loans conditionality, even though she supports the same measures — labelled ”economic incentives”— when it comes to the EU Common Agricultural Policy and the French farmers.

While critics often perpetuate many economic fallacies themselves — such as “beneficial subsidies,” or the better-known “exploitation” of developing countries by their developed counterparts — they are not entirely mistaken in their misgivings about the Fund. There is something inherent in what the IMF does that perpetuates conflict among and within national economies. This has to do with the monetary-policy principles on which the Fund was established.

How the IMF Spreads the “Wealth”

The IMF’s funds for loans are drawn from the expanded money supplies of its member countries on the basis of a contribution quota, and then redistributed to countries in need of financial or foreign exchange stabilization. The list of borrowers ranges from France in 1947 and Argentina (just before its 2001 crisis) to Ireland, Portugal, Ukraine, Colombia, Greece, and many others.

These loans promote an artificial and temporary type of global economic growth, because they do not have a neutral impact on the world economy. IMF loans endow some countries with additional purchasing power, thus allowing them to increase their command of resources and their wealth to the detriment of other countries. The latter’s resources and overall wealth are diminished by the depreciation of the monetary unit purported by every disbursement of the new money.

This global, inter-country redistribution of wealth is central to the conflicting relationships which arise around the allocation of IMF packages. Mises explained this to his students at FEE in the 1960s when he noted that the central problem is over who gets the money:

Everybody, every country, would say the same thing: “The quantity we got is too small for us.” The rich countries will say, “As the per head quota of money in our country is greater than it is in the poor countries, we must get a greater part.” The poor country will say, “No, on the contrary. Because they have already a greater part of money per head quota than we have, we must get the additional quantity of money.”

But, Mises observed, it’s impossible to distribute the money in a neutral way:

one can never increase the quantity … in such a way that it does not further the economic conditions of one group at the expense of other groups. This is, for instance, something that wasn’t realized in this great error — I don’t find a nice word to describe it — in starting the International Monetary Fund.

The IMF, Inequality, and Central Banks

These conflicts are underlined by an even less acknowledged conflict at the national level — also predicated on the redistribution of wealth — which arises from the inflationary policies of national central banks. National central banks often cooperate with each other to, as Jörg Guido Hülsmann summarized,

to coordinate central-bank policies, i.e. … to increase their note issues in concert, thus avoiding the embarrassment of the falling exchange rates that inevitably result from unilateral inflation.

However, when this coordination fails, IMF loans can be used to buy one’s currency off foreign exchange markets and temporarily halt its collapse. Here too, instead of macroeconomic stability, what IMF loans really accomplish is maintaining the inflationary monetary policies which have brought countries to this predicament in the first place. The primary social consequences of inflationary policies are the redistribution of wealth from the last receivers of the new money toward the first receivers. Thus, the perpetuation of this institutional framework is a fertile ground for growing economic inequality, a hot issue nowadays, often over-estimated, but always blamed on the free market.


Carmen Elena Dorobăț, “The IMF’s Global Tug-of-War,” The Austrian 2, no. 2 (March-April 2016): 28–19.

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Image Source: IMF Director Lagarde/
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