What Is the IMF and How Does It Work?

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A wave of protests against austerity programs promoted by the IMF is rocking several countries. Below are keys to understanding what this organization is and how it works.

Ecuadorian protests against the IMFs austerity package

The International Monetary Fund plays a central role in international politics, with increasing numbers of mass uprisings against its brutal policies. But what is it and how does it work?

What is the IMF?

The International Monetary Fund was created in 1944 at the Bretton Woods Conference but started to function in 1946. After World War II, the world’s great powers established the IMF to guarantee an organized economic transition—and protections for their businesses—after the war’s enormous economic, social, and human devastation. The fund’s localized interventions were meant to prevent crises in semicolonial countries from ending in another catastrophic world crisis like that of 1929, which put the global capitalist system at risk. The IMF’s function is thus to protect the profits of big multinationals from being adversely affected by economic crises occurring in individual countries.

Why does the United States dominate the IMF?

Currently, there are 189 member countries of the IMF, and its headquarters is in Washington. Each participating country pays a fee according to the size of its economy. This amount determines how many votes each country has. The United States has the highest percentage of votes at 17%. This gives the U.S. veto power over IMF decisions since its most important decisions require an 85% majority. The organization’s policies and activities are, therefore, dominated by the interests of North American imperialism.

How does the IMF operate?

The IMF exerts its power through lending. Its loans are presented as rescue plans for countries undergoing economic crises. The dependent countries accept loans that are granted under conditions that are often impossible to comply with, both politically and economically. The loans come with conditions, like the recipient country paying certain interest rates (which have increased more and more over the years, especially after the 1990s) and undertaking structural economic reforms like privatizations and austerity. These “rescue plans” are thus a form of extortion.

For example, several Latin American dictatorships in the 1970s took out large loans that were used to finance the interests of big capitalists and military regimes. The IMF’s loans were contingent on the implementation of brutal austerity plans that included the privatization of state-owned companies, the opening of markets to foreign capital, and the rollback of labor rights. During the 1990s, these practices spread all over the world, and the IMF played a key role in the neoliberal offensive.

After years of increasing unpopularity and following the 2008 international financial crisis, the IMF has tried to change its image with rhetoric in favor of the poor. In 2011, Christine Lagarde was elected as the IMF’s first woman president. Kristalina Georgieva, a Bulgarian woman, recently took her place. They claim to be looking out for the women of the world who suffer the worst effects of poverty. But beyond superficial reforms, the IMF does little to improve people’s lives and instead serves as an instrument for subjecting the semicolonial countries to imperialism.

What policies does the IMF currently promote?

The IMF promotes austerity policies against the working class and the poor, including short, medium, and long term reforms.

For example, it promotes the elimination of fuel subsidies, which raises the cost of basic necessities. This has already resulted in crises and rebellions, such as the bread protests in Sudan, where the elimination of fuel subsidies led to an increase in the price of food, and the demonstrations in Ecuador against the government of President Lenín Moreno. It also led to the crisis in Haiti, which forced the prime minister to leave in 2018 and is the backdrop for the current protests there. 

Another one of the IMF’s frequent requirements for disbursing loans is the cutting of public spending. In Greece and Portugal, adjustment plans led to massive unemployment as a result of cuts in the public sector, health care, education, and unemployment insurance. These policies unload the cost of economic crises on the workers and the most vulnerable people.

Loosening labor laws are a fundamental objective of the IMF. It is a way of increasing companies’ extraction of surplus value, as well as breaking up workers’ organizations by making unionization more difficult. Large companies also gain strategically because, if they succeed in lowering wages and increasing precariousness in a country, they also make labor cheaper in the region as a whole by pressuring other countries to lower wages for greater competitiveness. The IMF also promotes pension and tax reforms for the benefit of the richest.

Other long-term reforms are the privatization of public energy, gas, and other natural resources, which creates extraordinary profits for years or decades through the plundering of dependent countries, leaving them even poorer.

The IMF’s interventions are so brazen that its leaders openly try to influence member countries’ politics. In Argentina, where there is currently a big crisis as a result of IMF policies, its functionaries met with the candidates of the government and the opposition (except for the candidate of the Left and Workers Front, Nicolás del Caño) to ask about their policy proposals and to pressure them to continue paying the debt after the elections.

Why is the debt odious, illegal, fraudulent, and illegitimate?

In some cases a country’s foreign debt can be declared odious because people should not pay off debt contracted by an illicit government, such as a dictatorial or corrupt regime, with creditors who know they are imposing a debt that is impossible to pay.

A country’s debt can also be illegal if it does not respect the country’s legal framework, or illegitimate if it is contracted to favor the interests of a privileged minority, like big banks. In the case of Argentina the debt is considered odious, illegitimate, and also fraudulent because a large part of the country’s external debt was taken out by private capitalists. During the military dictatorship, the government took on the payment of those private debts. For this reason, some political parties in the semicolonial countries have often tried to audit the external debt and determine which part should be paid and which should not.

The problem is that no government, be it dictatorial or bourgeois democratic, has consulted the people about whether to borrow from the IMF. In fact, there are polls that show a broad rejection by the population of indebtedness and austerity plans. But under the IMF regime, there is no democracy for the masses. A paradigmatic case was that of Greece. The government of Syriza held a referendum in which the majority of the Greek masses voted not to accept the Troika’s austerity measures, but ended up implementing it anyway. As a result, the Greek economy continues to be in crisis, and the working class is suffering the worst effects with mass unemployment and cuts in pensions and social services.  

In addition, the bodies that audit the debt are made up of state representatives, not citizens. The people are excluded from deciding on measures that will affect them for generations.

Another problem is that audits cannot retroactively reverse the effects of indebtedness without structural measures (such as recovering previous salaries or changing labor legislation again). 

In addition, a debt may be declared illegal or illegitimate, but on the basis of that debt, there may be new loans and refinancing because of restructuring, which makes it impossible to get out of debt altogether. This is why in the development of a rescue plan, a country can end up with more debt than before it took out the loan. This is, in fact, usually the case.

In the event that default is declared as a consequence of auditing or because a country just cannot pay, the process can be catastrophic for dependent countries if they do not take certain measures to protect themselves. It can result, for example, in economic and political blockades or sanctions imposed by the IMF.

How can dependent countries protect themselves?

As socialists, we demand the cancellation of IMF debt and the dissolution of the IMF. In addition, we support the rebellions against the IMF austerity plans. In countries suffering under IMF-imposed austerity, the banks should be nationalized and the state should monopolize foreign trade. These two measures are the basic elements of a national defense against imperialism. In this way, capital flight and tax fraud by large multinationals can be prevented.

In some countries, mass mobilizations questioned the IMF and the national governments that seek to implement their policies. In these cases, we propose a free and sovereign constituent assembly where the working class can play a leading role and, in alliance with all the oppressed sectors, plan the economy in favor of the working and poor majorities.

Today, many of those in the United States who claim to defend the working class, like the candidates of the Democratic Party or even those who consider themselves socialists, do not say a word about the need to dissolve the IMF and take measures such as debt cancellation. This is indispensable to ending imperialist exploitation and domination over workers and oppressed people who are the brothers and sisters of the working class in the U.S.

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