What is the IMF?

By Nathan Tankus, a writer from New York City. Follow him on Twitter at @NathanTankus

International political economy is filled with an alphabet soup of organizations that govern all different areas of economic life. Journalists and other commentators tend to talk about these organizations like they have singular positions and immutable opinions. They do not. Instead these organizations are made up of human beings in various different roles prescribed by whatever formal documents (the IMF’s articles of agreement) or informal cultures (Basel Committee on banking supervision) that created them. Adding to the difficulty in understanding these organizations, participants – those who are supposed to be the most informed about internal organizational politics- tend to not have a clear understanding of what is a convention and what is a hard rule. When this muddled thinking is filtered through reporters the confusion becomes paramount. This confusion is not some idle curiosity, but very crucial to whether the IMF will be involved with a Greek bailout.

Overview of the IMF’s legal structure

At this point it’s important to start at the basics. The IMF has a tiered governance structure. On the top tier is the Board of Governors which has any powers not specifically vested in other entities. In my view its most important job is to review the current set of quotas which determines how much money each country puts into the IMF.

Next is the Executive Board which is “responsible for conducting the business of the Fund”. The board appoints the Managing Director. It is important to understand the structure of the Executive board. The Executive Board does not provide each member country a vote. Instead, geographic regions vote for their board representative (called an Executive Director) based on their “quota”ie how much money they put into the fund. This “one dollar, one vote” structure has been the number one complaint about the International Monetary Fund and one they periodically respond to by expanding the quotas for smaller and emerging countries and thus their vote. It is actually worse than “one dollar, one vote” in the sense that smaller countries voices are drowned out by the larger country (by money contribution) in their region.

Brazil for example overwhelmingly dominates its representative despite ten other countries also voting in that region. Even for regions were one country doesn’t have a majority vote, in practice it is difficult for the representative not to represent their home country’s views . South Korea has a slightly larger vote than Australia for their regional representative but the current representative is Barry Sterland, an Australian. What guarantee does South Korea have that he will represent their interests as strongly as other countries within the region? I will return to the structure of the board later.

The Managing director is the “face” of the fund, represents it in high level negotiations and manages (including appointing and firing) IMF Staff. The staff itself has no formal authority over IMF decisions. This is a crucial point to underscore. Take for example this quote from an otherwise strong paper describing the 2010 Greek bailout:

SPR had unique leverage over this matter, because its signature is required on any document of this kind going to the executive board… [continuing to footnote] Technically, IMF management could have brought the document to the board without SPR’s signature, but that would have been extremely awkward and embarrassing

Staff are taken seriously because they are supposed to be the experts of the organization but any claim that they can veto a decision is bunk. Rather the Executive Board, which has formal authority within the IMF, appeals to experts to justify their political decisions. That kind of appeal becomes all the easier when you imply or claim that an informal convention is a hard rule. This isn’t to say that informal conventions have no influence. They clearly do. However, in organizations where a lot of power is wielded conventions tend to melt away and rules bend when the most powerful members want them to.

No More Argentinas “Rule”

This brings us to the factors that influence the Board when bailing out a country. Over the past few months it has been widely reported that the IMF can only be part of bailouts if there is a “high probability” that the bailout will put the country on a path of debt sustainability in the view of the staff. It’s been further claimed that the only reason this was not a stumbling block to the first Greek bailout is that they get a financial stability “waiver” from the previous rule. This presentation of the recent past is very misleading. A much clearer summary (and appropriate historical context) comes from the CIGI paper quoted above:

the Fund board established criteria in 2003 that a country receiving a large loan would have to meet — one criterion being “a high probability” that the country’s public debt is sustainable, based on “rigorous and systemic analysis”

“Criteria” is very far from a formal rule- let alone an amendment to the articles of agreement. This is made very clear later on in the paper:

Normally, a policy change of this sort would be subject to careful deliberation, as it had been in 2003, perhaps over the course of several board meetings. Instead it had been inserted into a jargon-filled passage of the staff report. Nogueira Batista took up the cudgels on this issue as well, essentially suggesting that the policy change was being snuck past the board. “This issue would not have been transparent, had it not been for Mr. Weber’s question,” he said, according to minutes of the meeting, and he demanded: “Should we not have a separate decision… instead of just a sentence on page 19 of the staff report, which would then be used as a precedent?”

In other words this “criteria” was an informal convention that can be ignored at the discretion of the board. Countries are disqualified for assistance by the Executive Board, not by technocrats bearing models. The board might be “embarrassed” to act without the support of the staff but there isn’t any evidence that embarrassment alone can stop the Board. Lagarde has clearly been fighting the staff on this issue for months and working behind the scenes and in public to make a Bailout happen. It is hard to imagine that she would do that without at the very least believing she could convince the board to ignore the staff.

The final question remains, will the board follow the IMF staff or will they support Lagarde in continuing with the bailout? This of course remains to be seen but I find it very unlikely that the board will kill a deal. The way it is structured makes it difficult for coalitions of countries outside of the west to form and it is difficult to see which Executive Directors have an active interest in killing a deal. The executive directors cited in the FT last week don’t have close to the amount of votes to kill a deal. Until a detailed analysis showing which Executive Directors are willing to kill a deal appears (and they likely have enough votes) I would be very skeptical of claims about the IMF. Many things can change in the next few weeks but right now I think Lagarde will get her way.

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  1. IsabelPS

    Also, I think it would be wise to take this “Lagarde says” and “the Staff says” with a pinch of salt: I suspect that a great deal of what is said in public is part of attempts to arm-twisting of recalcitrant players (being it the other creditors, the GR gov and even “bystanders” like other countries who might exert some influence in this power play).

  2. Jim Haygood

    In 2011, the BRICS nations published a manifesto about the selection of the IMF executive director:

    The convention that the selection of the Managing Director is made, in practice, on the basis of nationality undermines the legitimacy of the Fund.

    Several international agreements have called for a truly transparent, merit-based and competitive process for the selection of the Managing Director of the IMF.

    This requires abandoning the obsolete unwritten convention that requires that the head of the IMF be necessarily from Europe.


    In the preceding Greek bailouts, it might have been thought that a troika (Eurogroup, ECB and IMF) had more resources at its command. But as Bailout III teeters on the edge of the abyss, it’s now apparent that this cozy club of euro politicians presents formidable bureaucratic obstacles.

    With good judgment, Lagarde might have recused herself in favor of a non-European director, in the IMF’s dealings with Greece. But no. She wanted to be one of the many chefs in the euro kitchen.

    And now — drat! — they have spoiled the soufflé.

  3. Brooklin Bridge

    How much does public opinion or the media (their misinterpretations) affect the executive board members, if at all? If public opinion is sufficiently established that the IMF will not make a loan that is clearly beyond the ability of the recipient country to repay, does that cause any restraints on what Lagarde can make the board agree to? Or, would such feed back be negligible at best?

    1. IsabelPS

      I don’t know it it affects the executive board members, but it might very well affect elected players elsewhere.

  4. washunate

    I like the overview overall. It amazes me how often people blur management decisions and the governing documents of an organization. The actual Articles of Agreement give the Board of Governors essentially unlimited discretion as long as they follow the procedures described.


    But I’m curious where you are going with this particular line of thought?

    It is actually worse than “one dollar, one vote” in the sense that smaller countries voices are drowned out by the larger country (by money contribution) in their region.

    Brazil for example overwhelmingly dominates its representative despite ten other countries also voting in that region. Even for regions were one country doesn’t have a majority vote, in practice it is difficult for the representative not to represent their home country’s views .

    In order to have a smaller group, the Executive Board by definition can’t have a representative from each country. What you are describing isn’t a problem with the IMF; it’s a problem with the concept of representation.

    The US, Japan, Germany, France, UK, China, Saudi Arabia, and Russia have their own national representatives. Every other country votes with a group of countries. If Suriname doesn’t like being represented by Brazil, then that’s a matter for them to take up with the Board of Governors, not a problem with the Executive Board. If anything, Brazil (and India and Indonesia) stands out as a huge country that doesn’t elect a direct national rep, not as a country that undeservedly dominates its regional voting. Brazil has the 7th largest GDP, 5th largest population, and 5th largest land area of any country in the world.

    I guess I think this is important because it gets at the question in the headline. I would answer it by saying the IMF is a largely obsolete expression of a complex system of international relations dominated by the US. With the US no longer the sole foundation of global power – and with fixed exchange rates having given way to floating ones – the key insight for me is that there is no correct answer to the formula for the quotas and no need to manage exchange rates.

    The very fact that a representative from Australia would not be doing things that are also in the interest of South Korea demonstrates that the IMF institutionally isn’t really about the noble purpose of fostering international cooperation and trade. That is largely uncontroversial, so regional reps would work just fine.

    1. TheCatSaid

      The question of fair representation is a sticky one indeed.

      I wonder if they’ve ever considered selecting regional representatives using a ranked preference voting method.

      Similarly, I wonder if the Executive Board (or the Board of Governors) has ever considered using ranked preference voting to identify a consensus policy action from a list of several options.

  5. Cugel

    Lagarde may “get away with it” and then slither out of town before the crash, but right now I’m betting against it. The Eurozone collapse is a game of hot-potato in which nobody wants to get burned by holding onto the potato when the music stops. But, the music is quickly winding down and it’s getting harder and harder to pass the potato to a new player. Schäuble still is opposed to any deal, because he wants to destroy the Eurozone and reconstitute the EU as a tight authoritarian entity under strict German control, and he still has the power to block a new deal by simply signaling his opposition to the Bundestag. Whether he will do this is an open question, but if enough doubts emerge about the new terms of any debt extension, then he may not even have to oppose it publicly. He could simply spread the word to doubting members and they would vote “no.”

    That would of course be quite popular in Germany, which has found it’s inner bully. Merkel may find it hard to convince her own party to go along with another hopeless round of bailout.

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