IMF Managing Director Dominique Strauss-Kahn was taken into custody on Saturday for allegedly assaulting a hotel maid in New York. He was removed from his first-class seat on an Air France flight, and it seems his plans to run for president of France have been irrevocably damaged. When he’s not getting embroiled in potential sex scandals, what does the IMF director do? In 1998, Slate helped distinguish the IMF from the World Bank. The article is reprinted below.
The job of the International Monetary Fund is to protect international trade. The World Bank’s is to promote economic development. Both institutions were created at an international conference held at Bretton Woods, NH in June 1944. Both are controlled and financed by member nations (about 180 of them), with larger nations coughing up more money and having greater say in decision-making.
The IMF’s primary responsibility is preventing or minimizing international trade crises. When a country buys more goods abroad than it sells abroad, it must borrow foreign currency to cover the difference. (This is the trade deficit. It is different than national debt, which is when a government spends more than it raises through taxes).
Many nations, including the U.S., run trade deficits and it’s not a crisis. Investors are willing to loan money to healthy countries because they are confident they’ll eventually be paid back. It’s only a crisis when international investors lose faith and stop lending money. The nation needs the money to repay its loans and to pay for imported goods. It reneges on its loan payments and slashes its imports. The disease spreads as banks go under, other countries lose export business, they renege …. This is the disaster scenario the IMF is supposed to prevent.
The IMF has a pool of almost $200 billion which it may loan to debtor nations at slightly below market rates. The IMF conditions a loan on reforms intended to enable the debtor to pay off its debts, which means earning more foreign currency than it spends, which means turning the trade deficit into a surplus. In other words, the price of a rescue from the IMF is to stop getting more from the rest of the world than you give, and to start giving more than you get. That is why the IMF is often unpopular.
The World Bank’s job is to help less-developed countries become less less-developed. The Bank also has a pool of around $200 billion, which it also loans to countries. But the World Bank loans are for development projects, not for trade stabilization. The idea is that they will be able to pay off the loans by making themselves more economically productive. The countries use the money to build roads, schools, clinics, irrigation systems, and so on. That is why the World Bank is generally popular.
John Maynard Keynes—the intellectual architect of the system—thought the Fund should be called a bank and the Bank should be called a fund.
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