Booker T. Washington High School

Model United Nations Club

Player Briefing: The International Monetary Fund (IMF)

 The IMF is a specialized agency of the United Nations and was created in 1945 to promote rebuilding and trade.  Its job is to loan money to countries under specific conditions to promote development and free trade.  It receives its funding from the wealthiest countries, particularly the US, Japan and the members of the European Union.  It loans money to countries that are willing to play by the rules of free trade, summarized as follows:

·         States should liberalize their economies – keep tariffs low and make it easy for foreign firms to do business.  There should be few restrictions on foreign direct investment, foreign ownership of property or foreign purchase and sale of local good.  Their currencies should float in international exchange markets, where foreign traders can buy and sell them.

·         States should also seek to privatize their economies – to sell off state-owned businesses, believing that the private sector can do a better job of running them.  States should not nationalize – take over – private businesses without compelling reasons.

·         States should live within their means.  Many states spend money on social programs like food subsidies, price caps and welfare benefits.  Too much government spending can cause inflation, which undermines economic growth.  In particular states should avoid deficit spending – spending more than they earn.

·         When faced by inflation, states should enact austerity measures – spending cuts to bring their budgets into balance and to curb inflation.  Note that austerity measures can be very unpopular at home, especially among poor people who depend on welfare and subsidies.

·         If all countries follow these rules, economic efficiency is maximized, and all enjoy the benefits of free trade and long term economic growth.

 History: the IMF was founded as a result of economic conferences after WWII on the future of the world economy.  Prior to that time, much of the world’s resources were in the hands of a few colonial powers still holding onto 19^th-century empires.  They restricted trade with one another through a variety of tariffs and other restrictions.  The war did enormous damage to these colonial powers, and put the US in a position of advantage.  With the largest surviving treasury and economy, the US argued for a world based on free trade, instead of the old colonial arrangements.  They contributed money to the IMF and drew up its rules of operation.  As a result, countries began to liberalize their economies, and world trade grew.  One of the major reasons for sustained global economic growth since 1945 has been the free trade atmosphere fostered by the IMF and other international financial institutions.

 The ideas of the IMF reflect the Washington Consensus (see the Department of Commerce page) and the economic agenda of the wealthy countries that provide IMF funding.  The IMF has many billions of dollars to loan, and actually provides money to most of the countries in the region.  This money is essential to their economic development.  This gives the IMF some leverage.  Here are a few of your policy tools in this game:

·         You can raise or lower interest rates on loans to any country in the region.  This has a profound impact on their development because it raises or lowers the cost of borrowing.

·         You can cut off loans to a country under extreme conditions, such as blatant violations of all the Washington Consensus principles.

·         You can make three new loans to countries in this game, again based on their respect for IMF principles.

·         You can rate the countries in the region (except the US) according to their economic standing.  Ratings include AAA (the best rating), AA , A and (worst of all) a poor rating.  This will have a profound effect on other banks, who will make or refuse loans to these countries based on the IMF rating.  In other words, a country that crosses the IMF will find it difficult to raise money anywhere.

 Note that the US is the major contributor to the IMF.  Feel free to work closely with the US representative from the Department of Commerce on your loan ratings.  Commerce has the power through its connections to veto any loans made by the IMF in this game.