When a country is on the brink of defaulting on its debt or plunging into economic catastrophe, to whom does it turn? Although it can try to get a loan from a regional bank or aid from a large power like the United States, those options often fail. Ultimately, many countries turn to the lender of last resort: the International Monetary Fund (IMF). Dozens of countries every year receive IMF loans after exhausting other options, and as of April 2024, over 90 countries still need to pay the IMF back for the loans they received. Given that countries often lack alternatives and that the IMF is under no contractual obligation to provide a loan to any country, it holds immense power in deciding who gets money and how that money is used.
The IMF’s Internal Power Structures
Given the global economic sway of the IMF, it is important to understand who holds power within the organization. Since voting shares within the IMF are allocated based on wealth, Global North countries dominate the voting share. For example, Afghanistan, Albania, Barbados, Botswana, Cambodia, Cameroon, and the Central African Republic combined have 36 times less voting power in the IMF than the United States alone, as of December 29, 2024. With over 15 percent of the vote share, the United States has veto power over major policy decisions. As of March 2022, the United States has contributed US$161 billion to the IMF, and this economic power is transferred into power to shape the global economy. Crucially, the fact that the United States is single-handedly able to block major changes to the IMF means that the institution is vulnerable to instrumentalization in the pursuit of US interests abroad. For example, the United States has resisted the revision of voting shares—which were last updated in 2010—to avoid giving China more say in the IMF; China accounts for about 19 percent of the world’s economy but only six percent of the IMF vote share. Moreover, the very countries that have little power in the IMF often receive support from the IMF. Therefore, the internal power structures of the IMF make it difficult to ensure that loans are fair to both parties.
Given that the United States is the largest shareholder in the IMF, it is incentivized to enact loan conditions that are conducive to loan repayment. Thus, the IMF has conditioned its loans on practices that are conducive to short-term economic productivity but do not set the building blocks for long-term growth. IMF structural adjustment programs cut funding for critical industries vital to the everyday lives of citizens of recipient countries. By enacting wage and personnel caps, for example, the IMF has restricted the ability of clinics and hospitals to hire enough staff to fulfill the population’s needs.
The Detrimental Impact of the IMF in West Africa and Argentina
After West African countries were forced to follow the IMF’s structural adjustment programs in the 1980s and 1990s, spending on education decreased by 25 percent and spending on healthcare decreased by 50 percent. This reduction in important social services spending caused an estimated 500,000 deaths of children in Africa. More broadly, education is a prerequisite for long-term economic growth and a flourishing society. In an uneducated society, people are less able to contribute to the economy and participate politically as informed voters, causing worse policies in the long-term. Without healthy and educated children, these countries often return to the IMF years later when the economy again fails after the initial increase in liquidity gained from cutting social programs. Notably, a study of 81 developing countries from 1986 to 2016 demonstrated that IMF structural reforms attached to loan agreements have trapped more individuals in cycles of poverty. This perpetuation of global inequalities fosters dependency on the IMF.
The IMF's intervention in Argentina in the 1990s demonstrates the potential destructiveness of this system. Argentina followed the IMF’s instructions—it implemented free-market reforms, privatized industries, slashed spending, raised taxes, raised interest rates, and even pegged the Argentinian currency to the US dollar. These changes failed as the economy went into recession. When the workers and retired people were not paid adequately, the economy spiraled as people lacked money to spend. Even though the initial increases in taxes and decreases in spending gave Argentina more capital, that capital was short-lived. Not only was there enormous capital flight, but Argentina also had to pay an additional US$22 billion per year in interest to the IMF. The lasting impacts of IMF structural adjustment programs can still be felt in Argentina today. After inflation rates of over 20,000 percent during the early 1990s, the economy has not been able to recover—more than one in three Argentinians lives below the poverty line.
Fostering Equity and Long-Term Prosperity: How to Reform the IMF
Thus, the IMF establishes a system in which poor countries like Argentina stay poor, as they are unable to invest in their future. To stop the treadmill of poverty, two independent policy recommendations for the IMF show promise. The first policy recommendation is to change the voting structure within the IMF. Developing countries have been pushing to only use purchase power parity (PPP) exchange rates when calculating voting shares. Although the weight of emerging and developing countries (represented by the G24) in the global economy is only 42.7 percent with the current system, it would increase to 58.9 percent on a PPP basis.
Another proposal to further help smaller countries—and incentivize a shift towards green technology—has been put forth by the Center for Economic and Policy Research (CEPR). It has proposed adding cumulative CO2 emissions as a variable in calculating voting power. Crucially, this reform would decrease the United States’ voting share to 6.05 percent—far below the threshold currently required for a veto—thereby forcing the United States to compromise with other countries. Equally importantly, this approach would increase the voting share for the Global South from 37 to 56.4 percent.
Although changing these voting structures would go a long way toward making the IMF more equitable, Global North countries would still have veto power. Thus, ensuring that the Global South constitutes a majority of the votes is not enough. Eliminating the 15-percent veto when implementing major programs that could help low-income countries would supercharge the impacts of the two aforementioned initiatives. If these reforms are implemented and every decision is made on a majority basis, the countries receiving loans will finally exercise a say in how those loans are structured. This restructuring would eliminate the IMF’s incentive to maximize returns in the short term while disregarding long-term damage, as the IMF did in Argentina. Countries at risk of facing these long-term economic harms are more likely to structure loans in a way that stabilizes the recovery of developing economies and fosters long-term prosperity. For example, if Argentina had exercised more say in the IMF loan agreement, it might have avoided the austere policies that saved money in the short term but proved disastrous in the long run.
The IMF is a critical part of the global economy. Without the IMF, countries on the brink of default would have no recourse. However, this necessity does not give the IMF’s main donors the right to structure loans in a way that exacerbates inequalities between the Global North and South. The lender of last resort should be reformed so that it not only provides emergency aid, but also sets up countries for long-term prosperity.
