With the collapse of communism in 1989, the International Monetary Fund (IMF) found itself in a situation without historical parallels. A large number of new countries required immediate stabilization and liberalization, with economic systems sharply different from a free market system. Because Poland was the first to adopt a radical stabilization and restructuring program and the first to recover from post-reform recession, its relationship with the IMF is of particular interest, both to other transition economies contemplating viable strategies and to post-cold war economic literature rethinking the IMF role in the international policy process.
Following the Bretton Woods Conference in 1944, the IMF was founded in 1945 to regulate the postwar international monetary system. As assigned by the Conference participants, the three main functions of the IMF include: (1) the administration of a code of conduct concerning exchange rate policies and restrictions on payments for current account transactions; (2) the provision of financial assistance to member countries correcting imbalances; and (3) the creation of a forum for continued international consultation and cooperation.
While the IMF's main task of promoting international trade and balance of payments equilibrium is in theory, a politically-neutral task, this does not mean that IMF negotiations have no political undercurrents. For James Bjork (1995) every economic program is intimately linked with domestic political issues. Managing directors' votes, weighted relative to the size of their home country's contribution, are inevitably linked with broader political considerations -- such as the human rights record of a recipient country, its political alliances, its environmental track record, and so on. As James Mayall (Taylor, 1988, p. 53) stresses, the institutional purpose of postwar economic cooperation was to safeguard liberal capitalism.
The IMF is currently active in two areas: exchange rates and international liquidity. Since 1971, the IMF has lost formal control over exchange rate movements but member countries are still obliged to certain rules of good economic conduct, as prescribed by the IMF. Member countries are also given borrowing or drawing rights from the IMF's resources -- consisting of a pool of currencies and international reserve assets, including SDRs (Special Drawing Rights, a new reserve asset in the form of bookkeeping entries) that they can use to help finance a balance of payments deficit.
IMF CONDITIONALITY PROGRAMS
Since the 1970s, the IMF has functioned mainly as the manager of foreign exchange crises and organizer of international debt agreements. The IMF's approval of debtor countries' economic policies has also become a precondition for other debt agreements, as commercial banks and official creditors link rescheduling agree meets to IMF-endorsed creditworthiness. Both IMF conditionality lending and cross-conditionality lending (involving commercial banks and official creditors) refer to the process in which countries receive loans on the basis of a promise to enforce a set of IMF macroeconomic prescriptions. These macroeconomic measures concern stability in the short and medium term. The IMF, as regulator of international economic order, is neither centrally concerned with economic growth nor equity. Thus, policy objectives and performance criteria are related to internal and external macro economic stability and have less to do with restructuring and redistributive justice.
IMF prescriptions for correcting balance of payment problems invariably include a sharp recession aimed at stabilizing prices and promoting trade balance. For the IMF, links between inflation and external imbalances are strong. Inflation creates overvaluation, erodes the tax base, depresses foreign investment, and promotes capital flight. As Stanislaw Gomulka (1991) puts it, the IMF is an "institutional guardian of low inflation," with its own credibility among member countries inextricably linked with the discharge of such a role.
The standard IMF solution to stabilization problems is to attack inflationary roots directly, mainly through a substantive cut in the budget deficit and devaluation. These two measures are intended to both dampen domestic demand and improve current account balances. Accompanying them are policies such as the liberalization of …