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Abstract
A genuine reform of the IMF would require as much a redirection of its activities as improvements in its policies and operational modalities. There is no sound rationale for the Fund to be involved in development and trade policy, or in bail-out operations in emerging market crises. It should focus on short-term counter-cyclical current account financing and policy surveillance. To be effective in crisis prevention it should help emerging markets to manage unsustainable capital inflows by promoting appropriate measures, including direct and indirect controls. It should also pay greater attention to destabilizing impulses originating from macroeconomic and financial policies in major industrial countries. Any reform designed to bring greater legitimacy would need to address shortcomings in its governance structure, but the Fund is unlikely to become a genuinely multilateral institution with equal rights and obligations for all its members, de facto as well as de jure, unless it ceases to depend on a few countries for resources and there is a clear separation between multilateral and bilateral arrangements in debt and finance.
Introduction
There have been widespread misgivings about international economic cooperation in recent years even as the need for global collective action has grown because of recurrent financial crises in emerging markets, the increased gap between the rich and the poor, and the persistence of extreme poverty in many countries in the developing world. Perhaps more than any other international organization the IMF has been the focus of these misgivings. Several observers including former Treasury Secretaries of the United States, a Nobel Prize economist and many NGOs have called for its abolition on grounds that it is no longer needed, or that its interventions in emerging market crises are not only wasteful but also harmful for international economic stability, or that its programs in the third world serve to aggravate rather than alleviate poverty.2 Others want the IMF to be merged into the World Bank because they see them as doing pretty much the same thing with the same clientele.3 Many who still wish to keep the Fund as an independent institution with a distinct mission call for reform of both what it has been doing and how it has been doing it.4 All these groups include individuals across a wide spectrum of political opinion, ranging from conservative free marketers to anti-globalizers.
The principal rationale for global collective action in financial matters and for institutions needed to facilitate such action is market failure. More specifically, international financial markets fail to provide adequate liquidity and development financing for a large number of countries, and they are the main source of global economic instability. These have repercussions not only for the countries directly concerned but also for the international community as a whole because of the existence of international externalities. Furthermore, due to cross-border interdependence, pursuit of national interests by individual countries in macroeconomic and financial policies can result in negative global externalities, and preventing conflicts and collective damage calls for a certain degree of multilateral discipline over national policy making as well as economic cooperation.5
Such concerns in fact provided the original rationale for the creation of the IMF and the World Bank with a clear division of labour between the two. However, these institutions have gone through considerable transformation in response to changes that have taken place in the world economic and political landscape in the past sixty years. In particular, the Fund is no longer performing the functions it was originally designed for; namely, securing multilateral discipline in exchange rate policies and providing liquidity for current account financing. Rather, it has been focussing on development finance and policy and poverty alleviation in poor countries, and the management and resolution of capital account crises in emerging markets.
This paper argues that there is no sound rationale for the Fund to be involved in development matters, including long-term lending. This is also true for several areas of policy closely connected to development, most notably trade policy which is a matter for multilateral negotiations elsewhere in the global system. On the other hand, while the management and resolution of financial crises in emerging markets constitute a key area of interest to the Fund in the context of its broader objective of securing international monetary and financial stability, there is little rationale for financial bail-out operations that have so far been the main instrument of the Fund's interventions in such crises. The original considerations that precluded IMF lending to finance capital outflows continue to be equally valid today since such operations do not correct but aggravate market failures. There are other institutions and mechanisms that can serve better the objectives that may be sought by such lending. By contrast the Fund should pay much greater attention to two areas in which its existence carries a stronger rationale; namely, short-term, counter-cyclical current account financing, and effective surveillance over national macroeconomic and financial policies, particularly of countries which have a disproportionately large impact on international monetary and financial stability. In other words, a genuine reform of the Fund would require as much a redirection of its activities as improvements in its policies and operational modalities. However, none of these would be possible without addressing shortcomings in its governance structure.
The purpose of this paper is not to provide a blueprint for the reform of the Fund, but to discuss and elaborate a number of broad issues that would need to be taken into account in any serious attempt to make the Fund a genuinely multilateral institution with equal rights and obligations for all its members, in practice as well as in theory. The next section will give a brief description of the original rationale for the Fund, its evolution in the past sixty years and current focus. This is followed by a discussion of what the Fund is but should not be doing; that is, development policy and financing, and trade policy. Section E makes a critical assessment of the Fund's role in crisis management and resolution while section F turns to issues related to the reform of its lending policy and resources. This is followed by a section on the Fund's surveillance function. Section H focuses on governance issues, notably the prerequisites for a genuinely symmetrical and multilateral financial institution. The paper ends with a summary of the main proposals.
Footnotes:
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Former Director, Division on Globalization and Development Strategies, UNCTAD. Paper prepared under the UNCTAD Project of Technical Assistance to the Intergovernmental Group of Twenty-Four on International Monetary Affairs, supported by the International Development Research Centre of Canada. An earlier version was presented at a technical group meeting of G-24 in IMF on 16 September 2005. Comments and suggestions by Ariel Buira, Andrew Cornford, Richard Kozul-Wright and the participants of the G-24 Technical Group Meeting are greatly appreciated. The usual caveat applies.
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The abolitionists include Walters (1994); Schultz, Simon and Wriston (1998); and Schwartz (1998). Friedman (2004) argues for closing down both the World Bank and the IMF on grounds that "they have done more harm than good, and have the capacity for continuing to do more harm than good."
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See e.g. Clark (1990), Crook (1991), Schultz (1998), Burnham (1999) and Fischer (2004).
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The list of reformists is much longer. The better known include the report by the Meltzer Commission (2000) and suggestions made by the former Chief Economist of the World Bank, a stern critique of the Fund, Joseph Stiglitz (2002, particularly chap. 9; and 2003). See also Boughton (2004) and a number of other articles in the same issue of Finance & Development prepared on the occasion of the 60th anniversary of the Bretton Woods Conference. For a review of several reports on the role and reform of the IMF see Williamson (2001). The Group of 24 research program has produced several papers on the reform of the IMF, now jointly published by UNCTAD and G24 and placed on their respective websites. There are also many NGOs in the group of reformists demanding profound transformation of both the IMF and the World Bank.
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For a discussion of the rationale for multilateral financial cooperation and the Bretton Woods Institutions see Akyьz (2005a, section I).
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