Two forces for change have converged on the IMF in recent years. The first is in relation to the financial crisis that swept across the globe in 1997 and 1998. In its aftermath, G7 finance ministers, spurred on by private financial interests, are pressing ahead to transform the IMF into a surveillance institution to assist private investors with making better investments in “emerging markets” and a quasi-lender of last resort to help manage financial crises.
The second has arisen from the pressure for debt cancellation to be linked to poverty reduction objectives and the acceptance that structural adjustment policies have failed to achieve lower levels of poverty. Thus the IMF has accepted that poverty reduction should be an objective of its programmes, suggesting the need to re-examine its macroeconomic policy prescriptions and operational procedures.
Whilst these forces are already making changes, many critics are calling for the IMF to be structurally adjusted to focus on a limited number of core functions. In response, IMF Managing Director, Horst Köhler, has established a committee to review the IMF‘s function. He will report the findings at the Annual Meeting in Prague. The G7 has also established a working group to look at IMF reforms.
Despite calls for a more streamlined IMF, there appears to be little coherence and coordination between the reform agendas. Rather than forcing its members to address this problem the IMF is simply endeavouring to placate both forces by accepting all roles assigned to it, whether it has the expertise to carry them out effectively or not. The result is that the IMF is becoming even more schizophrenic with conflicting priorities and inappropriate mechanisms to deal with a variety of financial problems.
Objective 1: Facilitating private investment
Those who believe that markets are generally efficient and that foreign private finance is the driving force behind growth, such as US Treasury Secretary, Lawrence Summers, and other G7 governments, want the IMF to focus on enhancing the flow of information from governments to investors and to assist countries to open their capital accounts and liberalise their financial markets to facilitate private investment.
To this end, the IMF‘s traditional surveillance function has been expanded. In addition to monitoring countries’ macroeconomic policies, the IMF is now monitoring countries’ financial vulnerability and compliance with a host of international codes and data standards (and may enforce them through its conditionality). In addition it has been given the remit to advise countries on financial sector reforms.
The problem is: 1) many of the standards, which have been developed by the industrialised countries, are appropriate for developing countries given their many different stages of development; 2) it is doubtful whether developing countries have the capacity to implement them nor whether it should be a priority to do so given the pressing need to address poverty issues; 3) the IMF is in danger of becoming an international rating agency, yet it is unlikely to perform this function better than private agencies and it certainly shouldn’t be funded from the tax payers’ money to do so.
Although the IMF‘s articles of agreement have not changed to give it an official mandate to facilitate Capital Account liberalisation (CAL), the IMF is implicitly supported by the G7 governments to “advise” countries how to do so. Whilst CAL brings ample benefits to foreign investors there is no evidence to show that poor people benefit. Indeed, since there is a high risk of crisis from which the poor are often least able to recover, it is suspected that they will be relatively worse off. The concern is that the G7‘s emphasis on private investment as the driving force for economic growth will make the IMF single-minded in its pursuit of CAL even if poverty objectives would suggest not to.
Objective 2: Crisis management
Whilst developing countries are being forced to make adjustments at the national level to address instability in the global system, the IMF has not been equipped (nor has any other institution) with the finance or debt workout tools to effectively assist countries that are hit by crisis. Whilst the Contingency Credit Line is likely to be reformed to make it more attractive, it will only be accessible to a few”emerging”, middle-income countries. There are no financing facilities from which the poorest can borrow to avert a financial crisis.
Yet even if they are not systematically important, relative to their size, some of the poorer countries are receiving large inflows of private investment and have liberalised quite considerably and more are looking to do so. As capital controls have been removed so have mechanisms for monitoring flows and many do not have capacity to regulate financial markets, making them very susceptible to sudden reversals.
Objective 3: Poverty reduction
At its annual meetings in September 1999 the IMF announced that poverty reduction was to be a central objective of its lending to the poorest countries. The new approach is to be realised through the Poverty Reduction Strategy Paper (PRSP) and the Poverty Reduction and Growth Facility (PRGF). Whilst many welcome this new focus, so far there has been little evidence to suggest that it is making any significant changes in its policy advice or operational procedures to accommodate this objective. Some NGOs are concerned that it has simply extended the IMF‘s influence in national decision making by justifying its involvement in micro-managing public spending and taxation decisions.
Other critics are arguing for the IMF to stop all medium-term lending and are calling for the PRGF to be closed or moved to the World Bank. Many sympathise with this stance, although there is a good case for the IMF to continue providing short-term finance for countries needing to stabilise. This suggests that there is a need to identify those countries that have short-term stabilisation problems and those that are effectively “post stabilisation” but chronically poor with limited capacity.
The question is what role should the IMF then have in the latter. Given its expertise the IMF should still be responsible for giving advice on macroeconomic policies. However, it must reexamine its Financial Programming Model and policy advice to ensure that it is poverty-focussed. This is essential whether it is advising countries in crisis needing to stabilise or those that are “post stabilisation” and are focussed on achieving sustainable growth.
A more doubtful role is its “seal of approval” function. The PRSP must be endorsed by the IMF before other donors will provide resources to fund it, thus the IMF stands in the gateway to all other finance. However, with the focus on poverty reduction it is less obvious that the IMF should perform this function. Some NGOs are critical that the IMF now has the potential to reject or accept an entire national programme not just the macroeconomic element, yet it does not have the expertise to do so.
In conclusion, reform proposals to address financial crises are likely to be inappropriate for the poorest countries and appear to conflict with poverty reduction objectives. To ensure that reforms to the IMF address the needs of the poorest countries it is essential that they are involved in these debates. It is unacceptable that the G7 governments continue to push their own, incoherent agendas without compromise on to these weaker governments. IMF governance structures must be reformed to give developing countries equal opportunity and power to engage in and direct the IMF.
Bretton Woods Project, September 2000.