From the towering heights of its pre-Asian-crisis command over the global economy, the Fund has stumbled through failed crisis management, had major policy initiatives rejected, and been stared down by Argentina. Now, with its balance sheet in jeopardy due to a lack of business, and as a rising Asia’s demands for reform of the institution become more emboldened (see Update 46), the Fund finds itself fighting a rearguard action to prevent its irrelevance. “The IMF has not been reformed”, says Mark Weisbrot of the Center for Economic Policy Research, “but its power to shape economic policy has been enormously reduced”.
In this context, managing director Rodrigo de Rato commissioned a strategic review. Released at the annual meetings in September, the review is disappointing both in its overarching focus and in the breadth and depth of treatment of key points of contention.
According to the review, the Fund’s raison d’être is to help its members “meet the challenges of globalisation”. Rather than viewing globalisation as a process shaped by economic, political and cultural forces, the review states bluntly that globalisation is “a reality for countries to come to grips with”. Presumably this is meant to suggest that the cornerstones of prevailing economic dogma – rapid trade and financial liberalisation and the rollback of the state – are simply ‘realities for countries to come to grips with’.
no basis for the contention that capital market liberalisation will necessarily lead to greater economic efficiency
Surveillance of who?
The review concludes that Fund surveillance needs “focus and country-context”. It envisions a role for the Fund in facilitating global policy dialogue on issues such as current account imbalances; more systematic surveillance of regional developments; and a move away from “template questionnaires” in country-level surveillance towards “continuous dialogue”. The Fund needs to “help convince broader public opinion” through a more “contextually-savvy programme of seminars, media events and regular press conferences”.
Largely missing from the discussion is the need for greater attention to the role played by the policies and institutions in rich countries in triggering financial crises. The G4 group of Belgium, Netherlands, Sweden and Switzerland, in its response to the review agreed: “surveillance of larger developed countries should include more analyses on aspects of global financial stability”. Yilmaz Akyüz, former director of UNCTAD’s globalisation division, in a technical briefing prepared for the G24, supports previous British calls for a greater separation of surveillance and lending functions. However he concludes that asymmetry in surveillance between borrower and creditor countries can only really be reduced by “minimising conditionality for borrowing countries and increasing the degree of automaticity of access to Fund resources”. Neither issue is addressed in the review.
Only brief mention is given to the need for a “review of the effectiveness of the Fund’s instruments to facilitate crisis resolution”. There is a call for a “second round of debate on the introduction of high-access precautionary arrangements and a successor to the contingent credit line” (both facilities were abandoned due to borrowing countries’ fears that they would give the wrong signal and impair access to financial markets) and a revisiting of the lending into arrears policy. However, likely due to US pressure, there is no mention of the urgent need to agree an orderly debt workout procedure.
More worrying is the description of capital account liberalisation (CAL) as “a reality, a part of globalisation”. While the Fund will abandon attempts to include CAL as an explicit purpose of the organisation, it “must be in a position to advise on how best to manage the process.” This comes in response to a review in June from the Independent Evaluation Office (IEO) of the Fund’s handling of CAL. The IEO called on the Fund to assist authorities “when and how to open the capital account”, and provide a “gauge of the benefits, costs and risks”. Staff will shortly bring a paper to the board that “lays out the key issues and a programme of case studies”.
There is by no means a consensus amongst economists that CAL is desirable at any pace. Former World Bank chief economist Joseph Stiglitz, in his briefing for the G24 before the WB-IMF annual meetings, concludes that there is “no theoretical basis for the contention that financial and capital market liberalisation will necessarily lead to greater economic efficiency and increased social welfare” and may, in fact, lead to “greater economic volatility and lower welfare.” Akyüz goes further to argue that what the Fund needs is guidelines for the circumstances where it should recommend the strengthening of capital controls, as well as “new techniques and mechanisms designed to distinguish among different types of capital flows from the point of view of their sustainability and economic impact, and to provide policy advice to countries at times when such measures are needed.”
What role for the Fund in low-income countries?
Of the Fund’s role in low-income countries, the review recommends more focus, flexibility and emphasis on the MDGs. In future, staff papers will assess whether macroeconomic policies support the MDGs. This represents an important step forward in response to pressure from civil society organisations. In his chapter in a new book exploring the Fund’s role in low-income countries, Matthew Martin of NGO Debt Relief International, urges the Fund to “start from GDP growth rates needed to attain the MDGs”. This would mean a reversal of its traditional logic of “designing programmes on the basis of inflation targets and availability of financing.”
The review recommends making the Poverty Reduction and Growth Facility (PRGF) permanent. Joining it will be a new Policy Support Instrument (PSI) – a programme of policy advice for countries which do not need to borrow from the Fund, and a new facility for countries experiencing economic shocks (see Policy support instrument: helping hand or more thumbscrews?).
The review fails to address debates over the degree of concessionality of IMF funds, the adequacy of IMF resources to meet member countries’ needs, or, most importantly, the urgent need for the Fund to respond to calls from civil society, academics and its own evaluation department for greater macroeconomic flexibility in its policy advice. Martin argues that the Fund’s stabilisation targets – primarily inflation rate and fiscal deficit targets – could be made more flexible in a number of ways: by greater emphasis on growth where it will not undermine stability; by allowing countries to propose alternative means of achieving targets; and through the inclusion of programme ‘adjusters’ which would allow higher expenditure if more aid or revenue materialises than expected.
Stiglitz believes that the “IMF could do more to shift more of the risk burden to the advanced developed countries”. He argues for repayments to be made in a basket of currencies to reduce the risk to vulnerable borrowing countries of a sudden shift in currency valuations or interest rates.
However, there is no consensus that there is a role for the Fund in low-income countries at all. Akyüz argues that “there is no sound rationale for the Fund to be involved in development matters, including long-term lending” nor in areas of policy connected to development, “most notably trade policy”. He calls for the abolishment of the Poverty Reduction and Growth Facility. Instead, “there should be greater automaticity in meeting payments imbalances resulting from external shocks and less emphasis on policy adjustment. Conditionality should not be extended to structural issues but confined to macroeconomic and exchange rate policies.”
Governance: reform or perish
On staff and management issues, the major direction announced by the review is a devolution of responsibility from management to staff, citing a work load for managers which “is impeding the efficient consideration of broad policy issues.” The review was notably silent on the issue of leadership selection. The G4 have called for a “selection process for Fund staff and management based on transparent rules”, while the powerful G20 grouping, at their annual meeting in China in October, made it clear that “the selection of senior management should be based on merit and ensure broad representation of all member countries.” The review calls for a reduction in the volume of documentation and time spent on routine matters by the board; and a modification of the format of IMFC meetings, with “more frank and interactive discussions between ministers on the most pressing issues, and more focused communiqués”.
But it is on the question of the democratisation of the structures of the Fund where calls for fundamental reform can no longer be ignored. On this issue, the G20 has drawn a line in the sand: “The G-20 underscores the critical importance of achieving concrete progress on quota reform by the next annual meetings in Singapore. The G-20 will seek to identify principles for quota reform which could be an important input into the IMF’s thirteenth general review of quotas, scheduled to be completed by January 2008.” The review conceded the need for reform, saying that “deep concerns over fair quotas and voice are straining the legitimacy of the institution”. Options of reallocating existing quotas, an increase in the provision of basic votes and consolidation and reallocation of chairs in the board are all to be considered.
Interestingly, the usual opponents to such considerations – small European states which stand to lose voting share relative to other countries – seem to have accepted the inevitability of reform. The G4 statement says that “member states’ quota should remain a reflection of their relative positions in the international financial system”. Surely, this is a tacit admission of over-representation from a country such as Belgium which enjoys a significantly larger voting share than the larger economies of Brazil, India, Mexico or Korea. In a parallel development, John McCallum, Canada’s minister of natural resources and national revenue, said that Asia’s increasing economic strength should be reflected in its representation at the IMF: “if the implication of what I say is that Western countries as a whole would have to reduce their share of the pie, then I’m sure that Canada would be willing to make its fair contribution.”
Lorenzo Bini Smaghi, former head of the European Parliament’s sub-committee on the IMF, in an October hearing before the Committee on Economics and Monetary Affairs, conceded that “the formula currently used to calculate quotas is considered by many as not anymore relevant to measure countries’ relative importance”. Bini Smaghi believes that the EU must find a solution to the crisis of legitimacy, “with a view to maximise its interests while at the same time preserving the legitimacy of the IMF.” Otherwise, he had dire predictions for the Fund, in a veiled reference to the prospect of the creation of an Asian monetary fund: “Unless this problem is satisfactorily solved, the IMF may lose its legitimacy and be replaced by other fora.”
In his presentation to the committee, Bini Smaghi examined the range of options available for Europeans, including a single chair for the EU and a single constituency of euro area countries. He concluded that both options would be “quite a challenging endeavour” and pulled back to a call for “improved coordination and cooperation” to offset what he views as an inevitable decline in Europe’s quota.
The European parliament is marshalling a response to the Fund strategic review, led by Benoit Hamon from the parliamentary committee on economic and monetary affairs. A hearing will be held end November to feed into the review, in conjunction with the European parliament development committee. Mr Augustin Carstens, deputy managing director of the IMF will be present, along with Mario Cafiero, an MP in Argentina, Ngaire Woods from Oxford University’s Global Economic Governance Programme, a World Bank representative and Hetty Kovach of the Brussels-based network Eurodad.
The review concludes with a tally of its recommendations: more analysis on globalisation, public relations, research into capital account liberalisation and assessments of the achievability of the MDGs; less work in low-income countries, time on procedures and documentation, work on standards and codes, overheads and support activity. Disappointing is the review’s failure to tackle key issues – the need for greater macroeconomic flexibility, the role of conditionality, concessionality and the adequacy of Fund resources, the Fund’s catalytic role, debates over country ownership and the role for the IEO.
A series of working groups have been formed to prepare follow-up issue papers for consideration by the managing director end 2005 and early 2006. How and when the papers will go to the board and to the public is as yet undecided, however, any major changes have to be wrapped up in time for the spring meetings in April.