IMF strategic review: too little, too late?

Fund acquires new powers for multilateral consultation

19 June 2006

versión español

Despite the most extensive critical thinking about and scrutiny of its role in years (see Updates 48, 50), the managing director’s report on the IMF’s medium-term strategic review released at the spring meetings was short on specific proposals for reform implementation of reform and lacked commitments for improved democratic functioning or strengthened surveillance of large industrial countries.

Scholars across the political spectrum have recognised that the IMF risks losing what little remains of its credibility if it does not revolutionise its ways of working. Ngaire Woods of Oxford University has argued persuasively in a new book, The Globalizers: the IMF, the World Bank and their borrowers, that the IMF must listen to its borrowers and meet their needs, create real ownership by enriching national policy debates, and involve them in decision-making.

the managing director has been too timid in his proposal

The IMF report’s only new proposal was the introduction of multilateral consultations to complement the single-country focus of its current economic monitoring. The IMF will, as necessary, arrange meetings of systemically important member countries to help them jointly try to resolve global macroeconomic imbalances. Deputy managing director Agustín Carstens stated: “The Fund is better placed than any other forum to be a catalyst for multilateral debate and action.”

The International Monetary and Finance Committee (IMFC), the highest governing body of the IMF, welcomed the move, while the G24 spring communiqué only “urge[d] the IMF to do more to identify and promote effective responses to risks to global economic stability, including from global imbalances, currency misalignments, and financial market disturbances.” Yilmaz Akyüz, former director of the division on globalisation and development strategies at United Nations Conference on Trade and Development (UNCTAD), commented that the consultations were merely a new method for the Fund to accomplish its original mandate, to provide surveillance of the global economy. But he had doubts the process given the failure of past multilateral efforts, stating: “Traditionally multilateral surveillance takes place around the [World Economic Outlook] during discussions at the board and the interim committee (IMFC now). Having represented UNCTAD in the interim committee/IMFC for over ten years, I can tell you that these deliberations were pretty useless.”

Some worry that the multilateral consultations will be used by powerful countries to extract favourable economic policies from smaller nations. UK NGO Jubilee Research issued a statement saying, “The move is explicitly designed to broaden the scope and influence of the Fund, and rectify the ever widening trade imbalance between the United States and the Asian economies.” Rede Brasil, a network of Brazilian non-profit organisations focused on international financial institutions, has called on its government “to undertake diplomatic efforts in order to publicly refuse the current proposal concerning the strengthening of the IMF which intends to transform the institution into a global financial police at the service of powerful states.”

The first test of this new procedure has already commenced, as a mid-May sell-off pushed down the value of the dollar and prompted the Fund to take action. On 4 June, the IMF officially announced its first multilateral consultation which will involve the US, China, Japan, the euro zone and Saudi Arabia. Some interpret this as the IMF yielding to US demands that the Fund bring China to heel over the country’s refusal to let the yuan appreciate against the dollar. Akyüz doubted the efficacy of the process: “Effectively this is G7 plus China. Would it work this time? Would China be persuaded to alter its currency regime without the Bush administration putting its fiscal house in order? I do not think so.”

Governance tinkering

Ariel Buira and Martin Abeles, in a G24 paper, argue that the Fund is the right institution to tackle global imbalances, but success “requires that the Fund is not seen as being managed according to the interest of its major shareholders. Indeed, the situation calls for a governance structure that is representative of its membership”. Yet governance reform is increasingly talked about as a two-stage process, under which ad hoc quota increases for a few members will be considered first, with proposals to redress the lack of democratic voice for smaller developing countries consigned to a second phase at an undecided later date.

With the IMFC pushing for a concrete proposal on the first phase by the annual meetings in Singapore, the only likely reform this year will be to increase the quotas of four to seven emerging economies. The beneficiaries with the most misaligned quotas are China, Korea, Turkey and Mexico, but expanded reform could also see increases for Singapore, Malaysia and Thailand. William Easterly, co-director of the Development Research Institute at New York University, said that the incremental governance reforms being considered would make no practical difference to the Fund. “I can’t imagine the leadership of the IMF really changing away from being America- and Euro- centred any time soon. It’s still the Americans and the Europeans who have the deepest pockets.”

The IMFC preference for ad hoc quota increases ignored the G24 proposals for fundamental reform of the quota formula to incorporate vulnerability to economic shocks and measures of economic size using purchasing power parity. There has also been no movement on the demand for increasing the number of basic votes that each member country receives in order to enhance the voice of low-income members.

Edwin Truman of the Institute for International Economics critiqued the whole approach, saying: “On governance, the managing director has been too timid in his proposal for a two-stage process of redistributing quota shares, and so far he has been silent on the issue of representation on the executive board. An open-ended commitment to do something undefined at a later stage will not restore the IMF’s legitimacy.” Truman has been one of the leading advocates for the consolidation of European seats on the boards of the Bank and Fund. “The European countries are unsustainably overrepresented on the board today, as well as in their voting power. In my view, the managing director should advocate as a first step the consolidation of EU representation into seven EU-majority seats in the next election of executive directors.”

Lack of transparency

The rationale behind the decision to ignore the demands for increased voice for the smallest members has remained unclear, as has been true of nearly every step of the strategic review. There has been little transparency in the strategic review process and even less opportunity for meaningful involvement of civil society. The Fund’s consultations on the strategic review were only to mail out a booklet to NGOs asking them to get back to them with comments on it. The Fund has not met with the call for the release of the working papers that fed into the managing director’s report on the strategic review. When CSOs in the United Kingdom officially complained about the withholding of the working papers to their executive director’s office, the indication was that the managing director himself steadfastly refused such requests for publication, which have come from many quarters including from some directors.

Management’s position towards involving stakeholders in policy formulation is clearly set out in the strategic review. The Fund’s policy stance is pre-supposed before communication with civil society and government is to take place, from which point “building consensus around Fund policy requires more active outreach.” The strategic review encourages country-specific communications strategies so that senior staff can get more favourable coverage in the media.