Recent developments on IMF reform

Opinions on reform of the International Monetary Fund (IMF) are widely diverse, ranging from
those who want the Fund to return to its origins to those who wish the Fund to disappear. Serious
doubts exist about the efficacy of IMF programs. Its initial functions included financial, monetary and
exchange rate policies. Over time it adopted roles involving debt cancellation, good governance and
technical assistance, and moved from mainly a monetary institution to one with developmental objectives.
The following article was written by Jose Henriquez, an intern with the Maryknoll Office for Global Concerns.

It is commonly acknowledged that IMF lost credibility during the Asian financial crisis in 1997
and has not fully recovered. After the crisis, many Asian countries (including China and India) stopped
asking for loans from the Fund, and other countries, such Argentina, Brazil and Indonesia (three main
debtors to the Fund), decided to pay off their debts before their due dates in order to free themselves
from what they believed were policies that fomented poverty. These decisions fed a major crisis, since
during the past 20 years the IMF’s budget relied on debt payments from so-called developing countries
and not from rich countries that prefer money from capital markets. Debt payments and interests might
drop from US$3.19 billion in 2005 to US$1.39 billion in 2006, down to US$635 million by 2009.

Some critics believe the IMF is having an identity crisis and showing itself incapable of adjusting to
the new global economy. In 2004, the IMF’s 60th anniversary, directors agreed to reflect on the future
direction of the Fund; the managing director’s report on the Fund’s medium-term strategy in 2005 brought
together many elements of those discussions. The report underlined how the IMF needs to adapt to
globalization processes qualitatively and quantitatively different to ones in the past and set some
priorities; however, according to the Bretton Woods Project, it is “short on specific proposals for reform
implementation and lacked commitments for improved democratic functioning or strengthened surveillance
of large industrial countries.”

Last April, the International Monetary and Financial Committee of the Board of Governors of
the IMF asked for concrete proposals to be presented at the IMF and World Bank’s annual meeting, to be held this October, on ad hoc quota increases to reflect important changes in the weight and role of countries in the world economy. But no major or structural changes are expected. Despite claiming governance as one of its priorities, the IMF is not
considering a new voting system nor improved representation on the executive board to enhance the voice of low-income members.

Ironically, the director’s report states that in recent years important events occurred and challenged
membership of the Fund; these events “ha[ve] raised deep concerns over fair quotas and voice, straining the legitimacy of the institution.” Participation and democratization are very critical issues because they are closely related to power, yet, at the end, no matter the arguments, the U.S. still holds 17.5 percent of the votes and the combined European Union members 32 percent. And those who hold the power dictate the rules.

Accountability, transparency and the abolition of strict conditionality are often demanded as elements of the Fund’s reform and are part of stretch and shrink negotiations with nongovernmental organizations (NGOs), but it seems the IMF is avoiding a real dialogue. Sometimes the official discourse seems to change, yet real policies do not.

NGOs are not alone asking for reform. In 2000, a Congressional International Financial Institution
Advisory Commission voted unanimously that the IMF “should restrict its lending to the provision of short-term liquidity. The current practice of extending long-term loans for poverty reduction and other purposes should end.” Earlier this year, the G24, an alliance of developing countries, released its spring communiqué urging 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.”

Also important to consider but not sufficiently explored within the IMF reform agenda is its relationship
with other international institutions, especially with the specialized agencies of the UN of which it is part. It will be important to envision how a reformed IMF should fit within the current United Nations’ system reform process.

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