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Solving the International Monetary Funds' (IMF's) Crisis

Date
Time (GMT +01) 12:00 13:30

Speakers:

Ariel Buira, Director, G24 Secretariat

Prof. David Vines, Dept of Economics, Balliol College, University of Oxford

David Woodward, Head of New Global Economy Programme, new economics foundation (nef)

Chair:

Dr Lauren Phillips, Research Fellow, ODI

Mr Buira spoke in a personal capacity. He began by explaining that the current legitimacy crisis stems from the fact that governance arrangements have not kept pace with changes in the world economy since the Bretton Woods Institutions (BWI) were founded.

He outlined the evolution of the IMF. It was originally a 'credit cooperative' where all members both contributed and borrowed. Conditions were not imposed. Nowadays, the situation is different. Industrialised countries have not borrowed from the Fund for the last 30 years and therefore not all countries are on equal terms. Conditions are imposed by creditor countries. Resources have dwindled and this is leading to IMF programmes failing because funds are too limited and conditions are too tight. The Fund's position as a multilateral institution is threatened because Asia turned away after the 1990s crisis and Latin America may do the same.

He summarised the Fund's purposes as follows:
o To facilitate the expansion and balanced growth of international trade, and to contribute to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy;
o To give confidence to members by making the general resources of the Fund temporarily available to them … thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national and international prosperity;
o When the Fund unduly emphasizes the reduction of aggregate demand and acts pro-cyclically, it pursues "beggar thyself policies".

He showed that the IMF's resources declined as industrialised countries ceased borrowing from the Fund and contributed less. Nevertheless, resources are not fully utilised: $140bn remains unused. He explained the IMF retains funds so that member countries do not have to raise their contributions. This has led to a situation in which programmes are structured around available resources creating very tough programmes.

He went on to show that the number of structural conditions per programme year increased from 7 to 19 between 1994 and 2004. He argued that there were too many conditions and that the number of conditions increased and resources dwindled. Furthermore, he argued that this has led to a breakdown in the success of IMF programmes, with the number of successful programmes (defined as those where funds were fully disbursed) have fallen from 45% of programmes in the mid 1970s to 16% of programmes in the 1990s.

He concluded by posing these questions:
- Are ownership and democracy compatible with externally imposed conditionality?
- Are transparency and accountability compatible with conditionality?
- When conditionality is coercive, to what extent can governments be held accountable for the effects of policies?
- Who are governments accountable to, their electorate or a G7 controlled IFI?
- If a program fails due to insufficient financing who is accountable?
- If IFIs are not accountable for programme results, to what extent is this power without responsibility?

David Woodward

Mr Woodward began by saying that the IMF should be trying to work itself out of a job. He argued that its financial problems are sign of failure, not success. The Fund is in crisis because middle income countries are, or are becoming, unwilling to borrow from it. This is due to inappropriate and ineffective responses to the East Asian crisis in the 1990s and the 2001-2002 problems in Argentina. At the same time, he pointed out that the debt crisis of the low income countries remains unresolved.

The IMF's has failed to deal effectively with either middle or low income country problems. The Fund is in short of clients (middle income countries are unwilling to put themselves in a position where they might need to borrow and low income countries cannot afford to), which leaves it short of resources. Both failures to attract clients are linked to governance of the IMF.

Woodward outlined that IMF decision making is heavily dominated by developed country governments who have more than 60% of the votes. This has allowed them to use the Fund as an instrument of their own ideological outlook and led to a crisis of legitimacy.

He posed the question: what should the international financial system look like today? He pointed out how much the world has changed since the BW institutions were founded. He argued that the Fund should not be permitted to gain the function of debt arbitrator because there are conflicts of interest and that there should be a neutral arbitration process. He further argued that the IMF should abandon economic policy conditionality as these have proven ineffective in reducing poverty.

He showed the limits of the IMF: it can act as one (of several) funders during liquidity crises (caused by the private sector) but it has a limited role in solvency crises (in the public sector) as lending money is not an adequate solution in this case.

He argued that the IMF should act to prevent crises (such as those that occurred in the 1980s and 1990s. For this, an even-handed and democratic approach is needed and he proposed that the IMF look at the principles of democracy at the national level and use these as a model. He called for improved transparency and accountability and questioned the veto system.

He concluded that the IMF has expanded beyond its competence; the governance systems have allowed developed countries to abuse it; institutional inertia has blocked transformation in response to world changes; the Fund needs a new decision making process if it is to transform itself; and that it is time for a new Bretton Woods process in line with the democratic norms of the 21st century.


Prof David Vines

Prof Vines began by stating his aim was to give concrete suggestions to improve the IMF. He argued that "the two most important reforms of Fund policies relate to improving the global coordination of macroeconomic policy, and improving the Fund's management of financial crises." In his presentation, he argued that the IMF should learn from how independent central banks function. He outlined three important factors: trust, accountability and enforcement that is embedded within trustworthy politics.

Prof Vines summarised an idea (based on work by Peter Kenen) for the structure of the IMF which consisted of a Managing Board or around 16 eminent people and a Council made up of Ministers of Finance.

On combating macroeconomic global imbalances, Vines argued that adjustment is currently required by the US and East Asia. Achieving 'orderly adjustment' is a challenge of cooperation and coordination and, therefore, one of governance. He criticised the current system as "allow[ing] countries to practice self-regarding policies in adjusting at different speeds, which will cause disorderly adjustment.

On financial crises, Vines explained that the East Asia crisis of the 1990s and the 2001-2002 Argentine crisis exposed intrinsic problems in the IMF's crisis management systems. The size of IMF loan packages grew too large, creating moral hazard and unsustainable levels of lending; throughout Asia monetary and fiscal policies were too contractionary; and the Fund was unable to impose 'standstills'. Vines argued that the Fund should act as an agency of restraint to curtail over sized loan packages. In response to a question from the floor, Vines stated that in his view conditions should be imposed as part of this mechanism. He argued that the existence of too many wrong conditions does not lead to the conclusion that there should be no conditions.

He concluded by returning to Keynes original vision for the IMF as an international agency to coordinate macroeconomic policies and to ensure that policies towards international financial crises were well managed. He warned that if the challenges are not met the Fund will be left with limited resources and a mandate which extends only to Sub-Saharan Africa.

Discussion

The following points were covered:
- Democratic vs. technocratic solutions: The possibility of developing countries using the Fund for technical analysis rather than borrowing. The IMF has a comparative advantage over the bilateral donors in terms of macroeconomic analysis. The fund could function as providers of as technical assistance, de-linked from conditionality.

- On the idea that the IMF worked better (but not perfectly) before 1976, when all members both borrowed and contributed. The point was raised that this leads to the conclusion that only countries with a dual interest in borrow and contributing should be part of the Fund and this is unworkable.

- Apply modern management theory to the IMF. Voting shares should be related to a measurement size of economy which takes purchasing power parity into consideration. Ranking should be kept up to date as economic circumstances evolve.

- The situation in Rwanda where there are too many different conditions imposed by a variety of multilateral and bilateral donors. These are sometimes contradictory and show the lack of coordination between the IMF, World Bank and bilateral donors.

- The demand for fiscal and monetary policy advice. The IMF already has the capacity to do this.

Closing Remarks

Mr Buira remarked that we do not know what the best solutions and conditions are for achieving development. We simply have had set of ideas based around one particular ideology. China, for example, is not following the Washington Consensus, yet it is prospering economically. Latin America followed the Washington Consensus and grew less than East Asia. He identified that ownership is key and that it does not exist when conditions come from above. He concluded by pointing out that the Fund can only put pressure on those who borrow from it - another mechanism is needed to provide a forum for discussion on world macroeconomic issues.

Mr Woodward reiterated that a solution cannot be found in an apolitical, technocratic approach. He stressed the need for a democratic solution and invited the audience to think about what is meant by 'democracy'.

Prof Vines concluded that it is his aim to find a technical solution and repeated that modern management principles should be applied to the IMF. He stressed it wasn't just the programmes that were at fault in countries where they did not do well.

Description

This meeting examined the role of the Fund in managing today’s global economy which faces shocks, imbalances and increased capital and aid flows. It also asked how the Fund should be governed given this volatile and rapidly changing economic environment.