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FINANCE: IMF Reform Divides Players

Emad Mekay

WASHINGTON, Apr 21 2006 (IPS) - Rich nations, poor nations, multinational corporations, International Monetary Fund officials, and civil society groups critical of the multilateral finance institution – all often at odds with each other – finally agree on one issue: the Washington-based IMF needs urgent changes if it is to stay alive.

But differences arise among those five groups when the question is asked, “Change the IMF to what?” The answer splits them into two teams.

In the first camp are the IMF technocrats, the business community and governments of industrialised countries that want to restore the IMF to its glory days when it was seen as one of the most effective tools for opening markets and liberalising economies in developing nations for Western corporations.

On the other stand civil society groups and anti-poverty campaigners, along with some of the few democratic governments in poor nations who demand an IMF that is more representative, less intrusive and one that would ideally serve the interests of all nations equally.

The IMF, an institution set up by the victorious Western powers after World War II, and which until recently dispersed orders and conditions to borrowing nations, has recently come under widespread criticism and accusations of ineffectiveness that threaten its future.

Developing nations are taking increasing responsibility for policy formulation at home, while shunning conditions-laden IMF loans. As many as 10 countries have paid off IMF loans either on time or before schedule to shed the institution’s unwelcome influence and notoriously stringent conditions.

And after it became clear that lending by the IMF has diminished, the first camp, the original beneficiary of a powerful IMF, had to accept the idea of change and reform.

The United States, which is on the first team, has floated ideas to keep the IMF alive saying it should now sharpen its focus on monitoring global exchange rates.

“The most basic purpose of the IMF is to monitor the international system of exchange rates,” said the U.S. Treasury’s Under Secretary for International Affairs Timothy D. Adams on the eve of the two-day joint meetings of the IMF and the World Bank set to begin here on Saturday.

On his side, too, are private financial institutions that want continued access to developing countries’ markets. Earlier this week the Institute of International Finance (IIF), which represents dozens of mostly Western banks and private lenders including Citigroup, Visa and Morgan Stanley, unveiled an eight-point plan to restore the IMF’s role.

These private capital companies say that the fact that IMF loans declined significantly reflects some diminution of its influence on policies in developing markets. Now investors look less often for the IMF’s “stamp of approval” before placing their money at risk.

“Notwithstanding the Fund’s long-standing emphasis on surveillance and the value of its advice in many cases, doubts about the overall effectiveness of its surveillance today have led to a search for new means of reinvigorating this crucial function,” said IIF’s managing director Charles H. Dallara.

“IMF management and shareholders should put multilateral surveillance front and centre,” he added.

The IMF technocrats, who do not want to see the Fund’s death certificate written during their tenure, agree.

IMF managing director Rodrigo de Rato has proposed a number of changes in his “medium-term strategy” for the IMF that includes greater surveillance and monitoring.

Another main proposal, backed by the United States, the main shareholder, would revamp quota formulas to make gross domestic product a basis for quotas paid to the IMF, which could lead to greater representation at the Fund.

But while civil society groups and developing nations, the second camp, support changes towards greater representation, they say that details of the plan are vague and are worried that changes will go to the more powerful developing nations, leaving out the poorest.

During their press conference on Friday, finance and economy ministers from the Group of 24 (G24) developing countries, which operates as an association of minority shareholders in the IMF and World Bank, decried the lack of a timeline to implement the proposals for IMF reform.

The group’s member countries “continue to express strong preference for a comprehensive package that would deal with all the major issues simultaneously within a firm deadline,” says a G24 communiqué.

The sceptical development groups and anti-poverty campaigners, whose long experience monitoring the IMF convinced them that the Fund and World Bank often fire blanks when it comes to dealing fairly with poor nations, have more profound concerns.

They point to the IMF’s record in the developing world, especially Africa, which saw IMF-imposed austerity measures dismantle social services and push down the standard of living, while forcing governments to sell their public assets either to local elites or to foreign companies.

“The history of the IMF in the past quarter-century is a perfect case study in the dangers of giving one institution too much power,” said Shalmali Guttal, programme coordinator for the Bangkok-based development group Focus on the Global South.

“Any reform of the IMF must focus not on redesigning or enhancing its powers but on dramatically reducing them. If this institution is to continue, its role and function has to be completely rethought. Only by respecting the right of peoples to control their own economic policy can it have any relevance in the 21st century,” she added.