Memorandum by Bretton Woods Project
A CRISIS OF IDENTITY? CONFLICTING ROLES FOR
Two forces for change have converged on the
IMF in recent years. The first is in relation to the financial
crisis that swept across the globe in 1997 and 1998. In its aftermath,
G7 finance ministers, spurred on by private financial interests,
are pressing ahead to transform the IMF into a surveillance institution
to assist private investors with making better investment in "emerging
markets" and a quasi-lender of last resort to help manage
The second has arisen from the pressure for
debt cancellation to be linked to poverty reduction objectives
and the acceptance that structural adjustment policies have failed
to achieve lower levels of poverty. Thus the IMF has accepted
that poverty reduction should be an objective of its programmes,
suggesting the need to re-examine its macro-economic policy prescriptions
and operational procedures.
Whilst these forces are already making changes,
many critics are calling for the IMF to be structurally adjusted
to focus on a limited number of core functions. In response, IMF
Managing Director, Horst Koehler, has established a process to
examine how the IMF's conditionality can be streamlined.
Despite calls for a more streamlined IMF, there
appears to be little coherence and co-ordination between the forum
agendas. Rather than forcing its members to address this problem
the IMF is simply endeavouring to placate both forces by accepting
all roles assigned to it, whether it has that expertise to carry
them out effectively or not. The result is that the IMF is becoming
even more schizophrenic with conflicting priorities and inappropriate
mechanisms to deal with a wide variety of financial problems.
OBJECTIVE 1: FACILITATING
With aid levels declining and tax receipts and
savings in developing countries stagnating, foreign private investment
is regarded by the G7 and the IMF as the primary driving force
for growth. Thus, the G7 governments are pushing the IMF to focus
on enhancing the flow of information from governments to investors
and to assist countries to open their capital accounts and liberalise
their financial markets to facilitate private investment.
To this end, the IMF's traditional surveillance
function has been expanded. In addition to monitoring countries'
macro-economic policies, the IMF is now monitoring countries'
financial vulnerability and compliance with a host of international
codes and data standards (and may enforce them through its conditionality).
In addition it has been given the remit to advise countries on
financial sector reforms.
The problems are:
many of the standards, which have
been developed by the industrialised countries, are inappropriate
for developing countries given their many different stages of
development and differing priorities;
it is doubtful whether developing
countries have the capacity to implement many of the standards
nor whether it should be a priority to do so given the pressing
need to address poverty issues. The joint IMF and World Bank Financial
Stability Assessments have already proven to be very expensive
before the standards are even put in place; and
the IMF is in danger of becoming
an international rating agency, yet it is unlikely to perform
this function better than private agencies and it certainly shouldn't
be funded from the tax payers' money to do so.
Although the IMF's articles of agreement have
not changed it to give it an official mandate to facilitate Capital
Account liberalisation (CAL), the IMF is implicitly supported
by the G7 governments to "advise" countries how to do
so. For example, the Government's White Paper on globalisation
states that "The UK Government favours a more country-specific
approach to capital controls, and a gradual approach to the opening
up of capital accounts. An important part of this is to work with
countries and international institutions to design `road maps'
for the opening up of capital accounts".
Whilst CAL brings ample benefits to foreign
investors there is no evidence to show that poor people benefit.
Indeed, since there is a high risk crisis from which the poor
are often least able to recover, it is suspected that they will
be relatively worse off. The concern is that the G7's emphasis
on foreign private investment as the driving force for economic
growth will make the IMF single-minded in its pursuit of CAL even
if poverty objectives would suggest not to.
Q: What research is the IMF doing to understand
the impacts of Capital Account Liberalisation on poverty reduction?
Q: How will the road maps identified in the
Globalisation White Paper take into account poverty reduction
Q: How will the UK Government take forward
its "road map" approach with the IMF?
Q: Does the UK Government agree that the
IMF should be encouraged to give developing countries advice about
what sort of controls are more market friendly and how to implement
OBJECTIVE 2: CRISIS
Whilst developing countries are being forced
to make adjustments at the national level to address instability
in the global system, the IMF has not been equipped (nor has any
other institution) with the finance or debt workout tools to effectively
assist countries that are hit by crisis. Whilst the Contingency
Credit Line has been reformed to make it more attractive, it will
only be accessible to a few "emerging", middle-income
countries. There are no financing facilities from which the poorest
can borrow to avert a financial/currency crisis (most of the poorest
countries are unable to afford non-concessional loans, and those
with IMF programmes or debt reduction programmes are not allowed
to borrow from these sources).
Yet even if they are not systematically important,
relative to their size, some of the poorer countries are receiving
large inflows of private investment and have liberalised quite
considerably and more are looking to do so. As capital controls
have been removed so have mechanisms for monitoring flows and
many do not have capacity to regulate financial markets, making
them very susceptible to sudden reversals.
Q: What steps are being taken to provide
appropriate short-term, concessional resources for the poorest
countries faced with currency crises?
Since the IMF does not have sufficient resources
to act as an international lender of last resort, it has been
suggested that the private sector should contribute to rescue
packages. To date this has proved extremely difficult to achieve.
The IMF has advocated that countries should agree credit lines
with private banks in case of emergencies. However, the recent
case of Argentina demonstrates that this approach is not working.
Despite having negotiated credit lines with the private sector,
when it came to need them the banks were only willing to extend
finance at exorbitant cost to the Government. In other cases,
such as Jordan, the banks have been unwilling to extend further
finance. Insufficient resources for rescue packages means that
crisis countries must adjust very rapidly, which can cause severe
social and economic dislocation.
The problem is that there are no rules governing
the private sector's involvement, which means that the private
sector does not have to play ball. Clear rules for private sector
involvement should be developed with appropriate mechanisms for
enforcement, including a debt standstill procedure.
Q: What examples can the Executive Director
give of successful cases of private sector involvement in crisis
resolution in the past two years?
Q: What is the UK's position on debt standstills
to allow countries time to adjust more slowly to financial crises,
with less negative impacts and to spread the burden of adjustment
Q: What progress has been made in discussions
with the IMF Executive Board on the topic of debt standstills?
Q: What is the Executive Board's agenda and
timeline for taking this work forward and when will the staff
report on progress?
OBJECTIVE 3: POVERTY
At its annual meetings in September 1999 the
IMF announced that poverty reduction was to be a central objective
of its lending to the poorest countries. The new approach is to
be realised through the Poverty Reduction Strategy Paper (PRSP)
and the Poverty Reduction and Growth Facility (PRGF). Whilst many
welcome this new focus, so far there has been little evidence
to suggest that the IMF is making any significant changes in its
policy advice or operational procedures to accommodate this new
objective. Some NGOs are concerned that it has simply extended
the IMF's influence in national decision making by justifying
its involvement in micro-managing public spending and taxation
Other critics are arguing for the IMF to stop
all medium-term lending and are calling for the PRGF to be closed
or moved to the World Bank. Many sympathise with this stance,
although there is a good case for the IMF to continue providing
short-term finance for countries needing to stabilise. This suggests
that there is a need to identify those countries that have short-term
stabilisation problems and those that are effectively "post
stabilisation" but chronically poor with limited capacity.
In the latter, the IMF should continue to be responsible for giving
advice on macro-economic policies but not loans (the IMF's loans
are too short term and therefore too expensive to finance development).
Instead, the World Bank should be allowed to provide more budget
support lending, with the proviso that it applies appropriate
safeguard policies to these loans, for example, social and environmental
Given its new role, it is imperative that the
IMF re-examines its Financial Programming Model and policy advice
to ensure that it is poverty-focused. This is essential whether
it is advising countries in crisis needing to stabilise or those
that are "post stabilisation" and are focused on achieving
sustainable growth. In particular, the model needs to be unpacked
to understand the distributional implications of macro-economic
policy. It is not sufficient to simply tack some analysis of pro-poor
fiscal spending on the end of the model. Poverty reduction should
be central to it. This is imperative if, as the Globalisation
White Paper suggests, "the IMF [is] to take greater account
of the relationship between stabilisation, structural issues,
poverty and growth in programme design".
A more doubtful role is its "seal of approval"
function. The PRSP must be endorsed by the IMF before other donors
will provide resources to fund it, thus the IMF stands in the
gateway to all other finance. However, with the focus on poverty
reduction it is less obvious that the IMF should perform this
function. Some NGOs are critical that the IMF now has the potential
to reject or accept an entire national programme, not just the
macro-economic element, yet it does not have the expertise to
Q: What steps is the IMF taking to understand
the distributional consequences of its macro-economic policy advice?
Is it collaborating with the World Bank to do so?
Q: What steps is the IMF taking to establish
procedures with the World Bank to undertake ex-ante social and
environmental impact assessments of its policy prescriptions?
Q: Is the IMF taking any steps to reconsider
its lending policies to the poorest countries?
Q: What assessment has the IMF made whether
countries are pre- or post-stabilisation and what its policy advice
should be in each case?
The PRSP process not only requires the IMF to
address poverty issues in its policy advice, it signals a new
approach to developing programmes. Unfortunately, to date, the
IMF has not demonstrated that it is changing its operational procedures
to reflect this change.
Criticisms are that:
the IMF has demonstrated little flexibility
in its policy advice which limits the opportunity for ownership.
Whilst there has been some shift in its willingness to consider
grants in the budgetary process, the IMF has not demonstrated
flexibility in other areas of macro-economic policy;
the IMF's programmes still assume
a three-year cycle, which is inappropriate. Programmes need to
take a longer perspective and should work within each country's
the timing of staff missions still
reflects the IMF's timetable and not that of individual countries.
Thus country processes must still bend to accommodate the IMF;
IMF staff have not sufficiently supported
participatory processes, for example, documents are often not
made available in time and insufficient notice is given for meetings.
Many NGOs are calling for the IMF to encourage
a more participatory approach to macro-economic policy setting
by providing alternative menus for macro-economic policies which
would allow greater public (including parliamentary) debate.
Many are also concerned that proper guidelines
should be developed for staff and the public to enable effective
participation. These should make clear what the public can expect
to receive for the IMF and by when and how it will input into
the process. For example, there should be clear guidelines indicating
by when documents should be made available, what minimum time
is needed to inform people of meetings and IMF visits, what the
purpose of meetings is etc.
Q: Will the IMF develop official guidelines
which set out clearly what the IMF's role is in a participatory
process and what actions staff are expected to take to facilitate
a national level participatory process?
Q: What examples can the Executive Director
give, in addition to more flexible budgetary processes, to demonstrate
that the IMF is becoming more flexible and poverty reduction focussed
in its macro-economic policy advice?
Q: What steps are being taken to reorganise
the IMF's operational procedures to allow more flexibility to
respond to countries' timetables?