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     Dec 13, 2006
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Fixing the IMF identity crisis
By Daniel D Bradlow

(Posted with permission from Foreign Policy in Focus)

The evidence that its member states are seeking to escape from the International Monetary Fund's "jurisdiction" continues to mount. Uruguay, the IMF's third-largest borrower, became the latest country to announce that it was pre-paying its outstanding obligations to the fund, and the IMF was forced to downgrade the multilateral consultations on global economic imbalances that it had proudly unveiled in April because leading economic powers

have proved reluctant to engage fully in these consultations.

The IMF has made some efforts to deal with the challenges it faces. In September, its members approved marginal increases in the voting power of China, South Korea, Mexico and Turkey and agreed to consider more general revisions to the formula for calculating each member state's quota and a doubling of its basic votes.

These changes still leave the IMF's decision-making concentrated in the hands of the world's richest nations, and since the increase in basic votes requires an amendment to the IMF Articles of Agreement, it is not clear when this may occur. Even if they are fully implemented, these modest reforms will fail to resolve the IMF's legitimacy and relevancy crisis because they do not effectively address the underlying cause of its problems: the IMF's failure to adapt its governance structures to its evolution from a specialized monetary organization into a macroeconomically oriented development-financing institution.

To understand the IMF's problem it is necessary to look at its original governance arrangements and the distortions that have arisen from its failure to adapt these to its changing functions.

When the IMF was established in 1944, its member states agreed to surrender some of their monetary sovereignty in exchange for the benefits of a rules-based monetary system in which all states committed to maintain a fixed value for their currencies, and in which the IMF acted as both the overseer and the financier to members in need. In all its operations, the IMF staff, operating under the firm oversight of its board of executive directors, focused only on those macroeconomic and monetary variables that affected the state's obligation to maintain its currency's par value, leaving the member states free to choose policies needed to reach the agreed macroeconomic and monetary goals.

The IMF's governance structure, despite being based on a system of weighted votes, had a built-in check on the influence of its most powerful member states. They understood that, since they would use (and in fact did use) the IMF's services, its policies could directly affect their own citizens and they could be held accountable by them for these policies.

When this system collapsed in the 1970s, the IMF amended its Articles of Agreement to allow each member state to determine its own exchange-rate policy. This had two important operational consequences. First, it created a de facto distinction between those rich IMF member states, such as the United States, Germany and Japan, which had access to alternative sources of funds and so did not need to use the IMF's services ("IMF supplier states") and those developing-country member states that did need to use its services, such as Argentina, Ghana and Indonesia ("IMF consumer states").

Second, at least in the case of IMF consumer states, the range of the fund's interests expanded, over time, beyond macroeconomic and monetary issues to include any issue, regardless of how intrusive, into the affairs of its member states that could affect the balance of payments and the monetary situation of its member states.

The IMF's failure to adapt its original governance arrangements to its changed operations has resulted in the following problems.

IMF-supplier-state relations. The supplier states, because of their wealth and power, are both independent from the IMF and have the votes and board representation to control its decision-making. This means they can make decisions for the IMF that will never affect their citizens. This situation of decision-makers having power without accountability to those most affected by their decisions is ripe with potential for abuse.

IMF-consumer-state relations. Although there is great variation in conditions among the consumer states, the underlying causes of their macroeconomic challenges lie in the governance of their societies. The IMF has attempted to deal with this reality by increasing the range of non-macroeconomic issues it addresses in its operations in these countries, thereby becoming an important actor in their policymaking processes. Although this narrows their policy space, consumer member states cannot effectively challenge the IMF because they are dependent on its financing or its approval for access to financing, and cannot easily influence its decision-making.

IMF-non-state-actor relations. The creators of the IMF believed that it was not necessary for the fund to have any direct interaction with non-state actors, such as labor unions, human-rights organizations or community associations. Given its important role in domestic policymaking, this position is no longer valid. There is no obvious reason that the IMF, when it "descends"

Continued 1 2 

A (slightly) more equitable IMF (Sep 20, '06)



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