WDEV special: Subscribe now and get 4 weeks free >>> here
deutschsprachige Version

Our new website address:  
www.wdev.eu  

Home Mission Statement Subscriptions Sample Copies Services Blogs Background Links Archives

Volume 2015
Volume 2014
Volume 2013
Volume 2012
Volume 2011
Volume 2010
Volume 2009
Volume 2008
Volume 2007
Volume 2006
In-depth:
Special Reports
LOGIN
For subscribers only
Show memo
Show shopping cart
Proceed to check-out
Your account
Europe Global Environment & Development The New South From G8 to G20 The Development Agenda UN Reform Global Finance Doha Final The Euro-zone in Crisis Eastern Europe


How to Reform the IMF? How Much Weight for Europe?

The current debate about the future of the International Monetary Fund, such as just recently at the spring meetings of IMF and World Bank in Washington, is a historic opportunity for reform. Only those who benefit from the fund’s role as a debt collection agency and an instrument of disciplinary neo-liberalism might regret its current loss of importance, comments Rainer Falk.

 

The governor of the Bank of England, Mervyn King, warns that the IMF “could slip into obscurity”; the Fund’s Managing Director, Rodrigo Rato, calls for more voting rights for the Fund’s Asian members, for a strengthening of the IMF’s global ("multilateral") surveillance role and for a rethinking of its relations to the poorest countries of the world; important large-debtor countries such as Brazil and Argentina carry out an early repayment of outstanding obligations; due to the relative stability of the financial markets the Fund is losing some of its traditional functions and now, for the first time since the early 1970s, the declining interest income means that the Fund is once again faced with the prospect of deficits – these are good news for those who have been advocating a fundamental reform of the IMF for years. Only one argument could be put forward: they are not far-reaching enough.

* Half-hearted and born out of necessity
Indeed, the proposals in the Report on the Implementation of the Medium-Term Strategy are either half-hearted or born out of necessity or both. A more global orientation of the IMF’s macro-economic surveillance would surely be desirable. Yet the decisive questions are: will the IMF’s prevailing, asymmetric focus on control of developing countries be balanced to also include the Fund’s large shareholders? And will the Fund’s attention to global economic developments primarily focus on the systemic causes of crises or on how countries can best adapt themselves to the (in the eyes of the IMF sacrosanct) conditions of the international financial markets.

The current move to reform comes against the background of US politicians’ lament about the American double deficit and the alleged Chinese responsibility for it. This suggests that the goal is to find ways to more effectively co-opt emerging economies into the existing model rather than to overhaul the model itself and give it a more democratic structure. At least there is now a consensus that the new, powerful Southern economies have to be given a stronger voice. According to the Communiqué of the International Monetary and Financial Committee, the Managing Director should come forward with concrete proposals for an ad hoc increase in quotas at the annual meetings in Singapore this fall.

The upcoming quota reform is about much more than just a few more voting rights or a new executive director for China and India. The entire system of representation within the IMF, from the representation in the decision-making bodies to the allocation of basic voting rights no longer reflects the world-wide division of economic power – if one is prepared to accept at all that the world-wide division of economic power is a just criteria for the distribution of power within the Fund.

* Europe’s pathetic role
The Europeans, once again, play a truly pathetic role in this debate. The EU countries have a quota in the IMF of 32.2% and they hold 31.5% of voting rights, although their share of global GDP (measured in purchasing power parity) only totals 21%. The Europeans are also clearly over-represented when it comes to the executive directors. Prior to the spring meetings the European Parliament issued a very promising report (>>> European Parliament resolution on the strategic review of the IMF), whose decisive points, however, were watered down in the subsequent deliberations.

While rational considerations make it seem only logical that the Europeans should speak with one voice in the IMF (thereby increasing their political weight even if they forgo a certain percentage of votes and executive directorships), it is above all the large EU member states that block. This is true, not least of all, for Germany, which, with a quota of 6%, has an even stronger representation than either Great Britain or France. And the German Ministry of Finance, whose initiatives within the IMF are almost non-existent, does everything it can to make sure it stays that way.

In the run-up to the spring meetings, the European Central Bank (ECB), which has continually been criticised by the IMF (and in this case rightly so) because of its interest rate policies, stepped forward with the demand for better representation within the IMF. Strangely the speaker of the Euro zone, the Luxembourg Prime Minister Jean-Claude Juncker, supported the ECB’s position. Nonetheless, European finance ministers should be weary of turning their disaccord into a rather doubtful virtue by giving the ECB the job of representing Europe in the IMF. It would simply be one more step toward giving economic and political sovereignty to an institution whose democratic legitimacy is at least as questionable as that of the IMF.

* Back to the drawing board
The third point that is currently being discussed under the heading of IMF reform, after surveillance and the question of voting rights, is the future role of the IMF in the poorest countries. This is also the most ambiguous point. The Rato report is very vague when it talks about the activities of the IMF becoming more “effective”, including the role of the Fund in the realisation of the Millennium Development Goals (MDGs). For a long time already there have been clear demands, raised by a wide range of institutions and people - that the Fund should completely withdraw from development funding, an area where it lacks both the expertise and the mandate.

And indeed, ever since the end of the Bretton Woods system there is hardly an area in which the IMF’ performance has not been either poor and devastating: financial crises, just as likely to happen in the future as they did in the past, have always surprised the IMF; the IMF is no longer involved in monetary policy (if you ignore the IMF’s about face when consulting various countries – such as Argentina – about their monetary policy). The standard pro-cyclical recipes applied in the poorest countries have worsened crises more than alleviating them; and everywhere the conditions set by the IMF have gone hand in hand with impoverishment and pauperisation.

All of that is not to say that there is no future role for the Fund. But if the role is to be meaningful, then now is the time to go back to the drawing board and redefine its duties, responsibilities and functions, as former chief economist of the UN Conference on Trade and Development (UNCTAD), Yilmaz Akyüz, recently delineated in a paper (>>> Reforming the IMF: Back to the Drawing Board). I myself wrote a paper more than 5 years ago – when another window of opportunity for IMF reform had opened (>>> The Reform of the International Monetary Fund) – arguing that any blueprint for reform must fulfil four criteria:

+ firstly, the Fund must give up its role as an instrument of societal and political disciplinary neo-liberalism,
+ secondly, the Fund’s functions in global economic co-ordination, steering and regulation must be maximised,
+ thirdly, the financing functions of the Fund must be redefined from the scratch and
+ fourthly, the Fund’s governance structures have to be radically democratised.

The current reform debate comes nowhere near such benchmarks. However, there are indications that the window of opportunity will not close as quickly as it did at the beginning of the decade.

Rainer Falk is the publisher of World Economy & Development.

The article has been published in World Economy & Development In Brief, 1/Apr-May 2006.

Recommended citation: Falk, Rainer (2006) ‘The European View: How to Reform the IMF? How Much Weight for Europe’, World Economy & Development In Brief, 1/Apr-May (www.world-economy-and-development.org)




Frontal Attack on the UN: Reform at the Crossroads / EU Council Meeting: More, and More Effective Aid

print

Top of page

Imprint General Terms and Conditions RSS Feeds Site Map