September 14, 2000
In view of the annual meetings of the IMF and the World Bank in Prague on September 26 to 28, the Bundesbank is publishing an article entitled "The role of the International Monetary Fund in a changed global economic setting" in the September issue of its Monthly Report. The article is now available on the Bundesbank's Web site.
The article states that profound changes in the global economy have brought considerable adjustment pressures to bear on the IMF and the World Bank. These institutions must respond by carrying out appropriate reforms. In doing so, the IMF as a monetary institution should continue to promote an open and stable international monetary and financial system and also provide catalytic liquidity assistance for this purpose. The World Bank, by contrast, should support less developed member countries by funding development projects.
The Bundesbank finds that the level of the IMF's actual lending to its member countries has been distinctly higher since the mid-seventies than it had been before. In addition, the dramatic expansion of international capital flows in the nineties, the increasing propensity of many market participants to incur risks and the misguided economic policies adopted by some countries eventually led to serious financial crises. The IMF's financing activities have therefore assumed new dimensions.
The Bundesbank views the IMF's evident break with the principle of catalytic financing as problematic. Large IMF loans have tended to compensate for crisis-induced private capital outflows in the past few years, and this has resulted de facto in a bail-out of the private sector. This strategy is highly questionable from a stability-oriented and regulatory point of view. The market economy principle, namely that investors should not only take the opportunity to make a profit but also run the risk of suffering losses, is being undermined, incentive patterns are being distorted by encouraging a more risky behaviour, and future financial crises are becoming more likely. According to the Bundesbank, the IMF should not and cannot act as a lender of last resort. Large-scale financing packages lead to a sub-optimal allocation of resources and often serve to finance unsustainable exchange rate levels. In addition, they bring about unbearable financial burdens.
The Bundesbank believes that the catalytic role of IMF loans should be emphasised again more strongly in the future. To this end, it seems absolutely essential to set regular access limits on IMF resources. This would inevitably lead to the financial involvement of the private sector in the resolution of financial crises. The planned revision of the facilities must also be geared to that objective. Nevertheless, it is essential that crisis prevention is primarily the responsibility of the individual countries, with each country being obliged to make that contribution. As a matter of fact, crises very often stem from deficiencies in economic policies.
Furthermore, the IMF has recently concentrated more and more on fighting poverty and has also granted development loans, while the World Bank has engaged in activities which rather come into the domain of the IMF. The World Bank has made large-scale loans and liquidity assistance available for the purpose of solving crises. The question is whether such measures actually help achieve the original intention to grant development assistance or whether they tend to thwart it. On the other hand, poverty alleviation and development funding can no more be the primary tasks of the IMF than they are of the national central banks. The objective in itself is unquestionable, and that is exactly why it calls for an effective division of labour between the IMF and the World Bank. The best contribution the IMF can make to fighting poverty is to ensure monetary stability in the poorest countries, above all, thus providing an essential precondition for economic growth.
The Bundesbank believes it is crucial that the IMF and the World Bank continue to have elementary tasks in a world economy that is being increasingly shaped by market economy principles. Open markets and stability in the international financial system are important public goods. It is therefore essential to remember the basic principles of the original mandates, which define the IMF as a monetary institution and the World Bank as a development organisation.
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