Global Policy Forum

By Mark Egan

Britain called for reform of the International Monetary Fund to make it less political on_Thursday and criticized the lender for not doing enough to head off recent economic crises in Argentina and Turkey. Ed Balls, chief economic advisor to the U.K. Treasury, used a speech to the Institute for International Economics in Washington to outline a vision of an IMF that would be less constrained by political considerations and more forthright in its censure of countries' economic policies. He urged the lender to undertake extensive internal reform to ensure it is as independent as it demands its members' central banks to be.

Were the IMF board less political, Balls said, the IMF would be able to do its job better. The British plan would see the fund more clearly divide its two main functions -- doling out loans and monitoring developments in members' economies. That, Balls said, would let the IMF be more blunt in its economic observations and give it greater scope to blow the whistle on nations with worrying economic policies. The separation would be akin to the so-called Chinese walls between investment and commercial banking in Wall Street firms. "The experience of Argentina ... clearly demonstrates the case for a further strengthening of IMF surveillance," he said. "We need to examine the effectiveness of fund surveillance and ask whether, in hindsight, it should have taken a firmer position on policies critical to sustainability."

MELTDOWN AND COLLAPSE

Argentina's economy suffered a catastrophic meltdown in late 2001 and early 2002 after its decade-long currency regime, which tied the peso one-to-one to the U.S. dollar, collapsed. The IMF has been criticized for not urging a quicker abandonment of the currency peg and for not taking issue with Argentina in the late 1990s, when it was enjoying an economic boom but borrowing heavily instead of cutting its debts. Since the peg collapse, the peso has fallen about 70 percent, sparking a vicious economic crisis that has left countless Argentines in poverty and which occurred despite a decade of almost continuous IMF lending. Before the collapse, the fund celebrated Argentina as a poster child of IMF reform. "Had surveillance reports more effectively highlighted Argentina's problems at an earlier stage, the decisions that the Argentine authorities would have faced would not have been any easier," he said. "But by forcing the Argentine government and the IMF to face up to them earlier, it might have prevented a crisis on the scale that subsequently emerged."

The IMF publishes reports and annual reviews on its members' economies that are meant to be objective. But in practice, the process is highly politicized. Such reports can only be published with a given government's consent and publication often only takes place after changes have been made to tone down the IMF's views. IMF Managing Director Horst Koehler has put better surveillance and averting economic crises atop his priority list and has himself voiced a desire to make his institution less politically driven.

Balls took issue with the IMF's handling of Turkey, which saw its currency regime collapse in February 2001 after a banking crisis. The British official noted that the IMF had actually uncovered weakness in the financial sector before the crisis but had failed to take decisive action. "Surveillance did actually identify some risks in the financial sector," Balls said of the IMF's work in Turkey. "But the link with the proposed exchange-rate regime was not adequately made -- despite the recent experience of bank losses under a fixed-exchange rate regime in the Asia crisis, and despite a World Bank team being in the country to do work on reform of the financial sector."

The speech highlights the issues Britain is likely to press at the upcoming IMF spring meeting in Washington in April. Balls is a key advisor to U.K. Chancellor Gordon Brown, who is also chairman of the International Monetary and Financial Committee -- the committee that sets the IMF reform agenda.

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