Global Policy Forum

By John W. Sewell, Nancy Birdsall, and Kevin Morrison

This Viewpoint reflects the findings of a specially convened Task Force of experts assembled by ODC to discuss the future role of the IMF in development. The Task Force's report was released April 12, 2000.

Horst Kí¶hler faces immense challenges as the new Managing Director of the International Monetary Fund (IMF). But no challenge is more crucial than making sure the IMF plays the right role in developing countries. Too often, it is not playing that role now.

The IMF's activities in the developing world have grown radically. Today, much of its work goes beyond macroeconomic issues and crisis prevention and management, into deeper structural issues. And as a major provider of long-term development finance, it is significantly involved in efforts to reduce poverty.

But the IMF lacks expertise in the wide-ranging policy and institutional complexities of development and poverty reduction. Its expertise lies in macroeconomic policy and restoring stability amid financial crises.

Macroeconomics is the same for poor and rich countries alike, as IMF First Deputy Managing Director Stanley Fischer has said. But much of what the IMF is involved in now is not macroeconomics. The Fund should focus on: short-term liquidity lending to all countries hit by macroeconomic crises; advising through policy dialogue; and collecting, assessing, and distributing information on countries with regard to macroeconomic policy and financial markets. While poor countries need access to the Fund's short-term lending and macroeconomic advice, the IMF should leave long-term development lending to the World Bank and to other lenders and donors expert in poverty reduction.

The IMF in the Poorest Countries

The Fund's vehicle for long-term lending to poor countries is its Poverty Reduction and Growth Facility (PRGF), formerly the Enhanced Structural Adjustment Facility. As its name implies, the facility's new goal is poverty reduction. For two reasons, the Fund is not the right institution to manage this facility.

First, while the IMF is uniquely qualified in macroeconomic analysis, it has not specialized in poverty reduction. Fifty years of work on development cooperation teach one thing above all: that reducing poverty is an enormously complex process requiring a different mix of policies and institutions for each country. The IMF has expertise on an important set of these policies—the macroeconomic ones—but many other factors of poverty reduction and growth (such as health, education, and institutional development) are outside its experience and realm of knowledge.

Second, the IMF's use of conditionality in its programs is far more effective in short-term stabilization situations than in longer-term interactions with countries. In crises, there are steps countries can take quickly to restore stability. Though often politically difficult, the required steps can be implemented and monitored over a relatively short period of time. However, the structural reform required for long-term growth and poverty reduction is a different story. It takes time—and mediation through political institutions—to ensure the country "ownership" that ultimately determines whether or not reforms are sustained.

Because poor countries continue to need the financing provided by the PRGF, the facility should be moved to the World Bank—the international financial institution with expertise in development. The Fund should continue to play the lead role in analyzing the macroeconomic components of these programs, while the Bank assumes overall responsibility—and accountability—for helping countries reconcile macroeconomic requirements with the other factors necessary for poverty reduction and growth.

This proposal—recommended by an ODC Task Force on the future role of the IMF in development—carries to a logical conclusion the spirit of U.S. Treasury Secretary Lawrence H. Summers' recent remarks, when he argued that the IMF should have a financing role more focused on preventing and managing crises: "International financial institutions…need to focus on core competencies. Going forward, the IMF needs to be more tightly focused in its financial involvement with countries, lending selectively and on short maturities." (Secretary Summers said nothing about the PRGF being outside the Fund's core competencies.)

Like the ODC Task Force, the U.S. Congress-sponsored commission chaired by Allan Meltzer also argued against IMF involvement in long-term lending. But this led the Meltzer Commission to conclude the PRGF should be closed. This was misguided. PRGF financing is needed by the poorer developing countries, many of which have virtually no access to private capital.

The IMF's Other Roles in Development

Applying its reasoning to all IMF activities, the ODC Task Force also recommended that the Fund stop longer-term lending (beyond 18 months duration) to middle-income countries. This would mean that the Fund's financial role in all developing countries would lie in its regular short-term stand-by arrangements. This is the appropriate role of the IMF. As the Task Force explained, the interest rates of these arrangements would have to be subsidized for the poorest countries.

The IMF's short-term lending for stability is itself a crucial contribution to development, since poverty reduction and growth require macroeconomic stability. But the policies required for stabilization can also hurt the poor (for example, by cutting government spending). For this reason, the IMF should enlist the World Bank's help in assessing the likely impact of policies before they are instituted, so that negative impacts are minimized. IMF policy conditions should be focused on reforms necessary to restore economic stability and, in effect, ensure timely repayment of the loans. The conditions should not extend to deeper structural issues, which are unnecessary to fulfill this role.

The IMF has another critical role in development: surveillance and policy advice for countries during stability. These functions can be important contributions to the decision-making in developing countries. With surveillance and policy advice not backed up by long-term lending, the relations between the IMF and client countries would be more transparent, and probably more reassuring to private investors.

At present, when a country signs on to an IMF loan, it appears to be accepting the policy conditions only because of the money it will receive from the IMF and the Bank (which does not lend for adjustment to countries without the IMF's approval of the macroeconomic environment). If the IMF's advice were not tied to lending, then a country's policy reforms would be more credible to external investors. By the same logic, the implicit IMF veto on World Bank lending for adjustment should be eliminated.

With regard to the specific policy advice the IMF gives, a number of lessons relevant to development have been learned in the last decade, particularly from the recent financial crisis. The IMF should explicitly recognize and incorporate them. They include: