Global Policy Forum

Oxfam Policy Papers
Oxfam International Media Briefing

Summary

IMF reform is back at the top of the international agenda, but for the wrong reasons. The new consensus, emerging from the US Treasury and the Meltzer report, is that the Fund should depart low-income countries, and focus on crisis prevention in financial markets. While some of the reform proposals now being debated are sensible, the thrust of the reform agenda is a source of concern for the following reasons:

· It reflects a growing disenchantment with multilateralism

· It threatens to replace inappropriate IMF conditions with inappropriate conditions dictated by the G7 countries

· It fails to address the real policy issues at the heart of the IMF's failure as a poverty reduction agency

· It does not address the politicisation of IMF loans, especially with regard to the US Treasury's influence

· It does not adequately consider the 'democratic deficit' which prevents poor countries from having an effective voice in the IMF

Background

Reform of the IMF is back on the agenda. The Meltzer Report echoes many of the themes raised in Larry Summers' speech last December, including the call for a rapid departure of the Fund from low-income countries and a more specialised role in crisis prevention. This approach has broad appeal. It unites conservative Republicans who want to rid the world of "global government" with non-government organisations who attack the IMF for its disregard for poverty issues and transparency. Both regard the IMF as an abject failure. Unfortunately, the new consensus on the IMF ignores many of the more fundamental problems associated with its operation - and it is in danger of throwing the baby of multilateralism out with the bath water.

Oxfam believes this new consensus is the easy way out and fails to address the fundamental problems with IMF policy. Of course, the IMF has failed to address the challenge of developing a poverty-focussed approach to macro-economic stabilisation. It is remote, unaccountable and undemocratic. It has also suffered from 'mission creep' on a grand scale, leading to overlapping mandates with the World Bank (which suffers from the same affliction) and inappropriate policy conditions being applied in areas where Fund staff are ill-qualified. However, these problems are the product of IMF management. To put it bluntly, the US and the G7 have got the IMF they want. After all, they control 57 per cent of its vote; and they oversee the loan conditions applied by IMF staff.

The Meltzer report has little to say on the policy content of IMF programmes in low income countries, or on their implications for poverty reduction. Similarly, the report barely mentions the 'democratic deficit' at the heart of IMF operations. These are the very issues that most deserve public debate.

ESAF and poverty reduction

Much is being made of the call for the IMF to get out of long term development financing in low-income countries. In fact, the Fund does not do long term development financing in low income countries. Net resource transfers are negative in most years. The strength of IMF policy conditions derive not from its financial role, but from the premium placed by its major shareholders on fiscal stability. Simply abolishing the Fund would not necessarily change the policy environment. At best it would lead to major donors finding new mechanisms for imposing the same conditions that they currently insist on through the Fund. The real challenge is to integrate monetary policy into a broad macro-economic reform framework geared towards poverty reduction and enhanced equity. This means:

· Abandoning the current stabilisation model, which relies solely on demand-side interventions, and developing more expansionary fiscal frameworks (especially for countries with long-term aid commitments)

· Ensuring that budget provisions are consistent with poverty reduction strategies (including the withdrawal of cost-recovery and support for marketing infrastructure in poor areas)

· Paying more attention to the sequencing of reforms

· Abandoning 'second generation' reform conditions in areas such as privatisation and trade liberalisation.

If the IMF cannot make these changes, then a case could be made for shifting the responsibility for monetary and fiscal policy in poor countries to the World Bank. However, the Bank too has failed to prioritize poverty reduction in its policy advice and would need to change dramatically to incorporate equity and poverty goals into its policy lending.

Our objective, as argued in our earlier report The IMF: wrong diagnosis, wrong medicine, should be a smaller, more focussed IMF. Stabilisation operations should be developed as part of national poverty reduction strategies, not as a set of narrowly-defined macro-economic goals devised in Washington.

Private capital markets

The IMF has been justifiably criticised for its response to the East Asian crisis. The emphasis on demand deflation to achieve balance-of-payments stabilisation, the 'Christmas tree' approach to loan conditions, failure to protect social sector budgets, failure to insist on debt reduction, all had the effect of prolonging and deepening the recession. There is also compelling evidence that the Fund's insistence on capital account liberalisation contributed to the crisis. This said, the loan conditions were drawn up in Washington under the gaze of the Executive Directors; and the proliferation of inappropriate loan conditions (i.e. opening up markets for car part manufacturers, foreign investment and foreign control of banks) reflected US Treasury demands. As for capital account liberalisation, this was brought on to the Fund's agenda by Secretaries Rubin and Summers, and the latter remains the most aggressive exponent of policy conditions linked to capital account convertibility.

Oxfam supports the call for a clearer focus on crisis prevention, and a streamlining of the lending facilities that have evolved in response to the various crises. Why not roll all non-concessional lending into one pool with access linked to national quotas, and loan duration/conditions determined by specific needs? Oxfam also supports the efforts of Summers and others to develop, through the IMF, more meaningful indicators to asses national vulnerability to financial shocks, including foreign currency claims on the private and public sectors.

In addition we call for the IMF to:

· Develop more expansionary approaches to stabilisation and recovery, especially for countries not suffering large budget deficits

· Provide better protection to basic social sector budgets (thereby preventing a repeat performance of the disaster inflicted on Indonesian education)

· Oversee the development of orderly debt work-out rules and be willing to lend to countries in arrears

· Abandon any linkage between loans and capital account liberalisation

More broadly, it has to be said that the Meltzer report (and the US Treasury position) suffers from some internal contradictions. The fund is supposed to act as a lender of last resort, but no new resources are envisaged. Loans will only be made to countries that have achieved "financial soundness", which raises the risk of contagion from those (such as Russia) that have not. Loans should have short maturities and penalty interest rates, which will exacerbate debt problems and add to instability.

The more serious criticism is that the G7 have apparently abandoned any attempt at systemic action to tame global capital markets. In reality, no lender of last resort will be able to operate effectively unless this task is addressed, though the Fund will doubtless serve as a convenient scapegoat when the next crisis erupts. Finally, the Fund could have an important role to play in addressing issues of money laundering, harmful tax competition, and outright tax evasion. These issues need to be brought into the reform debate.

Democratic control

The real problem, studiously avoided by Meltzer, is the system under which IMF votes are proportional to its quotas, which are in turn linked - albeit imperfectly - to a country's weight in the global economy. The G7 plus the rest of the EU accounts for 14 per cent of the world's population, yet they enjoy 56 per cent of the votes in the Executive Board. In effect, the IMF is not a 'revolving fund', as its staff like to claim, but a financial institution comprising 'structural creditors', who dictate loan conditions, and structural debtors, who accept the said conditions.

At a time when issues of governance and accountability are at the forefront of dialogue between bilateral creditors and governments, the IMF is an anachronism. In the words of former Trade Representative Mickey Kantor, the voting structure has facilitated the development of the IMF as a "battering ram" for US interests. It is unacceptable that people in Africa, whose lives are arguably most affected by IMF programmes, account for only around 2 per cent of voting rights. And it is outrageous that loan conditions are used to promote policy reforms in poor countries - such as agricultural market liberalisation, rapid trade liberalisation, financial market deregulation - which would be rejected in G7 countries.

Recent moves towards a more inclusive structure have been derisory. For instance, the initiative to create a Group of 20 "systemically significant economies" in the Interim Committee still leaves the poorest countries without an effective voice. And it is not clear that the G20 countries have any real say in developing Fund strategies.

The current shareholding based arrangement inevitably creates the impression that IMF programmes are not tailored to maximise the benefits for the countries receiving loans. If the G7 are serious about extending the principles of national ownership, increased representation for low-income countries should be an immediate priority.

Another problem is that the Board is only active in cases where the major shareholders have a direct interest. This leaves IMF staff with too much scope to define policy conditions in poor countries. As a result, the Fund is accountable neither to the populations of the countries operating its program, nor to the Interim Committee.

The perception of many developing countries that the IMF suffers from the excessive influence of the US Treasury is justified. Politically motivated loan conditions are now the order of the day. While it is inevitable that the major shareholder will carry more weight than others, restricting the vote of any one country to 10 per cent would help to correct the current imbalance.

Some wider issues

The Meltzer report includes recommendations for change in a wide range of areas, some of which are sensible. Unfortunately, many of the proposals are ill-conceived, and rooted in a perspective that reflects the subordination of human development concerns to financial market considerations.

For instance, the report suggests withdrawing virtually all concessional assistance from middle-income countries that can attract private capital. But private capital is unlikely to fill the social and economic infrastructure gaps faced by the poor.

Much is made of the need for the World Bank to convert IDA loans into grants. In reality, the grant element of IDA loans is already 70 per cent - and these loans can help countries graduate back into capital markets.

The report says that the World Bank should pull out of Asia and Latin America, leaving these regions to regional development banks. But slimming down the Bank while fattening up regional development banks will not produce obvious efficiency gains. Moreover, the Asian Development Bank and the Inter-American Development Bank do not have distinguished records on poverty reduction. The IDB in particular has failed to come up with its share of funds for the HIPC countries in Latin America.

This said, there is clearly a case for slimming the Fund. This would be achieved by excluding 'second generation' reforms from its mandate, and by developing a clearer focus. Similarly, problems posed by the overlapping mandates of the IMF and the World Bank need to be tackled at source - and not through the cosmetic approach of simply transferring the Fund's responsibilities to the Bank without addressing the underlying incoherence.

Conclusion

The IMF has lacked a proper role since 1971, when the exchange rate system it was created to oversee collapsed. For the past three decades it has been an institution in search of a role. It has mishandled virtually ever crisis since acting as a debt collection agency for commercial banks in the 1980s - and it has singularly failed to advance the cause of poverty reduction and equity.

There is now a real opportunity to recast the Fund as an agency that can contribute to human development. Abandoning multilateralism is not a good starting point.

For further information please contact:
Kevin Watkins +44 1865 312326 This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Tony Burdon +44 1865 312270 This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Jenny Kimmis +44 1865 312212 This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Veena Siddharth +1 202 393 5333 This e-mail address is being protected from spambots. You need JavaScript enabled to view it

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C íŸ 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.