IMF

Changing Role of the IMF in Global Economic Governance

1. Original Role at Bretton Woods (Peter Coffey & Robert J. Riley)

 The IMF was created to help member countries facing temporary balance-of-
payments problems.

 It aimed to provide exchange rate stability and support economic reconstruction

after WWII.

 Foundational principles included:

o Convertibility (promoted by the US but not achieved in Europe until the

1970s).

o The Gold-Exchange Standard: US agreed to convert dollars to gold at $35 per

ounce.

o Exchange Rate Adjustments allowed under ‘fundamental disequilibrium’,

after consulting the IMF.

2. Funding Mechanism

 Countries subscribed 25% in gold and 75% in their own currency, leading to early
shortages.

 This was addressed through mechanisms such as:

o Special Drawing Rights (SDRs)

o Standby Arrangements

o General Agreement to Borrow

3. Collapse of Bretton Woods (1971) and Shift in Role

 With the end of dollar-gold convertibility in 1971, the gold-exchange standard

collapsed.

 The IMF’s monetary role ended, shifting focus to:

o Exchange rate surveillance

o Assisting countries with balance-of-payments problems

4. Mission Expansion and the 1980s–2000s Shift

 The IMF evolved from a stabilizer to a policy advisor and enforcer, especially in the
Global South.
  Its roles expanded due to unanticipated changes in the global financial
environment.

 The Fund began interpreting its charter liberally and sometimes amending it to meet
new challenges.

 It adopted policies associated with the Washington Consensus, emphasizing:

o Privatisation

o Liberalisation

o Macroeconomic stability

 These policies were imposed uniformly, without tailoring to the specific needs of
underdeveloped economies (e.g., education, infrastructure).

5. Mission Creep and Overreach

 Critics (e.g., Meltzer Commission, Joseph Stiglitz) argue the IMF took on
inappropriate development roles, overlapping with the World Bank.

 Stiglitz accused the IMF of prioritizing international bank stability over the welfare
of developing countries.

 Lending conditions often involved austerity and liberalization, which exacerbated

crises (e.g., East Asia 1997, Argentina 2001).

6. Criticism of Crisis Management

 IMF misdiagnosed financial crises, recommending tight monetary policies and high
interest rates, deepening recessions.

 Soros and others accused the IMF of favoring lenders over borrowers.

 It was viewed by some as acting like a branch of the US Treasury, pushing politically
influenced agendas.

7. Governance and Transparency Issues

 Jacques Polak, former IMF Executive Director, criticized the opaque financial
structure of the IMF.

 Proposed reforms include:

o Publishing loan conditions and board votes

o Improving SDR and gold accounting

8. Current Concerns (as of 2004) (Peter Coffey)

 ‘Hot money’ flows destabilize economies due to fast-moving speculative capital.

  Persistent debt problems in Third World countries.

 Challenges in forecasting economic developments.

 Issues around currency linkages (e.g., pegged systems).

 Question of adequacy of financial aid to countries in need.

 Continued underrepresentation of developing countries in IMF decision-making.

9. The Author’s Proposals (Peter Coffey)

 IMF should:

o Provide urgent, reliable policy information, possibly by integrating BIS

economists.

o Be restructured into regional funds to improve responsiveness and

representation.

o Allow capital controls to address disruptive speculative flows.

o Re-emphasize its original BoP support role, with less intrusive conditions.

10. Reforms and Redefined Roles

Meltzer Commission (2000) Recommendations:

 IMF should become a smaller, focused institution, concentrating on:

1. Short-term liquidity for solvent countries.

2. Collecting and publishing economic data.

3. Non-binding policy advice via Article IV consultations.

 Avoid long-term loans or complex structural conditions.

 End the Poverty and Growth Facility; leave development work to the World Bank.

 Write off debts of HIPCs implementing effective development strategies.

 Only lend to countries meeting:

o Debt transparency

o Responsible fiscal policy

IMF’s Own Reforms:

 Ken Rogoff: Advocate for proactive, early intervention.

 Anne Krueger: Proposed a Sovereign Debt Restructuring Mechanism (SDRM).

 Independent Evaluation Office (IEO) suggestions:

 o Differential interest rates for repeat borrowers.

o Encourage country ownership of reform programs.

o Promote fiscal responsibility, selective lending, and transparency.

11. Broader Reform Proposals

Joseph Stiglitz:

 Support IMF's existence but with reforms:

o Return to original role (BoP support).

o Improve transparency and governance.

o Create an independent advisory think tank and regional surveillance units.

Barry Eichengreen:

 Suggests incremental reforms:

o Clear governance changes (e.g., independent board).

o Introduce capital controls (Chilean-style) and collective action clauses.

o Focus on macroeconomic policy (fiscal, monetary, exchange rate), not

structural reform.

George Soros:

 Suggests:

o IMF take on international credit insurance.

o Launch SDR-based aid program, operated by an independent IMF agency.

Calomiris & Meltzer:

 Recommend:

o IMF to offer only short-term loans with strict preconditions (e.g., sound
banking, minimum reserves, foreign bank access).

o Avoid bailouts to reduce moral hazard.

o Operate with a market-discipline focus.

Martin Feldstein:

 IMF should avoid imposing structural reforms unless crucial to restoring financial
access.

 Criticizes IMF’s role in creating panic, worsening crises (e.g., Korea 1997).
Implications for Developing Countries

1. Access and Representation

 Developing countries historically faced:

o Limited access to IMF aid.

o Modest representation, limiting influence over policy.

2. Policy Imposition and Social Impact

 IMF structural adjustment and liberalization policies often:

o Ignored local needs (e.g., education, healthcare).

o Caused social hardship and economic vulnerability.

3. Crisis Vulnerability and Trust Issues

 IMF’s failure to predict or mitigate crises (e.g., Argentina, SE Asia) undermined trust.

 Harsh conditionalities during crises intensified social and economic distress.

4. Potential Benefits from Reform

 Regionalization of IMF roles:

o Could lead to tailored, context-sensitive solutions.

o Enable better representation and responsiveness.

 Transparency and selectivity in lending could improve accountability and

effectiveness.

 Focus on original mandate (BoP support) would align IMF interventions with short-
term stabilization, not structural overreach.
WB
Changing Role of the World Bank in Global Economic Governance

1. Original Mission and Early Evolution

 The World Bank was originally established as the International Bank for
Reconstruction and Development (IBRD) in 1944 to rebuild post-war Europe.

 Once European reconstruction was completed, its focus shifted to the Third World,
particularly low-income countries.

2. Complex Institutional Structure

The World Bank consists of five separate entities:

1. IBRD (the Bank itself):

o Only a small part of its capital is actually paid up.

o Acts as a guarantor for countries entering capital markets.

o Rarely supports countries with poor relations with the US.

2. IDA (International Development Association):

o Provides concessional loans for social infrastructure (e.g., schools, hospitals,

roads).

o Loans are interest-free, with long maturities and grace periods.

3. IFC (International Finance Corporation):

o Lends to the private sector.

o Finances are comprised of 80% market borrowing and 20% Bank capital.

4. MIGA (Multilateral Investment Guarantee Agency):

o Provides political risk insurance for investors.

5. ICSID (International Centre for Settlement of Investment Disputes):

o Handles investor–state dispute arbitration.

3. Mission Creep and Complexity

 Critics argue that the World Bank’s mandate has become overly complex and diffuse
(Einhorn, 2001).

 It has expanded beyond infrastructure into social, cultural, macroeconomic, and

institutional reforms.
  Increasing overlap with the IMF (e.g., macroeconomic crisis response), especially
since the 1980s “Concordat”, has blurred the division of labor between the two.

4. Interference in Domestic Policy

 The Bank has been accused of supporting the less palatable face of capitalism,
interfering in national policies.

 Examples:

o Forced removal of cashew subsidies in Mozambique.

o Elimination of marketing boards in West Africa.

 These actions led to increased poverty, criminal activity, and slower growth.

5. Bureaucracy and Scale

 The World Bank Group employs ~17,000 staff across 170 offices.

 Manages $300 billion in assets and lends ~$50 billion annually.

 Its large size magnifies management challenges, leading to financial wastage and
operational inefficiencies.

6. Inefficient Resource Allocation

 70% of non-aid lending flows to 11 middle-income countries with access to private

capital markets.

 Socially necessary projects remain underfunded.

 The Bank faces risks of excessive loan exposure.

7. External Financial Context and New Demands

 Since the 1970s, the world has seen an expansion of capital flows, making private
capital more accessible.

 However, this has not addressed financing gaps for socially necessary investments.

 There is also a growing need for local/regional banks to support SMEs and rural
development.

8. Environmental and Governance Criticisms

 The Bank has been accused of funding environmentally harmful projects, especially
in Africa.

 It has shown limited vigor in promoting good governance.

9. Strategic Shifts and Focus on Public Goods

 The Bank has shifted toward providing “global public goods” such as:

o Tropical disease treatment

o Environmental protection

o Agricultural technology

 New emphasis also on governance, legal systems, public health, and human capital
development.

10. Recommendations for Refocusing (Meltzer Commission)

 Withdraw lending from middle-income countries with private market access.

 Focus on the 80–90 poorest nations.

 Replace loans with performance-based grants aimed at poverty alleviation and

public goods provision.

 Eliminate crisis-lending roles; assign that function to the IMF.

 Rename the World Bank as the “World Development Agency”.

11. Decentralization and Regional Empowerment

 Promote regional development agencies as key actors in Latin America and Asia.

 The Bank should focus on Africa, the Middle East, and poorer European regions.

12. Proposed Reforms (Peter Coffey)

 Downsize and Regionalize:

o Break the Bank into leaner regional development banks, modeled after the
European Investment Bank (EIB).

 Reevaluate IFC:

o With private capital widely available, consider dissolving the IFC and
reallocating its personnel.

 Expand and Prioritize IDA:

o Increase transparent, interest-free, long-term social sector lending.

 Champion Transparency:

o Adopt EIB-like transparency standards across all Bank institutions.

 Strengthen EU Role:
 o Leverage the EU’s colonial history and progressive trade policies (e.g., with
ACP countries) to guide Bank reforms.

13. Financial Innovation

 Eichengreen proposed a synthetic Emerging Market Currency (EMC) index to reduce

currency mismatch risks.

 Suggests the Bank issue EMC-indexed loans to stabilize emerging market debt.

14. Role in Supporting Millennium Development Goals (MDGs)

 The Bank has aligned its strategy to support MDGs including:

o Halving extreme poverty

o Promoting universal education

o Reducing child mortality

o Ensuring environmental sustainability

15. Private Sector Engagement Debate

 The roles of IFC and MIGA are contested:

o Meltzer Commission recommends eliminating them.

o US Treasury defends their importance in bridging capital gaps for the

developing private sector.

Implications for Developing Countries

1. Access to Concessional Finance

 Positive: Scaling up IDA would increase funding for critical social projects.

 Negative: Mission creep may divert funds to middle-income countries, reducing

availability for poorer nations.

2. Policy Autonomy

 Positive: Decentralization and regional banks could allow locally tailored programs.

 Negative: Past interventions (e.g., Mozambique subsidies) highlight sovereignty

concerns.

3. Institutional Capacity

 Positive: Leaner, regionalized banks may operate more efficiently.

 Negative: Eliminating IFC could limit private sector development financing.

4. Transparency and Accountability

 Higher transparency could lead to:

o Better project selection

o Reduced corruption

o Stronger developmental outcomes

5. Role of European Partners

 A stronger EU role could steer the Bank towards equity-focused, socially progressive
policies.

6. Political Manipulation and Conditionality

 The Bank remains susceptible to donor country influence, undermining fair access.

 Lending conditions often reflect Western economic models, risking one-size-fits-all

strategies.

7. Strategic Development Impact

 A refocused mission on infrastructure and global public goods can enhance

development.

 However, grant-based aid models may be difficult to sustain and politically

controversial.

8. Local Knowledge and Regional Coordination

 Greater engagement with regional banks and local experts is essential for effective,
context-aware strategies (e.g., PRSPs).

9. Ideological Tensions

 Developing countries face pressures between:

o Neo-liberal market-led reforms and

o Inclusive, state-supported development models.