The Changing Role of the IMF in Global Governance

1. The Changing Role of the IMF in the Governance of the Global Economy and its Consequences Daniel D. BradlowProfessor of Law and Director, International Legal Studies Program, American University, Washington College of Law, Washington D.C. and Research Associate, Centre for Human Rights, Faculty of Law, University of Pretoria, Tel: (202)274-4205, email: bradlow@wcl.american.edu

2. Introduction • Recent Signs of Loss Of Confidence in the IMF: • Argentina, Brazil, Russia, Uruguay prepay their obligations to the IMF. • Multilateral Debt Relief Initiativeis an acknowledgement of the inadequacy of past efforts to deal with the debt of the poorest countries. • The large reserves of key Asian countries. • Major Addresses by Leading Figures in the Industrialized Countries all of which have called for changes in the IMF.

3. Structure of Paper • Thesis of Paper: • The underlying cause of the IMF’s problems is its failure to adjust its governance structures and operating practices to its current role as a macro-economically oriented development financing institution. • Structure of Paper: • Description of the evolution in IMF operations • Describe 5 distortions and 4 resulting problems that have arisen from the combination of the evolution in the IMF’s functions and the inflexibility of its decision making structures. • Possible responses to the IMF’s current problematic situation. • Conclusion: • The most desirable option is a substantial program of structural reform.

4. The Evolution in the IMF’s Operations: The Bretton Woods System • Surveillance: focused on those macroeconomic variables relevant to the state’s obligation to maintain the par value of its currency. • Interactions with the member state’s Central Bank and Ministry of Finance. • Financing: Conditions limited to macro-economic variables such as currency devaluation, the budget deficit, and supply of money and credit. • Uniformity is one of the IMF’s operating principles. • Check on governance structure is the assumption that even the most powerful states would one day need the IMF’s support.

5. The Evolution in the IMF’s Operations: Post-Collapse of the Bretton Woods System • IMF Dilemma: what should it monitor in its surveillance missions if there is no par value system for it to oversee? • The amended Articles, written in very general terms, provide only limited guidance. • Result: The IMF now concerns itself with any issue that can affect the balance of payments and the monetary situation in its members.

6. The Evolution in the IMF’s Operations: The Impact of the Second Amendment • IMF Member states can be divided into: • “IMF supplier states” == countries which have no intention of using the IMF’s services. • “IMF consumer states” == member states that need or may need IMF financing in the foreseeable future. • In recent years, a third group of states has emerged: developing countries that have access to private financial markets and have such large reserves that they are in the process of “earning” their independence from the IMF.

7. Institutional Implications of the Changing Role of the IMF: The Five Distortions • The IMF has “forced” its new broader functions into its existing decision-making structures and governance arrangements and its existing interpretation of its mandate. • This has resulted in five distortions that are undermining its effectiveness and are increasing hostility to the IMF:

8. Distortion One: Three Legal Issues • Uniformity: does not make sense when its services are only being utilized by its developing country member states. • Interpretation of the Articles of Agreement as including a “political prohibition”: is neither prudent nor principled for an organization that is concerned with issues like governance. • It obscures the political considerations the IMF views as relevant to its operations, and the principles and procedures it applies in making these judgments.

9. Distortion One: Three Legal Issues (continued) • The perceived sui generis nature of the standby arrangement is problematic: • They are not classified as international agreements which need to be registered with the United Nations. • They are not treated as international agreements that are subject to predictable principles of interpretation.

10. Distortion Two: Relations Between the IMF and The Supplier Countries • The Supplier Countries have “regained their independence” from the IMF: • They do not need to heed any advice the IMF may offer them. • They resolve their monetary and financial issues in an alternate set of international forums. • They support the IMF for what it does for “others”== the “problematic” areas of the global financial system.

11. Distortion Two: Relations Between the IMF and The Supplier Countries (continued) • Their dominance in the IMF is enhanced by four developments: • The declining importance of the basic votes • The expanding size of IMF Board constituencies: Larger constituencies imply less ability to focus on policy issues • The permanency of the G-7's representation enables them to develop institutional memories and expertise in the IMF. • Their “independence” from IMF means that they can focus on cases of special interest and IMF policy issues.

12. Distortion Three: Relations Between the IMF and Its Consumer Member States • Consumer member states can be divided into two groups: • Emerging markets that need IMF for emergencies and for “stamp of approval”. • Some countries in this group are attempting to establish their independence from the IMF and so should be seen as a sub-group that are more similar to IMF supplier countries than to consumer countries. • Those poor countries which are dependent on official sources of external funds. • The primary cause of their social and economic, including macroeconomic, problems lies in the governance of their societies. • The nature of their requirements highlights the evolution of the IMF from a monetary institution to a development financing organization.

13. Distortion Three: Relations Between the IMF and Its Consumer Member States (continued) • The IMF is becoming an important actor in the policy making process of these member countries. • This expands the range of actors with whom it must directly interact beyond the Ministry of Finance and the Central Bank. • The IMF, utilizing informal procedures has consulted with some of these actors. • The IMF has not yet developed formal procedures for ensuring that all relevant stakeholders are consulted.

14. Distortion Four: IMF Relations with the Citizens of its Member States • The creators of the IMF believed that it was not necessary for the IMF to have any direct interaction with non-state actors. • Principles of good governance require that when the IMF “descends” into the national policy-making process it should be accountable to those people directly affected by its decisions i.e. citizens of consumer member states. • Since the IMF has global responsibilities, it also needs to be accountable to citizens of supplier member states.

15. Distortion Five: The IMF’s Relations with Other International Organizations • Specialized agencies were designed to have limited “jurisdiction”. • The U.N. Economic and Social Council was expected to be the forum in which their activities would be coordinated. • The relationship agreement between the IMF and the UN relieves the IMF of any significant responsibilities to the UN and denies the UN any meaningful role in the affairs of the IMF. • The expanded scope of the IMF’s operations results in it encroaching into the “jurisdiction” of other specialized agencies but without the ECOSOC being able to play the coordinating role it was expected to play.

16. Problem One: The Disconnect Between Power and Responsibility • The situation of the G-7 having power without direct accountability to those most affected by their decisions is ripe with potential for abuse. • One result: proposals that impose substantial burdens on already overloaded developing country governments or that make unrealistic assumptions about the capacity of these countries receive serious consideration.

17. Problem Two: The IMF’s Lack of Accountability • The IMF structure provides for two channels of accountability: • The Board of Executive Directors: • Most consumer member states are only indirectly represented on it. • IMF programs have become too numerous and complex for the Executive Directors to be able to exercise firm oversight over the staff. • The Board of Governors: • Unlikely that Governors have adequate knowledge of specific IMF operations.

18. Problem Two: The IMF’s Lack of Accountability (continued) • Consequences of current structure: • IMF staff and management are operating without effective accountability. • The lack of formal operational policies and procedures results in uncertainty about the operational and policy-related responsibilities of IMF staff. • The IMF is performing its policy-making functions without any formal mechanisms through which those non-state actors most affected by its actions can hold the IMF accountable.

19. Problem Three: The IMF and Other International Organizations • The UN specialized agencies’ implicit acquiescence in the IMF encroachment into their responsibilities adversely affects the functioning of the whole UN system. • The inability of other specialized agencies to effectively challenge the IMF’s position reduces the range of policy options available to developing countries.

20. Problem Four: Interpretation of Articles of Agreement • The IMF’s failure to stipulate a principled basis for determining what issues are inside and which outside its mandate : • creates perception that the IMF acts in an arbitrary and capricious fashion in interpreting its articles, and • undermines its claim to be a non-partisan body. • Given the differences in the IMF’s relations with the industrialized and developing countries, the uniformity principle hinders effective treatment for the consumer member states.

21. Three Approaches to Resolving The Problems Caused By the Five Distortions • First, the IMF should be abolished. • Advocated by both those who argue that the market is the most efficient and best means for allocating resources, and • those who contend that international organizations are merely used by the rich nations to keep poorer and weaker developing countries in “their place”. • While it is possible to abolish the IMF, it is not possible to eliminate the need for an organization like the IMF. • Conclusion: it is irresponsible to suggest abolishing the IMF, unless one can be confident that it is politically possible to create an alternate organization that will effectively and equitably perform its legitimate monetary and macroeconomic functions.

22. Three Approaches to Resolving The Problems Caused By the Five Distortions (continued) • Second, change the policies of the IMF: • Advocated by those who contend that the IMF should limit its operations to its original specialized mandate, and • Those who argue that the IMF should adopt new policies that are more pro-poor, pro-environment and pro-human rights. • This “reform the policies” approach focuses on the symptom rather than the real cause: the IMF’s governance and decision-making structure. • Conclusion: without structural change, the IMF will always adopt policies that are heavily biased towards the interests of its key supplier member states.

23. Three Approaches to Resolving The Problems Caused By the Five Distortions (continued) • Third, a comprehensive structural reform program that is based on two premises: • Before we reject the existing international organizations we need to be confident that we have exhausted all feasible possibilities for reforming them. • inter-governmental financial institution like the IMF must comply with the same principles of good governance that apply at the national level.

24. A Reform Program for the IMF • Includes: • Short-term items == only require action by the IMF staff and Executive Board acting on their own authority. • Medium term items == require action by the Governors of the IMF. • Long term items == require an amendment to the Articles of Agreement or at least the agreement of the member states, including the agreement of their legislatures. • It should be noted that the IMF has begun to implement at least some aspects of the proposed reform agenda.

25. A Short-Term Reform Agenda for the IMF • Making the IMF Board More Responsive to Its Developing Country Member States: • Begin restructuring the Board so that it includes more developing country representatives. • Formalize the current informal practice of allowing the member state’s governor or his/her representative to participate in any discussion in the Executive Board on the member state. • Give more resources to the Executive Directors representing IMF consumer countries. • Change the formula for calculating quotas, for example use purchasing power parity exchange rates.

26. A Short-Term Reform Agenda for the IMF(continued) • Actions to Make the IMF More Responsive to Non-State Actors in Its Consumer Member States: • Establish formal procedures for how the IMF will consult with non-state actors during its operations. • Establish a formal mechanism through which non-state actors as well as civil servants who feel that they cannot safely or freely participate in meetings with the IMF can communicate with the IMF. • Establish an IMF-NGO Liaison Committee • The IMF should formalize its participation in the World Bank-Parliamentary Network.

27. A Short-Term Reform Agenda for the IMF(continued) • Actions to Improve the Transparency of the IMF: • The IMF should adopt a policy of publicly releasing drafts of official reports and policies and submitting them to public comment. • The IMF needs to develop and make publicly available a manual of all its operating policies and procedures. • The IMF should adopt a formal policy to govern the formulation and revision of IMF operating policies and procedures.

28. A Short-Term Reform Agenda for the IMF(continued) • Action to Make the IMF More Accountable: • Establish an ombudsman at the IMF who has the power to receive and investigate complaints from any party that feels that the IMF has not been acting in conformity with its mandate or operating policies and procedures. • An independent review panel should evaluate existing policies and make recommendations on how to maximize their positive effect on poverty and the environment. • Develop transparent and open procedures for selecting senior management.

29. A Short-Term Reform Agenda for the IMF(continued) • Actions to Improve IMF Relations with Other International Organizations • Establish an independent expert panel to review the IMF’s relations with other international organizations and make recommendations on how the IMF can most effectively coordinate its activities with these organizations. • Legal Actions • The Board of Directors, after a notice and comment period, should issue a decision defining the scope of the IMF’s mandate. • The Board of Directors should abandon the principle of uniformity and should explicitly categorize countries according to their wealth and level of economic development.

30. A Medium-Term Reform Agenda for the IMF • Actions to Make the IMF More Responsive to its Developing Country Member States: • The IMF should increase the number of alternate directors for each constituency. • The Board of Governors should restructure Board constituencies so that the Eurozone countries are granted one seat on the Board with the combined voting power of all the Eurozone countries. • The IMF should make decisions on a basis that better reveals the preferences of those who will be most affected by the decisions. • One possibility: The IMF requires separate votes by Executive Directors representing consumer member states and those representing supplier member states. • Any decision would only be adopted if it commanded a majority of both groups.

31. A Medium-Term Reform Agenda for the IMF(continued) • Actions to Improve the IMF’s Relations with other International Organizations: • Establish formal links between the IMF and other relevant international organizations at both the senior management and staff levels. • The IMF should renegotiate its Relationship Agreement with the UN so that it clarifies the IMF’s responsibilities to the UN including its obligation to respect the jurisdiction of other specialized agencies. • The IMF should establish an independent review commission, to consider the optimal division of responsibilities between the IMF and the World Bank

32. A Long-Term Reform Agenda for the IMF • Actions to Make the IMF More Responsive to Its Developing Country Member States: • Amend the Articles of Agreement to increase the basic votes to at least its original proportion in the total votes at the IMF. • Amend the Articles of Agreement to introduce a qualified voting procedure that ensures that in votes on policy issues, consumer member states vote separately from supplier member states and the policy measure must obtain the support of a majority of both groups. • Implement the findings of the independent review commission that investigated the division of responsibilities between the IMF and the World Bank.

33. Conclusion • The serious structural distortions that have slowly developed since the Second Amendment to the Articles of Agreement can only be corrected through a broad ranging structural reform program that will overhaul the structure and operating principles of the IMF. • The problems that exist in the IMF are only the most extreme version of the structural problems that exists in all international organizations. • All those organizations that have great economic power in the developing world share, although maybe in less extreme forms, similar problems. • Those UN specialized agencies that lack adequate resources, influence and power often suffer from the reverse problem because they are deemed to be too sensitive to developing countries • If international organizations are to perform the global governance functions that were envisaged for them they will need to undergo their own reform programs,that will be complimentary to the one this paper proposes for the IMF.