IN FOCUS: IMF and Good Governance (fwd)

[Robert Weissman <rob@essential.org>]

Foreign Policy In Focus: The IMF and Good Governance  

October 1998
Vol. 3, No. 33

Written by Carol Welch, Friends of the Earth
Edited by Tom Barry (IRC) and Martha Honey (IPS)


Key Points
o	The IMF was created to solve short-term, external imbalances in debtor
country economies, but it has moved far beyond its original mandate.
o	The IMF does not have the expertise to provide the far-reaching policy
prescriptions that it ties to its loans. 
o	The IMF has recently bestowed itself with the credentials to judge good
governance, telling countries to become more transparent and efficient even
though the IMF still maintains a high level of secrecy.

The International Monetary Fund (IMF), along with the World Bank, was
chartered in 1945. While the World Bank was supposed to spearhead post-war
reconstruction, the IMF was created as the "guardian" of the global
economy, promoting unimpeded trade and ensuring that national exchange
rates would stay within set values. (At that time, the values of world
currencies were pegged to gold-the gold standard.) The IMF also provided
short-term financing to countries that had difficulty defending their
currency values and meeting trade obligations. The IMF's financing was
intended to stabilize economies-not restructure them.

When the gold standard was suspended in 1971, the IMF lost its core
mission. Since then, the IMF has searched for a new mission and
justification for its existence. As a result, the IMF has consistently and
increasingly involved itself in affairs far beyond its original mandate.
This has been done with grave consequences: the IMF, staffed with
macroeconomists, does not have the expertise to provide the kind of advice
that it is dispensing today. Nor is the IMF, which has no independent
evaluation unit and has been labeled one of the most secretive public
institutions in the world, held accountable for the policy advice that it
gives. 

The oil price shocks in the 1970s provided the IMF with a major opportunity
to extend its mandate. To help some countries meet increased oil costs, the
IMF offered short-term loans. It also encouraged the distribution of the
massive amounts of oil dollars from international commercial banks to
developing countries. This practice led to excessive and dubious lending,
which then contributed to the debt crisis of the 1980s. 

The debt crisis gave the IMF another role: lending to countries on the
brink of default, thereby making the IMF the lender of last resort and the
global economic policeman as it stepped in and set up a system of debt
repayment to the North. Since then, developing countries have needed the
IMF's "seal of approval"-IMF endorsement of an economy-to obtain new aid
flows. This has deepened the dependency of developing countries on the IMF
and empowered the IMF with vast influence over the economic policies of
these countries.

During the 1980s, the IMF further extended the scope of its programs by
moving into the development field, establishing its Structural Adjustment
Facility (SAF) and Enhanced Structural Adjustment Facility (ESAF). Through
these facilities, the IMF extends medium-term loans and sets strict
economic conditions for broad sectors of a country's economy. These
conditions-which can include relaxation of labor laws, foreign investment
incentives in natural resource sectors, and privatization schemes-go far
beyond the IMF's original purview of addressing short-term external trade
imbalances. 

Such restructuring has been done with minimal success: on average, debtor
country economies continue to perform below developing countries that are
not borrowing from the IMF, while environmental degradation and poverty
frequently worsen (see Structural Adjustment Programs, FPIF, April 1998).

The IMF's "mission creep" has been consistently endorsed by the United
States Treasury Department as a way of furthering U.S. economic foreign
policy. Most recently, the IMF has been pursuing an amendment to its
Articles of Agreement that would give it power to govern international
capital flows. This amendment would obligate IMF member countries to remove
capital controls that they have established to protect themselves against
the vagaries of short-term, speculative capital, thereby opening up markets
to bankers and investors. 

Another recent endeavor is the IMF's involvement in "good governance,"
taking up the issues of corruption, transparency, tax reform, and other
domestic concerns. Although the principle of good governance is broadly
endorsed, bestowing the IMF with the power to determine good governance is
extremely problematic. It further legitimizes the IMF's power grabs of the
last several decades and entrenches the IMF in the position of giving
development and stabilization advice even when its qualifications are
highly dubious. The IMF's ability to apply good governance principles
consistently is also impaired by the dominant influence of the political
interests of the U.S. and the other wealthy nations who, by virtue of their
economic control, dictate IMF policies. Finally, the IMF is advocating good
governance principles of transparency to its member governments while not
applying the same principles of transparency, accountability, and
participation to its own operations.


Problems With Current U.S. Policy

Key Problems
o	The U.S. has used the IMF, including the IMF's new policy on good
governance, as a way of furthering narrowly conceived U.S. foreign policy
interests.
o	The IMF must apply good governance principles to its own operations,
making more information publicly available and establishing effective
accountability mechanisms.
o	The lack of public consultation in IMF loans means that good governance
reforms imposed by the IMF will be illegitimate and ineffective.

In August 1997, the IMF for the first time released guidelines regarding
its role in governance issues. According to IMF Director Camdessus: "A much
broader range of institutional reforms is needed if countries are to
establish and maintain private sector confidence," and "Every country that
hopes to maintain market confidence must come to terms with the issues
associated with good governance." So the IMF announced plans to evaluate
debtor countries' governance practices and to condition IMF loans on good
governance. The IMF then flexed this new muscle when it withheld a loan to
Kenya because of corruption concerns.

This new interest in good governance is ironic given the IMF's history. The
IMF lent over $1 billion to Zaire's legendarily corrupt leader, Mobutu Sese
Seko, despite receiving a detailed report of Mobutu's corruption. Kenya
received IMF assistance throughout the 1990s and was only recently
disciplined. The IMF's $11 billion loan to Russia in July 1998 complemented
an ongoing $10 billion loan. The IMF extended loans to Russia despite
overwhelming evidence of corruption as the country's political and business
elites reap the spoils from IMF-mandated privatization schemes. The U.S.
Treasury Department strongly supported these IMF loans to U.S. allies. 

The strong U.S. voice at the IMF stems from the fact that the U.S. is its
largest financial contributor and has the largest share of votes-about 18
percent. (Voting power at the IMF is based on each member's funding of the
institution.) In addition, many of the most important decisions at the
IMF-such as amendments to the IMF's Articles of Agreement or use of its
gold reserves-require an 85 percent majority, thereby giving the U.S. veto
power over the most critical decisions.  

The U.S. has used its influence within the IMF as a way of promoting U.S.
foreign policy through a multilateral façade. The ever-expanding mandate of
the IMF-from macroeconomic stabilizer to development fund and good
governance expert-has enabled the U.S. to exert its agenda in
ever-increasing ways. 

As an institution promoting good governance, the IMF itself is still too
secretive. Many of the most important economic assessments that the IMF
makes of its member country economies are confidential. Most of the loan
documents that the IMF negotiates with its borrowing members are not
available to the public. This means that the citizens of an affected
country have little way of knowing which policies the IMF is prescribing
and which policies are coming from their government. The secrecy of these
policies also means that when loan programs do not progress as planned, it
is extremely difficult to hold the IMF accountable for any role it may have
played in dispensing bad advice. Some of the secrecy problem can be blamed
on member governments that prevent disclosure of information.

Good governance at the IMF is also thwarted by the IMF's flawed practices
of audit and evaluation. The IMF does its own internal assessments of how
its programs operate and how apt its policy advice is. These internal
assessments are made public on a case-by-case basis, raising concerns that
the reports most critical of the IMF are hidden. Internal IMF studies that
reportedly criticized IMF policies in the Mexican peso crisis and (more
recently) in Indonesia have never been made available outside the
institution-not even to members of the U.S. Congress, who in 1998 were
asked to approve an $18 billion contribution to the IMF. A credible
evaluation process is central to any global system of good governance.

Finally, good governance by the IMF will never be credible as long as
governance conditionality is imposed on a country without consulting civil
society. The IMF negotiates its programs with just a handful of government
officials, usually the finance minister and central bank head, and has no
formal process to consult with civil society. The lack of broad input in
IMF loan programs is a fundamental flaw in IMF operations and a major
obstacle to the design of effective loan programs. As the Indonesians have
demonstrated, the public is best equipped to identify both the problems of
corruption within a country and the necessary good governance remedies.


Toward a New Foreign Policy

Key Recommendations
o	The IMF should return to its original mandate of monitoring economies and
lending for short-term stabilization. 
o	The U.S. must play a leadership role in demystifying the IMF by making
the Executive Board more transparent to public scrutiny and enhancing
accountability through an independent evaluation unit.
o	To prescribe effective solutions, the IMF should recognize the importance
of public input and should foster genuine exchanges between its officials,
client governments, and the public.

The human and economic crises in Asia and Russia have shed new light on the
IMF's function in today's global economy. The world's major financial
leaders implicitly acknowledged the IMF's shortcomings in April when U.S.
Secretary of the Treasury Robert Rubin called on governments to "modernize
the architecture" of international finance. Such modernization is not
possible without dramatic reforms at the IMF. These reforms must be a key
component of Washington's foreign policy agenda. The first priority should
be to address the role of the IMF itself; the second should be to analyze
how it fulfills that role.

The IMF was created to oversee economic developments in the global economy
and to address short-term external imbalance when necessary. The IMF should
return to this role and stop prescribing policy in a vast realm of
structural issues. The role of multilateral consultation about economic
development issues is better left to organizations with the appropriate
mandate and staff expertise, such as the World Bank and certain United
Nations agencies. 

The IMF's surveillance function should continue with one important addition
to improve management of the new global economy: monitoring private capital
flows, whose movement played a major role in the crises of 1998. But even
though the IMF should track such flows, imbalances created by these flows
may not warrant short-term IMF assistance. In today's world of massive,
volatile capital flows, the IMF should not step in and bail out banks and
private lenders who knowingly took investment risks. Good global governance
means that speculators and bankers should not get special treatment.

While the IMF reins in its activities, it must adhere to principles of
global economic governance. One necessary step is more progress in the area
of access to information. Many of the country documents that should have
contained the fund's warnings about the Asian economies were not made
public. The annual economic surveys (Article IV consultations) should be
public documents, although certain sensitive information could be withheld.
Currently, the IMF only makes available, on a voluntary basis, a brief,
sanitized summary. More comprehensive information is critical if
international bankers and investors are expected to make sound decisions
about investing in a country, and such input would help avoid the types of
financial crises that are spreading throughout the world. 

IMF governance would also be improved by making the Executive Board, which
runs the IMF on a day-to-day basis, more accountable for its decisions. The
IMF Executive Board essentially operates behind closed doors and makes
agreements by consensus. Only rarely do recorded votes allow an outsider to
verify the position of a particular country's representative. The current
U.S. executive director, the official U.S. representative to the IMF,
admitted in an April 1998 congressional hearing that out of 2,000 decisions
she has only formally voted about twelve times. With such secrecy, it is
extremely difficult for outsiders to judge the position of the IMF's board
members. Further complicating this problem is that board minutes are made
available only after a 30-year time lag, again preventing the public from
knowing a government's position on a given issue at the IMF. At a minimum,
summaries of all board discussions should be made immediately available,
and board votes should be public. These changes would also help shed light
on the enormous influence that the United States and other industrialized
nations play in determining IMF policy and would help democratize
decisionmaking at this institution. A weighted voting method, however, will
never be as equal as the UN model of one nation, one vote.

The IMF should also establish an independent evaluation unit that can
systematically assess the effectiveness and impact of IMF policies and
programs. This unit should be independent of IMF management, and it should
consult with a broad array of actors to determine the full effect of IMF
operations around the world. These reviews should be public, and the
Executive Board should issue a response or action plan for each review's
recommendations. 

Finally, discussions between the IMF and a borrowing country, to the
greatest extent possible, must involve the full range of cabinet ministers
and parliamentary leaders. Without the representation and agreement of a
wide set of government authorities and without appropriate consultation
with the public by the government through regular interactive meetings,
hearings, and workshops, IMF programs may not identify core problems,
predict likely negative outcomes, and win popular support for difficult
measures. Although broad public consultation may not be immediately
possible in times of crisis, there are many opportunities to establish more
regular contact between IMF officials, government officials, and the
public. The IMF's resident representatives should take a strong role in
encouraging such public dialogue and in following such initiatives to
ensure that public sentiment is known to the IMF. Reforms that have the
support of the populace-rather than those imposed without consultation by
the IMF-are much more likely to be appropriately targeted and successfully
adopted.

Carol Welch is an international policy analyst at Friends of the Earth in
Washington, DC, where she specializes in  international financial
institutions.


Sources for More Information

Organizations

Bretton Woods Project
PO Box 100
London SE1 7RT
United Kingdom
Voice: 44-171-523-2117
Fax: 44-171-620-0719
Email: bwref@gn.apc.org
Contact: Angela Wood

Center of Concern
1225 Otis St. NE
Washington, DC 20017
Voice: (202) 635-2757
Fax: (202) 832-9494
Contact: Jo Marie Griesgraber

Centre for the Study of Global Governance
St. Philips Building
London School of Economics
Houghton St.
London WC2A 2AE
United Kingdom
Voice: 44-171-955-7583
Fax: 44-171-955-7591

Focus on the Global South
c/o CUSRI, Wisit Prachuabmoh Building
Chulalongkorn University
Phyathai Rd.
Bangkok 10330
Thailand
Voice: 66 2 218 7363
Fax: 66 2 255 9976
Email: admin@focusweb.org
Website: http://www.focusweb.org
Contact: Walden Bello

Friends of the Earth
1025 Vermont Ave. NW, Third Fl.
Washington, DC 20005
Voice: (202) 783-7400
Fax: (202) 783-0444
Website: http://www.foe.org/FOE
Contact: Carol Welch

Third World Network
228 Macalister Rd. 
10400 Penang
Malaysia
Voice: 60 4 226 6728
Fax: 60 4 226 4505
Email: twn@igc.apc.org or twnpen@twn.po.my
Website: http://www.twnside.org.sg
Contact: Martin Khor

Publications

Jan Aart Scholte, The International Monetary Fund and Civil Society: An
Underdeveloped Dialogue (The Hague, Netherlands: Institute of Social
Studies, 1998).

Marijke Torfs and Carol Welch, Arming NGOs with Knowledge: A Guide to the
International Monetary Fund (Washington, DC: Friends of the Earth, 1998). 

Carol Welch and Angela Wood, "Policing the Policemen: The Case for an
Independent Evaluation Mechanism for the IMF," available at http://www.foe.org

Carol Welch, "Structural Adjustment Programs," Foreign Policy In Focus,
April 1998, available at
http://www.foreignpolicy-infocus.org/briefs/vol3/v3n3sap.html

Ngaire Woods, Governance in International Organizations: The Case for
Reform in the Bretton Woods Institutions (New York: United Nations
Conference on Trade and Development, 1997).

World Wide Web

Oxfam International
http://www.oneworld.org/oxfam/

European Network on Debt and Development
http://www.oneworld.org/eurodad/


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