[stop-imf] REFORMING THE IMF: BACK TO THE DRAWING BOARD

[Robert Weissman]

*           19 February 2006*
*           from Third World Network  (www.twnside.org.sg
<http://www.twnside.org.sg>)*
**
*           Dear friends and colleagues*
*           An important and path-breaking paper on the need to reform
the IMF, and in*
*           particular to have it not deal with trade and development
policies, has been*
*           authored by Yilmaz Akyuz (formerly Chief Economist of UNCTAD
and the main*
*           author and coordinator of its annual Trade and Development
Report).*
**
*           Below is an announcement of this paper, as well as a report
summarising its **main points.*
**
**
*           Please send any comments that you may have on the paper and
ideas for follow-up activity.*
*           *
*           With best wishes*
*           Martin Khor (Director, TWN)*
**
**
**
**
**
*         **REFORMING THE IMF:  BACK TO THE DRAWING BOARD*
*         **/By YILMAZ AKY=DCZ/*
*//*
         A comprehensive critique of the role of the International
Monetary Fund
         and a call for fundamental reforms is avaliable in the paper
"Reforming the IMF:
         Back to the Drawing Board."

         It is authored by Dr. Yilmaz Akyuz, former Chief Economist of
UNCTAD.
         Akyuz was formerly Director of UNCTAD's Division on
Globalisation and
         Development Strategies and the chief author and coordinator of
its annual
         Trade and Development Reports.

         The paper is published by the Third World Network and can be
found at
         http://www.twnside.org.sg/title2/par/IMFREFORM_word_with_cover_for=
_website_nov05.doc

         It was originally presented at the 21st technical group meeting
of the G24 held
         at the IMF headquarters in Washington on 15-16 September 2005.
The G24 is the
         main grouping of developing countries operating in the IMF and
World Bank.

         The paper comprehensively reviews the IMF's various activities
and performance,
         and provides reform proposals that include removing several
issues from its
         activities, changing the content of the remaining functions,
and overhauling the
         governance system.

         The paper makes the following main points:

         -- A genuine reform of the IMF would require as much a
redirection of its activities
         as improvements in its policies and operational modalities.



-- There is no sound rationale for the Fund to be involved in
development and

trade policy, or in bail-out operations in emerging market crises.



-- It should focus on short-term counter-cyclical current account
financing and

policy surveillance.



-- To be effective in crisis prevention it should help emerging markets
to manage

unsustainable capital inflows by promoting appropriate measures,
including direct

and indirect controls.



-- It should also pay greater attention to destabilizing impulses
originating from

macroeconomic and financial policies in major industrial countries.



-- Any reform designed to bring greater legitimacy would need to address

shortcomings in its governance structure, but the Fund is unlikely to
become a

genuinely multilateral institution with equal rights and obligations for
all its

members,/  //de facto/ as well as /de jure/, unless it ceases to depend
on a few countries

for resources and there is a clear separation between multilateral and
bilateral

arrangements in debt and finance.





To view the full paper, click on the webpage below:



http://www.twnside.org.sg/title2/par/IMFREFORM_word_with_cover_for_website_=
nov05.doc





For a summary report of the paper, please see below.





-----------------------------------------------------

* *



*"THE IMF SHOULD GIVE UP DEVELOPMENT AND TRADE POLICY"*

**

*Report on some Highlights of the Paper by Yilmaz Akyuz *

*on "Reforming the IMF: Back to the Drawing Board"*


The International Monetary Fund should give up its lending and policy
activities
relating to development and trade, and instead return to its original
mandate
of safeguarding international financial stability.

This is one of the key messages in a paper "Reforming the IMF: Back to the
Drawing Board"  by Dr. Yilmaz Akyuz, former Chief Economist of UNCTAD.

The paper is published by the Third World Network and can currently be
found at this webpage:
http://www.twnside.org.sg/title2/par/IMFREFORM_word_with_cover_for_website_=
nov05.doc




It was originally presented at a meeting of the G24 held at the IMF
headquarters
in Washington on 15-16 September 2005.
The paper comprehensively reviews the IMF's various activities and
performance, and provides reform proposals that include removing several
issues from its activities, changing the content of the remaining functions=
,
and overhauling the governance system.

The paper by Akyuz makes the following major points:



*IMF SHOULD RETURN TO ORIGINAL MANDATE*

The original rationale of the Fund, namely to safeguard international
monetary
and financial stability, is now even stronger than in the immediate postwar
era given the size and speed of international capital flows and their
capacity
to inflict damage on the real economy.

Thus, the Fund needs to go back to its core objectives and focus on
preventing market and policy failures in order to attain greater
international economic stability and facilitate expansion of employment,
trade and income."


*REFORMS NEEDED ON MANY FRONTS*

To realise this objective, there should be reforms of the IMF on many
fronts, including:

(a)  The IMF to have a greater focus and stay out of development finance
and policy.

(b) There should be strict limits to its crisis lending and instead the
Fund should
develop orderly debt workout mechanisms.
(c) The Fund should also focus on lending to finance temporary current
account
imbalances, with greater automaticity in meeting imbalances and less
emphasis
on policy adjustment.

(d) Conditionality should not be extended to structural issues but
confined to
macroeconomic and exchange rate policies.
(e) The IMF's surveillance activity has increased the vulnerability and
fragility
of emerging markets by promoting premature capital account
liberalization and
failing to alert countries to looming dangers. There should thus be
fundamental
change in the IMF's approach to capital market issues.

(f) The reforms must also address shortcomings in the Fund's governance.


*NO REASON FOR IMF TO BE IN DEVELOPMENT*

The paper says that the Fund is no longer performing its original
functions - securing multilateral discipline in exchange rate policies and
providing liquidity for current account financing. Rather, it has been
focussing on development finance and policy and poverty alleviation in poor
countries, and the management and resolution of capital account crises in
emerging markets.

The paper argues that there is no sound rationale for the Fund to be
involved in development matters, including long-term lending. This is also
true for trade policy which is a matter for multilateral negotiations
elsewhere in the global system. There is also little rationale for financia=
l
bail-out operations that have so far been the main instrument of the Fund's
interventions in crises.

*WHAT THE FUND SHOULD FOCUS ON*

By contrast the Fund should pay much greater attention to two areas in whic=
h
its existence carries a stronger rationale: namely, short-term,
counter-cyclical current account financing, and effective surveillance over
national macroeconomic and financial policies, particularly of countries
which have disproportionately large impact on international monetary and
financial stability.

The IMF was originally designed to ensure an orderly system of internationa=
l
payments at stable but adjustable exchange rates under conditions of
strictly limited international capital flows. A key task was to provide
international liquidity to avoid deflationary and destabilizing adjustments
and trade and exchange restrictions in countries facing temporary balance o=
f
payments deficits.

*THE PROBLEM WITH CONDITIONALITY*

A major divergence from the Bretton Woods objectives has been in
conditionality. Through conditionality the Fund has imposed exactly the kin=
d
of policies that the postwar planners tried to avoid in countries facing
payments difficulties - austerity and destabilizing currency adjustments.

Austerity has been promoted not only when balance of payments difficulties
were due to excessive domestic spending or distortions in the price
structure, but also when they resulted from external disturbances such as
adverse terms of trade movements, hikes in international interest rates or
trade measures introduced by another country.

Furthermore, the distinction between temporary and structural dis-equilibri=
a
has become blurred, often implying that a developing country should
interpret every positive shock as temporary and thus refrain from using it
as an opportunity for expansion, and every negative shock as permanent, thu=
s
adjusting to it by cutting growth and/or altering the domestic price
structure.

*THE IMF SHOULD GET OUT OF DEVELOPMENT POLICY*

The paper analyses the IMF's "mission creep" into development finance and
policy. The Fund has been criticised for three things: its promotion of
rapid deregulation and liberalization, with adverse effects on growth and
poverty; the interference with sovereignty caused by Fund conditions; and
the inadequacy of financing for such programs.

Akyuz, however, pointed to the issue of whether the Fund should really be
involved in development finance and policy, and poverty alleviation. He sai=
d
there are indeed no compelling reasons why the IMF should deal with
structural problems in developing countries. As noted, the Fund moved
towards developing countries in large part because it was no longer needed
by industrial countries as a source of liquidity and it lost leverage over
exchange rate and macroeconomic polices of these countries.

The Fund introduced long-term facilities and concessional lending. In doing
so, however, it has gone into the domain of development, with its programs
and structural conditionality having addressed almost all areas of
development policy, which are issues dealt with by multilateral development
banks.

This is problematic for several reasons. First, it is not clear that the
Fund has the necessary competence and experience in such complex issues.
Furthermore, there are serious risks in entrusting development matters to a=
n
organization preoccupied with short-term financial outcomes and susceptible
to strong influences from sudden shifts in market sentiments about the
economies of its borrowers.

Difference of perspective is a latent source of conflict and competition
between the Bank and the Fund, creating confusion in countries relying on
policy advice from these institutions.

In reality much of what is being done in development by the Fund could
easily be transferred to the Bank, said Akyuz. It is important that they
have distinct mandates and objectives. He suggested that the Fund should
cease development-related activities and transfer them to the Bank.


*THE FUND'S MISGUIDED TRADE POLICY*

The paper criticises the Fund's intrusion into trade policy matters. It say=
s
that the Fund, as a monetary institution, was not to be involved in trade
issues. In the event, however, it has gone in the opposite direction,
putting pressure on deficit developing countries to undertake payments
adjustment despite mounting protectionism in industrial countries against
their exports, forcing them to resort to import compression and sacrifice
growth.

More importantly, it has increasingly seen trade liberalization as an
important component of structural adjustment to trade imbalances.

Low-income countries and LDCs working under Fund programs have been
encouraged and even compelled to undertake unilateral trade liberalization,
putting them at a disadvantage in multilateral trade negotiations. Trade
liberalization has also been promoted in certain emerging market economies.

An implication of unilateral liberalization is that the industrial countrie=
s
would not need to lower their tariffs in areas of export interest to
developing countries in order to secure better access to the markets of
these countries in the WTO where trade concessions are based on some form o=
f
reciprocity.

Liberalization without improved market access in the North creates the risk
of deterioration in their trade balances, hence leading either to a tighter
external constraint and income losses, or to increased external debt.

Developing countries find it difficult to raise their tariffs once they are
lowered. Also, applied tariffs are now a benchmark in binding and reducing
tariffs in the current negotiations on industrial tariffs in the WTO.

The paper notes that Fund staff have been advancing arguments in favour of
unilateral liberalization in developing countries that go even beyond the
positions advocated by major developed countries in the current negotiation=
s
on industrial tariffs.

It is advisable for the Fund to focus on its core responsibility of
ensuring greater stability and better alignment of exchange rates, rather
than narrowing the policy space for developing countries in matters related
to trade and pushing trade liberalization as if a consistent international
monetary order had existed.

"As the Fund transfers its work on development to the Bank, it should also
stop being involved in trade policy issues or undertake activities that
interfere with multilateral trade negotiations."


*THE MISMANAGEMENT OF FINANCIAL CRISES*

On the IMF's handling of recent financial crises, the paper criticises the
Fund's ad hoc management of crises and instead proposes that it assists in
orderly debt workouts. It says the IMF rescue packages tend to aggravate
market failures and financial instability by creating moral hazard. The
bailouts encourage imprudent lending since private creditors are not made t=
o
bear the consequences of the risks they take.

The paper adds that there has been growing agreement that orderly debt
workout procedures drawing on certain principles of national bankruptcy law=
s
provide a viable alternative to official bailout operations.

These should meet two goals: prevent financial meltdown in developing
countries facing debt servicing difficulties and facilitate an equitable
restructuring of debt. This requires a few key principles: a temporary debt
standstill; provision of debtor-in-possession financing; and debt
restructuring including rollovers and write-offs, based on negotiations
between the debtor and creditors.

These principles could serve as the basis for a coherent approach to crisis
intervention. The Fund appeared to be moving in this direction at the end o=
f
the previous decade, with the Board at first recognizing that a unilateral
standstill may be necessary in extreme circumstances, and the Fund
secretariat moving towards a sovereign debt restructuring mechanism (SDRM).

The secretariat's SDRM proposal had many shortcomings. But
even a watered down version could not elicit adequate political support, an=
d
has been put on the backburner. Indeed, the impetus for reform has generall=
y
been lost.

NOTE:  This is a shorter version of a report on the paper that was
published in
the South North Development Monitor (SUNS)