Reforming the IMF
The IMF was created at the Bretton Woods conference to extend credit to countries that have short-term balance-of-payments problems. It currently describes itself as “an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world” (IMF 2011).
Since its inception, the IMF’s role as lender of last resort has expanded. After the Asian financial crisis, the IMF was reviled for imposing poor policies on the weakened crisis countries in return for a loan. Blecker (1999) records criticisms post-Asian crisis against the IMF, as follows, for:
- • Imposing excessively harsh austerity policies that unnecessarily depress a country’s economy as a condition of obtaining bailouts;
- • Inviting speculative attacks by encouraging countries to maintain indefensible exchange rate targets with unsustainably high interest rates;
- • Worsening moral hazard problems by repeatedly bailing out foreign investors who take imprudent risks (and thus encouraging them to overinvest again);
- • Exacerbating financial panics by announcing that countries with temporary illiquidity problems and fundamentally sound economies were suffering from deep structural flaws;
- • Pushing capital market liberalization on countries that lack the requisite internal institutions and regulations to manage the resulting capital inflows;
- • Unduly interfering with domestic institutions and practices that are unrelated to the IMF’s core mission of solving balance-of-payments problems;
- • Prescribing macroeconomic and financial policies that ignore structural features of national economies and that fail to take into account their likely social and political effects; and
- • Worsening inequality by making ordinary workers and citizens bear the burden of adjustment through increased unemployment and reduced incomes, while bailing out wealthy creditors (both domestic and foreign).
Some of this was debatable at the time; Eichengreen (1999) noted that the IMF is a necessary institution since systemic risk continues to exist, and that the concern that the IMF presents moral hazard risk must be measured against the risk of systemic crisis. Evidence supporting creditor moral hazard associated with IMF bailouts has come to opposite conclusions, and further, some scholars believe that the risk of moral hazard may be constrained by conditionality (Bird 2007). The idea of conditionality itself is still a subject of debate.
Conditionality attached to IMF loan packages requires countries to implement policies that may or may not be in their favor. Certainly the intent of the IMF has been to improve the macroeconomic outlook of countries in crisis, but conditions imposed have often had a negative impact on the economies. Opponents of conditionality have argued that it may create uncertainty in policy ownership, and that it disempowers countries in making their own policies (Bird 2007). IMF policies have rarely been fully implemented (Ivanova et al. 2003), and there is no clear evidence that conditionality policies positively impact growth. In defense of the IMF, Kenneth Rogoff, former IMF Chief Economist, makes the case that countries must face budget constraints even in hard times since it is unrealistic to expect that running a budget deficit will eventually stimulate enough growth to make up for the increased debt levels (Rogoff 2003). While IMF intervention has been seen as exacerbating crises, it has also been seen as imposing a force of stability in crises. Rogoff (2003) also explains that the IMF has sided with neither private investors nor regular citizens.
The IMF, aware of these issues, set out to create new conditionality guidelines in 2000. These were approved in 2002, and set out to improve the implementation record and country ownership of conditionality guidelines. These guidelines also strove to ensure that the guidelines are appropriate to each case and to lay out specific performance criteria and benchmarks (IMF 2002).
Since the late 1990s and early 2000s, after the Great Recession, the IMF’s image has improved. The IMF played a partly uncontroversial role in the Great Recession due to the clear need to bail out Latvia, the Ukraine, Hungary, and Iceland (Bordo and James 2010).4 Austerity measures imposed as conditionalities on IMF-eurozone loans in Europe have, however, incited protests in several crisis-enveloped countries.
The US crisis of 2008 led G-20 countries to resolve to reform the IMF, in particular to ensure that the IMF better represented developing countries. The IMF agreed to governance reforms in November 2010 to better reflect the presence of developing countries. Brazil, Russia, India, and China (the BRIC countries) will become top ten shareholders, and 110 out of 187 countries will maintain or increase quota shares (IMF 2010b). The shift toward major emerging economies is slight but encouraging.5
The criticism that the IMF has failed to properly survey global imbalances was taken up in the replacement of the Financial Stability Forum with the Financial Stability Board (FSB), which has set out to improve surveillance of countries’ economic status. The Financial Stability Forum was created in 1999 to promote international financial stability, improve market functioning, and reduce systemic risk. The Financial Stability Board was assigned the tasks required of the Financial Stability Forum, as well as to monitor and advise on market developments and on the meeting of regulatory standards, review policy development work of the international standard-setting bodies, put forth guidelines for the establishment of supervisory colleges, manage contingency plans for international crisis management, and collaborate with the IMF to carry out Early Warning Exercises (Financial Stability Forum 2009). The FSB is still considered “soft” law rather than “hard” law, less enforceable than regulations drawn out by the World Trade Organization (WTO), for example (Arner and Taylor 2009).