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IMF PRIORITIES AND POLICIES NEED URGENT REFORM

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GENEVA, Jun 15 2011 (IPS) - Much of the recent public discussion on the International Monetary Fund has been about the successor to Dominique Straus-Kahn and the flawed system of choosing its chief.

However, an even more significant issue is the reform needed on the mandate, agenda and policies of the IMF.

In its website under the rubric “About the IMF”, the Fund defines its main purpose as the provision of “the global public good of financial stability”.

The record of the IMF in preventing financial instability and crises leaves much to be desired. Recent decades have seen repeated gyrations in exchange rates of major currencies, persistent and growing trade imbalances, recurrent balance-of-payments, debt and financial crises in many countries.

The IMF has been unable to cope with misguided policies in countries with large influence on global financial conditions, or with instability caused by financial markets and international capital flows unleashed by widespread liberalization which it has been constantly espousing.

A reason for this is that the Fund has no teeth vis-à-vis its non-borrowing members. But, more importantly, the IMF has generally been unable to identify the build-up of financial fragilities, predict instability and crises and issue early warnings in large part because of its blind faith in markets.

In the sub-prime turmoil, it missed the biggest crisis of its lifetime. It has almost constantly failed to warn developing countries against destabilizing capital flows, unsustainable exchange rates, payments and debt positions.

Since the mid-1990s several countries working under IMF programs confronted severe instability and crises and in some cases, such as Russia and Argentina, sovereign default could not be avoided. The IMFÂ’s debt sustainability analyses and recommendations left many poor countries in disarray when they fell into debt distress.

The more the IMF has failed to prevent instability and crises, the more it has become involved in crisis management and lending which is now its primary activity.

IMF emergency lending is said to play multiple roles -provide breathing space to countries facing severe crises, prevents crises in countries with sound policies, and to diminish the need for self-insurance in international reserves.

However, the evidence shows that Fund lending rarely prevents economic downturn in countries facing payments instability and crises. By contrast, such lending is often associated with pro-cyclical policy conditionality which serves to deepen the impact of the financial crises on jobs and incomes. This is still the case with the IMF programs with European countries despite the improvements claimed.

But more importantly, emergency lending could create more problems than it solves. When the scale is large, it can endanger the financial integrity of the IMF. It is not always easy to determine if a crisis is one of liquidity rather than insolvency. Argentina and Russia ended up in default while receiving IMF support and there is no guarantee that Greece will now be able to avoid default.

Since the IMF crisis lending is effectively designed to keep countries current on debt payments to international creditors and to maintain an open capital account, it often leads to an unequal burden-sharing between creditors and debtors.

Commercial debt gets replaced by debt to the IMF which is often more difficult to renegotiate. Private debt gets dumped on the public sector –sovereign debt invariably rises after financial crises resulting from excessive build up of debt by the private sector. All these create moral hazard and prevent the operation of market discipline, because they allow investors and creditors to escape without bearing the full consequences of the risks they have undertaken.

Because of the problems posed by bailout operations, the primary task of the Fund should be crisis prevention rather than crisis lending. This calls for a significant improvement in the quality of the FundÂ’s financial and economic surveillance. It also calls for a reform of its membersÂ’ obligations so as to bring about a reasonable degree of multilateral discipline over macroeconomic, exchange rate and financial policies of its main shareholders.

There is a stronger case for multilateral discipline in money and finance than in other areas including trade since adverse external spillovers from monetary and financial policies in systemically important countries tend to be much more damaging.

But even with radical reforms in these areas, balance-of-payments and financial crises will continue to occur. Emergency lending is neither the only nor the best way of dealing with them. An alternative method is orderly debt work-out procedures based on widely recognized principles of insolvency designed to secure the involvement of private lenders and investors in crisis resolution.

This is more equitable between debtors and creditors and between private and official lenders, and more effective from the point of view of their impact on the behaviour of lenders and investors and, hence, on financial stability.

This is a vital component of the reforms needed to strengthen the IMFÂ’s role in crisis prevention. Otherwise, the IMF may increasingly become a quasi-international lender-of-last-resort without the requisite capacity and power of oversight and this will likely do more harm than good.

The international monetary system needs to be restored with the primary objective of preventing instability and crises and the missing components should now be evident.

However, some of the most important issues such as enforceable exchange rate and adjustment obligations, the international reserves system and orderly sovereign debt workout mechanisms are not squarely on the agenda of the IMF nor the G20.

Developing countries have a particular stake in this endeavour given their vulnerability and limited capacity to respond to shocks.

If major countries do not support the establishment of an orderly and equitable international monetary and financial system, developing countries should find ways and means of protecting themselves and looking after their interests through regional mechanisms. (END/COPYRIGHT IPS)

(*) Yilmaz Akyuz, Chief Economist, South Centre, Geneva ( www.southcentre.org) ============================================================ ============================================================

IMF PRIORITIES AND POLICIES NEED URGENT REFORM

By Yilmaz Akyuz (796 words)

// NOT FOR PUBLICATION IN CANADA, CZECH REPUBLIC, IRELAND, POLAND, AND THE UNITED STATES //

IPS COLUMNIST SERVICE, JUNE 2011

Editor’s note:

Much of the recent public discussion on the International Monetary Fund has been about the successor to Dominique Straus-Kahn and the flawed system of choosing its chief. However, an even more significant issue is the reform needed on the mandate, agenda and policies of the IMF, writes Yilmaz Akyuz, Chief Economist of the South Centre (Geneva).

The IMF has been unable to cope with misguided policies in countries with large influence on global financial conditions, or with instability caused by financial markets and international capital flows unleashed by widespread liberalization which it has been constantly espousing.

Because of the problems posed by bailout operations, the primary task of the Fund should be crisis prevention rather than crisis lending. This calls for a significant improvement in the quality of the FundÂ’s financial and economic surveillance. It also calls for a reform of its membersÂ’ obligations so as to bring about a reasonable degree of multilateral discipline over macroeconomic, exchange rate and financial policies of its main shareholders. ———————————————————————— IMF PRIORITIES AND POLICIES NEED URGENT REFORM

By Yilmaz Akyuz (*)

GENEVA, Jun (IPS/South Centre) Much of the recent public discussion on the International Monetary Fund has been about the successor to Dominique Straus-Kahn and the flawed system of choosing its chief.

However, an even more significant issue is the reform needed on the mandate, agenda and policies of the IMF.

In its website under the rubric “About the IMF”, the Fund defines its main purpose as the provision of “the global public good of financial stability”.

The record of the IMF in preventing financial instability and crises leaves much to be desired. Recent decades have seen repeated gyrations in exchange rates of major currencies, persistent and growing trade imbalances, recurrent balance-of-payments, debt and financial crises in many countries.

The IMF has been unable to cope with misguided policies in countries with large influence on global financial conditions, or with instability caused by financial markets and international capital flows unleashed by widespread liberalization which it has been constantly espousing.

A reason for this is that the Fund has no teeth vis-à-vis its non-borrowing members. But, more importantly, the IMF has generally been unable to identify the build-up of financial fragilities, predict instability and crises and issue early warnings in large part because of its blind faith in markets.

In the sub-prime turmoil, it missed the biggest crisis of its lifetime. It has almost constantly failed to warn developing countries against destabilizing capital flows, unsustainable exchange rates, payments and debt positions.

Since the mid-1990s several countries working under IMF programs confronted severe instability and crises and in some cases, such as Russia and Argentina, sovereign default could not be avoided. The IMFÂ’s debt sustainability analyses and recommendations left many poor countries in disarray when they fell into debt distress.

The more the IMF has failed to prevent instability and crises, the more it has become involved in crisis management and lending which is now its primary activity.

IMF emergency lending is said to play multiple roles — provide breathing space to countries facing severe crises, prevent crises in countries with sound policies, and to diminish the need for self-insurance in international reserves.

However, the evidence shows that Fund lending rarely prevents economic downturn in countries facing payments instability and crises. By contrast, such lending is often associated with pro-cyclical policy conditionality which serves to deepen the impact of the financial crises on jobs and incomes. This is still the case with the IMF programs with European countries despite the improvements claimed.

But more importantly, emergency lending could create more problems than it solves. Argentina and Russia ended up in default while receiving IMF support and there is no guarantee that Greece will now be able to avoid default.

Since the IMF crisis lending is effectively designed to keep countries current on debt payments to international creditors and to maintain an open capital account, it often leads to an unequal burden-sharing between creditors and debtors.

Commercial debt gets replaced by debt to the IMF which is often more difficult to renegotiate. Private debt gets dumped on the public sector –sovereign debt invariably rises after financial crises resulting from excessive build up of debt by the private sector. All these create moral hazard and prevent the operation of market discipline, because they allow investors and creditors to escape without bearing the full consequences of the risks they have undertaken.

Because of the problems posed by bailout operations, the primary task of the Fund should be crisis prevention rather than crisis lending. This calls for a significant improvement in the quality of the FundÂ’s financial and economic surveillance. It also calls for a reform of its membersÂ’ obligations so as to bring about a reasonable degree of multilateral discipline over macroeconomic, exchange rate and financial policies of its main shareholders.

There is a stronger case for multilateral discipline in money and finance than in other areas including trade since adverse external spillovers from monetary and financial policies in systemically important countries tend to be much more damaging.

But even with radical reforms in these areas, balance-of-payments and financial crises will continue to occur. Emergency lending is neither the only nor the best way of dealing with them. An alternative method is orderly debt work-out procedures based on widely recognized principles of insolvency designed to secure the involvement of private lenders and investors in crisis resolution.

This is more equitable between debtors and creditors and between private and official lenders, and more effective from the point of view of their impact on the behaviour of lenders and investors and, hence, on financial stability.

This is a vital component of the reforms needed to strengthen the IMFÂ’s role in crisis prevention. Otherwise, the IMF may increasingly become a quasi-international lender-of-last-resort without the requisite capacity and power of oversight and this will likely do more harm than good. (END/COPYRIGHT IPS)

(*) Yilmaz Akyuz, Chief Economist, South Centre, Geneva http://www.southcentre.org/

 
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