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FINANCE: IMF Slow to Adapt Despite Dwindling Clout

Analysis by Emad Mekay

WASHINGTON, Feb 16 2006 (IPS) - Both critics and supporters of the International Monetary Fund (IMF), once the preeminent institution of the multilateral financial system created by world’s most powerful nations, agree that the Fund is facing a legitimacy crisis that threatens its future.

But the Fund, while recognising the problems, has so far been sluggish to change despite numerous calls for reforms.

Intense questioning of the Fund’s future surfaced over the past few months after two of its main clients, Argentina and Brazil, said they were paying back their debts early. The move prompted speculation that the Fund, often charged with promoting policies that primarily serve international corporations and industrialised nations, may be losing its leverage and financial resource base.

Loans have been one of the main channels for the Fund to steer governments on issues like privatisation, deregulation and public spending cuts. Turkey, Indonesia, Argentina and Brazil are the four largest borrowers from the Fund, together accounting for 70 percent of its outstanding loans.

A second group of developing nations, mostly in Asia, which suffered in the late 1990s Asian financial crisis, are accumulating huge reserves to avoid ever resorting to the institution again.

Combined with proposed debt forgiveness plans for the poorest nations, this could reduce the IMF’s outstanding debts, whose interest sustains the Fund, to about 40 billion dollars by the end of 2006 from the April 2004 level of 90 billion dollars, according to data from the anti-debt group Jubilee Research.

Also fueling discontent with the IMF is the longstanding complaint by poorer nations that they are underrepresented in the body, which has been dominated by the United States and Europe since its founding in Bretton Woods in the U.S. state of New Hampshire in 1944.

This evident erosion of trust in the IMF has prompted supporters from rich nations, especially the United States, the largest shareholder at the Washington-based institution, to rally behind the Fund.

Declaring it “indispensable” earlier this month, Tim Adams, the U.S. Treasury undersecretary for international affairs, suggested that the economic stability of global markets, a crucial concern for firms seeking a secure environment in which to do business, should remain the function of a strong IMF that would more rigorously police global exchange rates.

This view was reinforced by a new study released on Tuesday recommending that the IMF become more, rather than less, involved in global financial affairs.

The International Institute of Economics (IIE), a Washington-based think tank, says that the world needs an effective IMF as the principal multilateral institution responsible for international economic and financial stability, even if this requires making concessions to developing nations.

Edwin M. Truman, the author of the study and former assistant secretary of the U.S. Treasury for International Affairs, argues that the IMF should strengthen its role in the international monetary system, bolster lending facilities and financial resources as well as reform its governance as required by poor nations.

One way to remain attractive, he suggests, is to promote the Fund’s potential for large-scale lending and explore new avenues as the global lender of final resort.

The IIE study says that the European Union should consolidate its representation into a single seat, or at most two, from its current 10 seats, and that IMF voting shares must be realigned to reflect the economic and financial weight of key emerging-market countries like India, China and Brazil.

“Progress on IMF governance is crucial to enhancing the Fund’s legitimacy and restoring member countries’ trust. Although countries generally agree on the need for such reform, the IMF has shown no movement to date,” Truman lamented.

But while IMF officials have generally agreed with proposals for more democratic governance, at the same time, they appear dismissive of the danger posed by the transition of developing nations away from dependence on the Fund.

In a speech at the Aspen Institute in Rome last week, IMF Managing Director Rodrigo de Rato, who has ordered a strategic review of the IMF’s future direction, endorsed some reforms in the Fund but saw no reason for worry over the dwindling appetite for IMF loans.

“I am not too concerned by this. It demonstrates economic success on the part of the countries, and the Fund has in the past lived with low levels of outstanding loans,” he said.

Suggesting that the IMF still has a key niche to fill, he argued that emerging-market economies that benefited from trade and investment in the current wave of corporate globalisation have also been exposed to the volatility of capital flows, and to capital account crises, an area in which the Fund can offer expertise.

He also maintained that the Fund’s core business of surveillance of national economies and of the global economy remains intact because the bulk of the IMF policy advice and technical assistance are provided outside the framework of lending.

Rato also took heart from the fact that other developing nations may still need the Fund and that “many emerging markets remain vulnerable”, and “not all have built up a cushion of reserves”.

Rato’s statements, although they carry technical weight, are indicative of how officials at the IMF rationalise their reluctance to adopt deep and real changes and choose instead cosmetic and feel-good measures, despite the longstanding calls for reform from critics and supporters alike.

“Bureaucracies don’t die easily, especially ones with a history of tremendous power,” said Soren Ambrose, an analyst with Solidarity Africa Network in Nairobi, Kenya.

“And it is the powerful ones that prove the hardest to reform. Despite its declining influence, the IMF’s immense arrogance and narrow-minded ideological obstinacy are still in place,” he concluded.