The International Monetary Fund (IMF) is a key global institution which was established as part of the Bretton Woods financial system in the aftermath of the Second World War. This institution, along with the World Bank, was tasked with reviving the war-ravaged world economy; therefore, the IMF focused on providing international economic cooperation, especially after the Great Depression. The agenda of the IMF has changed considerably over the decades since its establishment. Today, it concentrates on providing technical advice and loans to better align countries’ economic policies with the global economy. Despite the crucial role it plays, the Fund has received criticisms for various reasons — voting structures favouring developed countries, conditionality attached to loans, adopting one-size-fits-all strategies, inability to foresee the 2008 Financial Crisis, alleged neoliberal imperialism, and accusations of incompetence. This article will evaluate these issues and assess how the IMF must be restructured to meet the current global realities.
The IMF, along with the World Bank and the World Trade Organisation (previously, the General Agreement on Tariffs and Trade), forms the triad of the global economic regulation system. The Fund is headquartered in Washington, DC, and is led by a European Managing Director. Since the era of fixed exchange rates ended in 1971, the IMF has focused on evaluating the macroeconomic policies of governments and providing economic advice. Since the 1980s, it has played the additional role of promoting neoliberal economic policies among developing and former Soviet Union countries. These neoliberal policies focus on removing trade and non-trade barriers, adopting free-market principles in economic policy, slashing spending on public services, opening up the domestic economy for overseas investment and reducing bureaucratic control of the economy.
Many countries in the global south accuse the IMF of promoting policies that are favourable to the United States, its western European allies, and Japan, since most foreign direct investment (FDI), trade and capital is controlled by the US and its allies. It is argued that developing countries cannot compete with developed countries in an economic realm based on neoliberal rules. This is mainly owing to the large existing markets, high-income employment and infrastructure that developed nations possess, whereas developing countries continue to face economic, political and social problems which may be exacerbated by blindly adopting neoliberal policy prescriptions.
Another related criticism is the ‘conditionality’ imposed by the IMF through its Structural Adjustment Programmes (SAPs), whereby countries requesting loans do not qualify unless they adopt neoliberal economic policies prescribed by the IMF. Developing countries, especially the Least Developed Countries (LDCs), have criticized this policy as neoimperialism. In order to rectify such criticisms, the IMF must adopt more inclusive strategies by tailoring its assistance based on country and region, renouncing conditionality as part of loan guarantees. Consulting domestic policymakers, hiring economists from developing countries, understanding the abilities and requirements of borrowers, and updating its policies to reflect the changing balance of power in the global system are also essential steps.
The voting structure of the IMF has been criticized for being disproportionately inclined towards the West. The quota system of voting comprises of basic votes (each member gets 5.502% of the total votes) and one additional vote for 100,000 units of Special Drawing Right of a member country's quota (SDRs are reserve assets maintained by the IMF which represents a claim to currency).
Although this may seem fair, the real reason it has drawn criticism is the supermajority of 85% required to pass any major proposals. This means that the United States, Japan and the European Union countries (who usually vote along similar lines) have a de facto veto power in the IMF. In essence, these countries, and the US in particular, may block loans to developing countries that do not comply with the requests of the West or align with the US foreign policy.
The SDRs are determined by the countries’ current prominence in terms of international trade and national foreign exchange reserves. Poorer countries, therefore, have lesser say in issues that affect them the most, owing to the fewer share of votes they can secure. In order to better reflect the changing global economic power systems, the IMF must adopt a voting system where one vote is allocated to each member state, and countries may separately decide to choose how their respective reserves and contributions are to be used by the Fund. For instance, Norway concentrates on divestment from fossil fuels; therefore, it may decide that its contributions must be used to this effect only, while having one vote just as any other member.
The biggest shortcoming of the IMF came about when it failed to predict or halt the 2008 Global Financial Crisis, which was the most devastating economic crisis since the Great Depression. Prakash Loungani, an IMF economist, states that ‘the [IMF] record of failure to predict recessions is virtually unblemished’, meaning that the IMF does not predict recessions or financial crisis as well as it should, despite having the best access to information about the global economy.
Predictions from the IMF have aligned with private sector predictions. This creates a problem -while the private sector focuses on personal gain, the IMF must act as a watchdog; it cannot become complicit with the private sector and replicate its errors and miscalculations. The 2008 Crisis precipitated with the sub-prime mortgage crisis in the United States where banks were unable to recover mortgage payments from defaulting borrowers who were given credit despite having low credit scores. This portrays that the Fund may be unable to or even unwilling to use all of its resources to intervene in the affairs of some of its powerful members, in this case, the US. Loungani opines that the IMF must actively forecast crises by monitoring the trends in macroeconomic, investment and trade policies, and fix the problems if and when they arise. This may be done by working closely and consistently with central banks and finance ministries, instead of providing one-off economic advice at irregular intervals.
Restructuring an international organisation at the scale of the IMF comes with its challenges — organizational inertia, lack of consensus among member-states, status-quo powers holding on to the mantle, unwieldy bureaucracy that has created a distinct culture of its own, and so on. Not everyone agrees that change is required. The caucus of developed countries argues that their voting rights in the Fund are justified because they are the largest contributors to the IMF. Developing countries may not have the technical capability or infrastructure required to lead the IMF. Moreover, developing countries may not be able or willing to earmark the magnitude of funds required to sustain the programmes of IMF. The Fund has not been rigidly fixated on traditionalism as was showcased with the historic 2016 reforms which made Brazil, India, Russia and China the few emerging economies to be ranked among the ten largest members of the IMF, due to changes in voting rights as a result of quota increases.
The IMF has largely replaced the SAPs with Poverty Reduction Strategy Papers to provide more holistic strategies to improve economic conditions in developing countries. The Fund has also initiated the Highly Indebted Poor Countries scheme which provides debt relief to LDCs which are overburdened with debt repayment. Hardcore critics of reform also point out that the loans of IMF are mere ‘handouts’ to developing countries led by authoritarian leaders who spend more on defence than on public services. The rhetoric of US President, Donald Trump, has largely followed this reasoning — developed countries should not be subsidizing poor governance in developing countries through the disbursal of loans to corrupt and despotic leaders.
An overarching claim that the IMF is closed to reform is not entirely correct, as was detailed in the preceding paragraph; neither is there consensus about whether the IMF must be reformed at all. Nonetheless, what is expected of the Fund is that it keeps up with the changing time. Emerging economies like Brazil, China, India, Mexico, and Russia have already begun shifting the global economic balance of power away from the West, and this will only become more prominent in the future. With their growing importance, the Asian Development Bank (Asia), the African Development Bank (Africa) and other regional financial institutions may take over from the IMF as economic advisory and support institutions. Therefore, a constant evolution, and not a one-off revolution, is required in the IMF or it risks losing its relevance in the future.
Evolution, Not Revolution: Reforming the International Monetary Fund
August 6, 2019
