Changing the IMF

Though the international monetary system has returned to relative tranquillity from the turbulence that began in the middle of 1997, the IMF as the system’s custodian and anchor continues to get flak from governments of member countries, politicians in the developed and developing countries alike, academicians and civil society at large. The hostility of the attacks may have abated somewhat, but the debate over the role of the IMF and its organisational structure and governance continues. The persistence of the criticism and the clamour for reform of the Fund reflect the multiple problems which the recent convulsive developments in the international economy – Mexico’s meltdown, the shake-up of the once rapidly growing east Asian economies and the Russian and Brazilian foreign exchange chaos – have left behind in their trail. These problems are not transient in nature and reflect the profound changes that have occurred in the world economy over the last decade and a half.

First, world trade has seen remarkable expansion and private financial flows to the emerging countries even more, from almost $ 170 billion in the 1980s to approximately $ 1.3 trillion in the 1990s. This has had profound consequences for world development and financial stability. A larger number of countries, including some of the leading developing countries such as Brazil, Argentina, India, China and Thailand no longer depend on multilateral institutions like the IMF and the World Bank for medium- and long-term development finance. This function has been largely taken over by private capital flows. The flip side of this development is that the probability of financial instability has increased enormously, not only because of the fickle nature of the capital flows but also due to the temptation of both borrowers and lenders to dispense with discretion and sound judgment in such financial transactions. Governments too have not been immune to excessive and irrational borrowing, in disregard of the state of their national balance sheets, as illustrated by the short-term borrowing from abroad by Mexico, Thailand and Russia. The IMF can stand aloof while the going is good, but when the capital flows get reversed not only the economies of the countries concerned but those of other countries as well are destabilised. Since the Fund’s basic function is to stabilise the international system, its stance on lending, be it in regard to volume or conditionality, has acquired an importance out of proportion to its capacity to raise finances in sufficient volume to counter the unsettling effects of private capital flows. If the IMF slips up, as it indeed did with the ill-judged conditionalities attached to its lending to the east Asian countries, the international monetary system is further thrown out of kilter. Even when the conditionalities are appropriate, it is a moot point whether the IMF is at all in a position to marshal resources on the required scale to cope with the massive financing needs of the crisis-affected economies.