In the wake of the global credit crunch, the International Monetary Fund (IMF) has come under renewed scrutiny. Some critics have signaled that a raise in contributions should be matched with more representation for those donors. Others have asked if the IMF should not have seen the current crisis coming and if the organization still has a credible role to play on the world stage, as for decades it promoted a neo-liberal agenda of privatization, deregulation and liberalization of financial markets in developing countries. Today it stands among the main cheerleaders for the wave of state interventions to keep the global financial system afloat. The IMF was established at Bretton Woods in 1944 with the goal of stabilizing exchange rates and assisting in the reconstruction of the post-WWII global order. Today the IMF has 185 member states, whose financial contributions enable the organization to offer short-term loans to countries with payment imbalances, given they are willing to structurally readjust their economies. Both the IMF and its Bretton Woods sister organization, the World Bank, aim to bring progress and prosperity by promoting free trade. The latter, however, works with a broader, long-term agenda.
“The core principles adopted in 1944 remain intact, of course; the promotion of economic growth through the expansion of trade, all underpinned by the stable international financial system,” said the IMF’s first deputy managing director, Anne Krueger, at the celebration of the IMF’s 60-year anniversary in 2004. Ironically, Krueger held her speech at the Central Bank of Iceland, one of the IMF’s founding members and one of the main victims of the current financial crisis. In October, Iceland became the first developed nation to obtain an IMF loan since 1976.
Organizational intransigence
Although there seems to be a widespread consensus to ‘renovate’ the IMF, it is unlikely significant changes will materialize any time soon. Illustrating this was the G-20 meeting in Washington on November 15. The group’s final communiqué called for more regulation and transparency in the world’s financial markets, yet it failed to mention how to achieve this. The statement stressed that the IMF still has an important role to play in crisis response and it urged member states to supply the organization with sufficient resources to fulfill its role. The G-20 also claimed to be committed to reform the IMF and the World Bank so that “they more adequately reflect changing economic weights in the world economy.”
IMF Managing Director Dominique Strauss-Kahn welcomed the G-20 leaders’ support and backed their call for reform. He also claimed that a stimulus package of some two percent of global GDP is needed to get the world economy back on track and praised the hefty stimulus packages introduced by governments from Tokyo to Washington. Meanwhile, the IMF introduced new short-term liquidity facilities to enable cash-strapped countries to get loans in less than two weeks with fewer strings than normally attached. To help stop the global crisis from spreading, Britain’s Prime Minister Gordon Brown called upon the Gulf countries to pledge “hundreds of billions” of dollars to the IMF. The organization’s reserves were seriously depleted following emergency loans to countries such as Iceland ($2.1 billion), Hungary ($15.7 billion) and Ukraine ($16.5 billion). In addition, the IMF has reached an initial loan agreement worth $7.6 billion with Pakistan, while Turkey is desperately trying not to ask for a $10 billion loan. Aware of the fact that Arab leaders might prove unwilling to contribute to the IMF, Brown also called for the structure of the IMF to be changed to better reflect the rising economic power of the Gulf region. An editorial in Abu Dhabi’s English-language daily The National spelled it out quite bluntly. “Mr. Brown has made clear his belief that when international institutions are reformed, as they must be, the Gulf States should play a much more influential role in those institutions. There must be, in other words, a seat at the table.” Currently, as the president of the World Bank is per definition an American, the IMF top post always goes to a European. The organization’s main decisions are made by a 24-member executive board, in which the IMF’s main creditors — the US, Japan, Germany, France and Britain — have a fixed seat. Other member states are organized in regional groups, which select a single member to the board. Voting power is based on the contributions made by member states, which reflect the strength of their national economies. The world’s largest economy, the US, has 17 percent of voting power, the EU 32 percent, while the G7 represents but four percent of member states, yet it has 45 percent of the votes. The voting power of the developed world is further enhanced by the fact that structural decisions, including changing quota-based voting procedures, needs an absolute majority of 85 percent, which means that the US alone can block any changes deemed undesirable, as it holds 17 percent of the vote. In March 2008, the IMF announced it backed a limited reform of voting power, by which some emerging economies, such as China, India and Brazil would gain ground at the expense of other mid-table economies such as Russia, Egypt, Saudi Arabia and Argentina. The IMF’s limited democratic caliber has long been a cause for grievances, especially among developing nations. Not only is the IMF boardroom dominated by the developed world, it is the developing world that is on the receiving end of most of its decisions. Critics claim the IMF technocrats push through fundamental economic policies regardless of the wishes of the local population. Finally, the World Bank and IMF democratic reputations are not exactly helped by their track records. During the Cold War, the duo had no problem supporting dictators, as long as they were on good terms with the capitalist world. In the 1960s, for example, both the IMF and World Bank issued loans to Brazil’s military dictatorship, having previously refused to support its democratically elected government. That said, however, the IMF is in more than just managerial trouble. Following the organization’s highly unpopular shock therapies in Argentina and Russia, more countries today question if neo-liberal orthodoxy is always the right approach to economic and social well-being. Following years of liberalization and privatization, some 90 percent of South America’s population is currently ruled by left-leaning governments that share an anti-IMF stand and, like the Asians, they are in the process of establishing a regional bank to deal with future calamities. While to most people the financial crisis came completely out of the blue, professor Paolo dos Santos of the School of Oriental and African Studies at the University of London recently argued that the ground for the global crisis was laid by privatization, liberalization and deregulation. International organizations such as the IMF have played a crucial role in pushing these policies throughout the world, thus exposing them to the current downturn. “Bank economists led the policy push for the entry of top international banks into middle-income economies,” wrote Dos Santos. “The International Finance Corporation (IFC) provided handsome financial support to the development of many of the financial models and instruments at the heart of this crisis, including consumer and mortgage lending, loan securitization, mortgage-backed securities, collateralized debt obligations, and originate-and-distribute business models.” The IMF’s policies are closely linked to the ‘Washington Consensus,’ a term first coined by economist John Williamson to describe the economic reform conditions prescribed to developing countries in crisis by the US Treasury and Washington-based institutions such as the IMF and World Bank. The package includes lowering taxes, trade liberalization, privatization and deregulation of financial markets.
Not all bad
In defense of the IMF, however, it should be noted that the institution in recent years seems to have slightly distanced itself from orthodox neo-liberal thought. In 2006, for example, it published Garry Schinasi’s study, ‘Safeguarding Financial Stability’, which claims that the deregulation and liberalization of financial markets, as prescribed by partisans of the Washington Consensus, has lead to market fragility and instability and could have disastrous economic consequences. It is interesting to see that the main criticism of the neo-liberal mantra often stems from economists themselves. Schinasi worked for nearly a decade as a senior researcher at the IMF. Contrary to what many free-market ideologists believe, Ha-Joon Chang, professor of economy at Cambridge University claims that developed countries did not subscribe to free market policies while they were developing. In fact, the biggest 19th century opponent to free trade was the US. Yet, the biggest blow so far to the IMF’s credibility has been the resignation of the World Bank’s former senior vice-president and chief economist, Joseph Stiglitz, who went on to win the Nobel Prize. Stiglitz evaluated the IMF’s shock-therapies in South America and Eastern Europe and concluded that they had barely booked any positive results. Under pressure from Washington, Stiglitz resigned. Shortly after, he wrote in The New Republic, “They’ll say the IMF is arrogant. They’ll say the IMF doesn’t really listen to the developing countries it is supposed to help. They’ll say the IMF is secretive and insulated from democratic accountability. They’ll say the IMF’s economic ‘remedies’ often make things worse — turning slowdowns into recessions and recessions into depressions. And they’ll have a point. I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled.”
