Order Code RL32432
CRS Report for Congress
Received through the CRS Web
The International Monetary Fund:
June 10, 2004
Jonathan E. Sanford
Specialist in International Political Economy
Foreign Affairs, Defense, and Trade
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade
Congressional Research Service ˜ The Library of Congress
The International Monetary Fund: Future Prospects
The IMF was created in a world of fixed-parity exchange rates, where most
currencies were defined in terms of the U.S. dollar and the dollar was defined in
terms of gold. Countries could devalue their currencies only if they were faced with
— in the original language of Article IV — “fundamental disequilibrium” in their
economy and only if the IMF approved. International capital movements were
restricted and cumbersome. That world has now largely disappeared. Since the
1970s, the relative value of most major currencies is determined by world currency
markets, and the daily volume of international currency movements far surpasses the
volume of currency circulating in most major countries. Article IV was amended in
1976 to replace the fixed-parity exchange rate system with new procedures for
enhanced surveillance in the new world of flexible exchange rates.
This has led over time to the IMF having basically the same customer base as
the multilateral development banks (MDBs). While the IMF’s core concerns are
macroeconomic and exchange rate stability, many of the factors the IMF now takes
into account in its surveillance and loan programs are similar to those the MDBs
consider in their development programs. The IMF is a monetary institution, not a
development agency. Nevertheless, growth and development are among the purposes
specified in its Articles of Agreement and its activities can have a significant impact
on the economic prospects of its borrower countries.
Many ideas have been put forward in recent years suggesting ways the IMF,
World Bank and other international financial institutions (IFIs) might be restructured
or reformed. This report looks at proposals which have been made to alter the
structure of the IMF — to change its format, add or eliminate programs, restrict the
scope of its lending programs, and limit the scope of its loan conditionality.
This report discusses seven proposed ways that different authors believe the
IMF should be changed: (1) Abolish the IMF, (2) Shrink the IMF, (3) Focus on
Macroeconomics, (4) Streamline IMF Loan Operations, (5) Reassign Functions
among the IFIs, (6) Better Coordination between the IMF and World Bank, and (7)
Expand the IMF. Each is discussed and analyzed. In this way, the report hopes to
give readers a better understanding of the basic issues and choices which affect the
future direction of the IMF.
There are many avenues by which Congress can influence this debate. Congress
must approve any increase in IMF or World Bank funding. It also frequently enacts
legislation or includes directives in reports specifying goals the United States should
pursue in the IFIs. The United States needs the support of other countries, however,
if it wishes to effect change in the policies, procedures or structure of the IMF and
the MDBs. Many of the alternatives listed above require changes in the international
agencies’ Articles of Agreement. This requires an 85% majority vote. Other changes
may be effected by simple majority. However, this requires a broad consensus of
support among the advanced industrial countries. Their views on these issues are
often quite different from those expressed by policy makers from the United States.
This report will be updated only if major developments require changes to be made.
What is the IMF’s Mission? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overlap With World Bank Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
“Mission Creep” or Effective Adaptation? . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Early Beginnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Since 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Asian Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Coordinating Institutional Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Alternative Directions for the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Abolish the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Shrink the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Focus on Macroeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Streamline Loan Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Reassign Functions And Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Better Bank/Fund Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Expand the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The Role of Congress in Shaping the IMF’s Agenda . . . . . . . . . . . . . . . . . . . . . 23
Changing the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Figures
Box: The International Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The International Monetary Fund:
What is the IMF’s Mission?
The IMF was created in a world of fixed-parity exchange rates, where most
currencies were defined in terms of the U.S. dollar and the dollar was defined in
terms of gold. Countries could devalue their currencies only if they were faced with
— in the original language of Article IV of its Articles of Agreement —
“fundamental disequilibrium” in their economy and only if the IMF approved.
International capital movements were restricted and cumbersome.
That world has now largely disappeared. Since the 1970s, the relative value of
most major currencies is determined by world currency markets, the daily volume of
international currency movements far surpasses the volume of currency circulating
in most major countries, and no developed country — save perhaps South Korea in
1997 — has borrowed from the IMF since the United Kingdom’s last standby expired
in January 1979.1 The IMF’s Articles of Agreement were rewritten in 1976 to take
account of the new realities caused by the system of flexible exchange rates.
The IMF now has basically the same developing country customer base as the
multilateral development banks (MDBs). The balance of payments (BOP) problems
of developing countries are often deeper and harder to resolve than those of the
IMF’s prior customer base. While the IMF’s goals and core concerns
(macroeconomic and exchange rate stability) differ from those of the MDBs, many
of the factors the IMF now takes into account in its surveillance and loan programs
are similar to those they consider in their development programs.2 The IMF is a
monetary institution, not a development agency. Nevertheless, growth and
development are among the purposes specified in its Articles of Agreement and its
activities can have a substantial impact on the economic prospects of its borrower
Some of the smaller developed countries have drawn since from their reserve tranche in
the IMF. This is their own money, however. Access is automatic and borrowing it is akin
to borrowing against the cash value of a life insurance policy. These were (country and IMF
fiscal year): Australia (1983), Denmark (1987), Luxembourg (1984), Netherlands (1984 and
1987), and New Zealand (1982 and 1985). Australia borrowed from the IMF buffer stock
facility in 1983, a specialized use of IMF resources. None have borrowed since 1987.
For a further discussion, see CRS Report RL32364, International Monetary Fund:
Organization, Functions, and Role in the International Economy, April 22, 2004.
As set forth in its Articles of Agreement, the purposes of the IMF are (1) to promote
international cooperation on international monetary problems, (2) to facilitate the expansion
In many respects, the IMF’s role in the world economy is much different than
it was before. BOP lending continues to be a principal focus of IMF activity, to help
countries correct maladjustments in their balance of payments without resorting to
practices damaging to the world monetary system. However, with the end of the
fixed-parity exchange rate system, the IMF’s role in relation to exchange rates has
changed substantially. In 1976, new language was added to Article IV requiring
countries to pursue economic policies which generate orderly economic growth with
reasonable price stability and a monetary system which does not produce erratic
disruptions of the international monetary system.4 The IMF was told “to exercise
firm surveillance over the exchange rate policies of members” and to “adopt specific
principles for the guidance of all members with respect to those policies.”
The IMF was given no disciplinary tools, however, to exercise these functions.
Currency values are determined in the marketplace, based partly on the strength of
a country’s foreign exchange reserves but mainly on the strength of its national
economic policies and the market’s confidence that sound policies will be
maintained. The IMF has no role in exchange markets. Article IV now directs the
IMF to consult annually with each IMF member country about its exchange rate and
other economic policies. The staff submits an Article IV consultation report to the
executive board annually summarizing these discussions and assessing economic
conditions for each country. Article XII says that, without the permission of the
country involved, the IMF may not publish information about these consultations.
Since 1997, however, the IMF successfully persuaded an increasing number of
countries to allow publication of their Article IV reports. The IMF has also expanded
its technical assistance functions and broadened its role as a source of data about
economic conditions and economic performance in its developing countries.
It is in this context that debate arises about the IMF’s purpose, its policies, and
it operating procedures. Some analysts argue that, with the end of the fixed-parity
system, the IMF is no longer needed and it should be abolished. Others say the IMF
and balanced growth of international trade, promoting high levels of employment and real
income and the development of productive resources in all member countries, (3) to promote
exchange rate stability and to avoid competitive exchange rate depreciation, (4) to help
establish a multilateral system of payments among countries for current transactions and to
help eliminate foreign exchange restrictions which hamper world trade, (5) to make loans
to member countries on a temporary basis with adequate safeguards for repayment, “thus
providing them with opportunity to correct maladjustments in their balance of payments
without resorting to measures destructive of national or international prosperity,” and (6)
to shorten with such loans the duration and to lessen the degree of disequilibrium in the
international balances of payments of members.
More specifically, Article IV requires that each country “(I) Endeavor to direct its
economic and financial policies towards the objective of fostering orderly economic growth
with reasonable price stability, with due regard to its circumstances, (ii) Seek to promote
stability by fostering underlying economic and financial conditions and a monetary system
that does not tend to produce erratic disruptions, (iii) Avoid manipulating exchange rates or
the international monetary system in order to prevent effective balance of payments
adjustment or to gain unfair advantage over other members, and (iv) Follow exchange rate
policies compatible with the undertakings of this section.”
is still vital but it needs to be restructured and its operations refocused. Still others
suggest that new functions should be added to the IMF and its role in the
international monetary system should be expanded.
Much of the discussion about the IMF’s role centers on the issue of “mission
creep,” the idea that the IMF has broadened its agenda, taken on new functions, and
expanded its mission into new areas not contemplated or perhaps not intended by its
founders. Not everybody agrees that there has been mission creep. Many believe the
IMF’s basic mission has not changed, but — because of changes in the world
financial system — it has had to evolve new procedures and new criteria in order to
carry out its mission successfully.
Analysts, critics and non-critics alike, agree that a broad interpretation of the
IMF’s Articles of Agreement has been necessary to justify its new activities and its
increased emphasis on poverty and economic development. This has raised, to a
greater extent than before, questions (in Congress and elsewhere) about possible
overlap between the activities of the IMF and those of the MDBs (particularly the
World Bank) in developing countries.
Box: The International Financial Institutions
The International Monetary Fund (IMF) makes loans to help countries address
financial or balance of payments crises. The IMF is a monetary institution, not a
development bank. It does not finance projects or programs. Its principal
responsibilities include stability of the world’s monetary system and oversight of
its member countries’ exchange rate and economic systems.
The World Bank is a multilateral development bank (MDB) which makes loans
(and some grants) to promote poverty-alleviation, economic development and
growth, and economic policy reform in low- and middle-income countries. Two
of its facilities, the International Bank for Reconstruction and Development
(IBRD) and International Development Association (IDA) lend directly to
governments to finance projects and programs. The IBRD lends at market-based
interest rates. IDA aid is highly concessional and is available only to low-income
countries. They also make non-project loans to promote economic policy and
institutional reform. Two other facilities, the International Finance Corporation
(IFC) and Multilateral Investment Guarantee Agency (MIGA) also work with
private firms to promote private sector growth.
The Regional Development Banks are MDBs which operate in specific areas of
the world. They are independent bodies, not subsidiaries of the World Bank. The
United States is a member of four regional banks: the African Development Bank
(AFDB), Asian Development Bank (ADB), European Bank for Reconstruction and
Development (EBRD), and Inter-American Development Bank (IDB). Except for
the EBRD, the regional banks all have facilities — like the IBRD and IDA of the
World Bank — which lend on market-based and concessional repayment terms.
Overlap With World Bank Activities
Whether one sees IMF and World Bank overlap as a problem or a necessity will
depend on one’s expectations about their roles in the world economy. Some believe
they have distinct goals and unique functions. Any overlap in their activities is
deemed unnecessary. Others believe the IMF and World Bank share a global agenda,
yet retaining their own set of core activities. Though some have made proposals,
others find it hard to separate the issues which should be the exclusive responsibility
of the Fund from those which should be the exclusive jurisdiction of the Bank. As
peoples’ expectations differ, this debate will likely continue for some time.
Congress will be an active participant through its oversight and appropriations role
“Mission Creep” or Effective Adaptation?
What some people call “mission creep” others call effective adaptation on the
part of the IMF to new conditions and new requirements. The issue of mission creep
has both functional and legal dimensions. The IMF’s independent internal evaluation
unit summarized the question in a 2002 report:
The international community increasingly looks to the IMF to help developing
countries — particularly the poorest — implement and maintain policies and
institutions needed for the achievement of sustainable growth.... The fundamental
objectives of the IMF, as set out in Article I of the Articles of Agreement, are
sufficiently broad that they could encompass such an expanded role. However,
this raises the basic question of where a legitimate adaptation of roles ends, and
where inappropriate “mission creep” begins.5
Parkinson and McKissack, senior officials with the Australian Treasury,
explained the issue in a 2003 report prepared for their government.6 In part, they
say, mission creep occurred at the behest of the IMF’s shareholders, who asked the
Fund to pay more attention to a range of areas only loosely related to its original
purpose. They cite, for example, the IMF’s increased attention to military
expenditures, poverty reduction, and economic growth. In addition, they say,
pressure for the IMF to expand the scope of its activity has also arisen as changes
have taken place in its membership. With the end of the cold war, they note,
countries with very different types of economic systems sought to make the transition
to market economies. Likewise, the IMF found that many of the basic monetary and
financial institutions in these countries and in developing countries were
dysfunctional in ways that made more difficult the traditional application of
macroeconomic conditionality. Consequently, they say, the IMF gave more
consideration to institutional and structural issues because of their implications for
macroeconomic stability and growth.
Independent Evaluation Office, Evaluation of the Prolonged Use of Fund Resources,
International Monetary Fund. September 25, 2002. Pg. 110.
Martin Parkinson and Adam McKissack. The IMF and the Challenge of Relevance in the
International Financial Architecture. [Australian] Treasury Working Paper 2003-01, October
2003. Australian Government. The Treasury. Available at [http://www.treasury.gov.au].
Type authors’ names in the keyword box.
Parkinson and McKissack report that there are some 40 separate issues covered
in every IMF Article IV surveillance report.7 Ultimately, they say, the key issue in
mission creep is knowing where to stop. Almost any economic issue can be linked
in some way to macroeconomic policy, they conclude, but lines should be drawn and
not all of them need be considered. The temptation to expand might be diminished,
they propose, if the Fund’s technical assistance functions were shifted to other
international agencies and it consulted with them instead.
Some critics argue that the IMF must reduce the scope of its operations because
— they say — its new functions and activities violate the terms of its Articles of
Agreement. Hockett says that, from a legal point of view, however, the question of
mission creep is clear.8 The IMF Board of Governors has final authority to interpret
the IMF’s Articles. If new measures are justified by its reading of the Articles and
by reference to exigencies and changes in the world economy and the world financial
system, he said, that is legally the end of the matter. Arguments that the IMF must
drop these concerns because they are not included in its Articles are based, he said,
on unsound legal premises. The question, he concluded, is not whether the IMF has
the authority to deal with issues which go beyond the area of macroeconomic and
exchange rate policy but whether its attention to these concerns is appropriate and
whether other international agencies are better positioned to deal with them.
It was originally thought at Bretton Woods that the IMF would focus on the
short-term and on monetary and balance of payments (BOP) issues while the Bank
would look at the long-run and concern itself with economic development,
production, growth and project support. This division of labor was spelled out in a
1966 internal memorandum. The IMF would have jurisdiction “for exchange rates
and restrictive systems, for adjustment of temporary balance of payments
disequilibria and for evaluating and assisting members to work out stabilization
programs as a sound basis for economic advice.” The Bank’s responsibility would
be “for the composition and appropriateness of development programs and project
evaluation, including development priorities.”9
Article IV of the IMF’s Articles of Agreement specifies that the IMF “shall exercise firm
surveillance over the exchange rate policies of members, and shall adopt specific principals
for the guidance of all members with respect to those policies.” To carry out that duty, IMF
staff meet annually with senior officials of each member country to assess its economic
condition and its compliance with Fund-approved standards and guidelines. An annual
Article IV consultation report is prepared for each country. If the country permits, each
report is posted on IMF web page, at [http://www.imf.org]. Select “Country Information”
at the top of page. Countries have a right to refuse publication of these reports, thought the
identity of the countries blocking publication can be easily determined.
Robert Hockett. “From Macro to Micro to ‘Mission-Creep’: Defending the IMF’s
Emerging Concern with the Infrastructure Prerequisites to Global Financial Stability.”
Columbia Journal of Transnational Law 41:153 (2002).
Quoted in Graham Bird. “A suitable case for treatment? Understanding the ongoing debate
about the IMF.” Third World Quarterly 22:4 (2001), 823-48.
The IMF had concluded in the early 1970s, however, that payments deficits
could be caused by structural problems in a country’s economy and long-term
assistance was needed to address them. In 1974, it created the Extended Fund
Facility (EFF) to make long-term loans to promote BOP stability through basic
change in institutions and the structure of the borrower’s economy. Under the 1966
agreement, this task was entirely within the jurisdiction of the World Bank. In 1976,
the IMF began making long-term low-interest stabilization loans to poor countries
through the Enhanced Structural Adjustment Facility (ESAF) and its predecessors.
In 1999, the ESAF was refocused and renamed the Poverty Reduction and Growth
Facility (PRGF). Among other things, the PRGF plan required the IMF to work with
the World Bank and developing countries to formulate Poverty Reduction Strategy
Papers (PRSP) which would be supported by its loan program. In the late 1990s, in
response to a series of international financial crises, the IMF began including
institutional and structural change in its loan conditionality.
The overlap between the functions of the IMF and those of the MDBs was not
necessarily the result of a one-sided IMF invasion of the other agencies’ “turf.” In
the 1970s, when the IMF began making loans to promote structural change, the
MDBs focused primarily on project finance. Since the early 1980s, however, the
MDBs have expanded their emphasis in areas — such as macroeconomic stability
and policy change — which were traditionally seen as the purview of the IMF.
Adjustment loans are now a major component of the World Bank’s annual loan
program. From less than 4% of total lending in 1980, adjustment lending has grown
substantially in recent years. By 1990 it comprised 27% of all World Bank lending.
In 1999, during the world financial crises which followed Russia’s default of its debt,
adjustment loans accounted for 53% of the World Bank’s annual aid. In the past
three years, about one-third of the money lent by the World Bank has gone for
adjustment loans.10 The Bank is considering a plan to rename the program and to call
these “development policy” loans in the future.11 However, though the word
“adjustment” will be eventually dropped and more emphasis will be put on growth
and consultation with civil society, the basic requirements for macroeconomic and
institutional change will be essentially the same in the newly re-named program as
before. The regional MDBs have also expanded their levels of lending for
adjustment-type programs. Only the European Bank for Reconstruction and
Development (EBRD) — which has a more private sector focus — continues to
allocate most all its aid for investment projects.
Three years ago, the World Bank undertook a major review and evaluation of its
adjustment loan program in order to determine what had worked and what had not. See
World Bank. Adjustment Lending Retrospective: Final Report, June 14, 2001. Prepared by
the Operations Policy and Country Services Department. Available through the World Bank
web page at [http://www.worldbank.org]. Type title in inquiry box.
World Bank. From Adjustment Lending to Development Policy Lending: Update of World
Bank Policy. March 15, 2004. Operations Policy and Country Services Department.
Available through the World Bank website at [http://www.worldbank.org]. Type title in
Adjustment loans are a specialized form of BOP support. In effect, in exchange
for the loan, the country agrees to make specific policy or institutional changes. The
MDB disburses its funds directly to the country’s central bank. These are not used
to fund inputs for development projects or development activities. In most cases, the
Bank expects that countries will use the money for activities with positive
development effects.12 The developmental impact of an MDB adjustment loan
comes, not from the activities funded, but from the increased productivity and the
growth that occurs when the policy and institutional changes specified in the loan
conditionality are put into effect.
In recent years, the IMF and the MDBs have sometimes used their stabilization
and adjustment loan programs for common ends. In many cases, the IMF did not
have enough money to fund a major stabilization program alone, or rather it did not
want to leave its financial cupboard bare in case more crises occurred while other
countries were still repaying their loans. To supplement the IMF’s resources in times
of crisis, the MDBs have sometimes lent substantial amounts for parallel adjustment
operations and bilateral lending agencies have agreed to provide backup financing
in case of additional need. Three instances might be cited — the Asian financial
crisis and the recent crises in Brazil, and Argentina — which show the IMF and
multilateral banks working jointly in their response to major financial crises.
Asian Financial Crisis. During the Asian financial crisis in 1997 and 1998,
the World Bank and Asian Development Bank (ADB) lent major sums to help South
Korea, Indonesia, Thailand and other countries.13 This was, the IMF reported, “a new
breed of economic crisis.” In South Korea, the IMF announced a $58.2 billion
program, including $21 billion of its own funds, an initial $14 billion pledge from the
MDBs, and $23.3 in standby assurances from bilateral lenders. The IMF said that
institutional and structural reform were the heart of its stabilization program.
However, it disbursed all its money in the initial weeks of the crisis and the programs
to restructure and strengthen Korea’s financial institutions were managed by the
MDBs. The World Bank lent $5 billion and the ADB lent $4 billion in fastdisbursing aid. Their loans were linked with programs to rebuild Korea’s financial
sector, improve corporate governance, and restructure its competition and labor
market policies. They also provided technical aid to facilitate action in these areas.
Structural adjustment loans (SALs) promote broad changes in the structure and policy
framework (not necessarily macroeconomic) of the borrower country. These are also now
used sometimes to promote change at the sub-national level. Sector adjustment loans
(SECALs) promote institutional and policy change in particular sectors of the economy.
The IMF said later, in an assessment of the Asian crisis, that the sudden collapse of the
three countries’ currencies was due more to poor debt management policies, unsound
banking institutions, and weak bank oversight procedures than to any specific problems with
macroeconomic policy. See IMF. Recovery from the Asian Crisis and the Role of the IMF,
prepared by IMF staff. IMF Issue Brief number 00/0-5, June 2002, available from the IMF
website at [http://www.imf.org/external/np/exr/ib/2000/062300.htm#II].
Brazil. In November 1998, the IMF announced a $41.5 billion stabilization
program for Brazil. Of this amount, $18.1 billion was from its own resources, $3.3
billion came from the World Bank and Inter-American Development Bank (IDB) and
the rest was pledged by various countries. The MDB money was disbursed rapidly,
to help Brazil cope with a very serious financial crisis. However, the MDBs targeted
their money in ways which also served development objectives. To receive the
banks’ Social Protection and Social Sector Reform loans, the Brazilian government
had to demonstrate that its domestic expenditures for health, education, and other key
social services would be sustained as it strove to achieve the budget reduction goals
mandated by it IMF-funded stabilization program.
Argentina. In 2000 and 2001, the IMF agreed to lend Argentina $14 billion
to help it deal with a serious and growing balance of payments crisis. In January
2001 the Fund announced that the Argentines had assembled a $39.7 billion financial
support package, including (besides the IMF money) $5 billion pledged by the World
Bank and Inter-American Development Bank (IDB), $1 billion from Spain, and about
$20 billion in voluntary refinancing by the private sector. In September 2003, the
IMF agreed to lend an additional $12.6 billion.14 That year, the IDB lent Argentina
$1.9 billion and the World Bank lent $1.1 billion in fast disbursing emergency
assistance to help it cope with the financial crisis. As in the Brazilian case, the
Argentine government had to pledge that it would protect the budgets of priority
social programs and maintain the social safety net which helped children, the poor,
the unemployed and others vulnerable groups.
Two features of the MDBs’ emergency aid programs for Argentina were
particularly interesting. First, disbursements of the IDB funds were tied to the
country’s successful implementation of measures in the IMF-funded stabilization
program aimed at strengthening the tax system and improving budgeting and
financial management. Second, the World Bank funds were used in part for “deficit
reduction efforts, elimination of quasi-monies, and regularization of salary payments”
to civil servants. Clearing up the outstanding stock of national and provincial script
was a central element of the IMF’s program. Control of the monetary system was not
possible so long as provinces could issue debt and circulate it as currency. In these
two respects, the MDBs used their funds to encourage Argentine compliance with
key aspects of the IMF’s program for macroeconomic and structural reform. Unlike
the Korean situation, though, they did not manage the reform programs themselves.
Coordinating Institutional Reform. These examples show the IMF and the
MDBs working in a synchronized manner to address financial crises in developing
countries. In all three instances, the MDBs provided fast disbursing money, to
supplement the IMF’s program, but their conditionality was targeted to bolster their
prime development and anti-poverty concerns. The MDBs also addressed, either
through activities they funded or through their conditionality, some of the key
There was serious concern that Argentina might default (indeed it was twice overdue on
payments) and many believed that the loan in 2003 was made to forestall that prospect. In
March 2004, Argentina (SDR 10.7 billion) was the third largest borrower, after Brazil(SDR
10 billion) and Turkey (SDR 16 billion). For a further discussion of the Argentine situation,
see CRS Report RS21072, The Financial Crisis in Argentina, June 5, 2003.
structural or institutional issues which the IMF said were at the heart of the problem.
The IMF has expanded its program of technical assistance, to help countries design
and implement improvements in their financial and monetary policies and
institutions. For the most part, however, major projects for policy and institutional
change are funded through projects funded and supervised by the MDBs.
Alternative Directions for the IMF
Many ideas have been put forward in recent years suggesting ways the IMF,
World Bank and other international financial institutions might be restructured or
reformulated.15 On the whole, these can be separated into three categories. One is
concerned about potential changes in the policies of the institutions — raising or
lowering interest rates, including or excluding issues such as the environment,
poverty alleviation, labor standards, or altering the policy conditions the international
financial institutions (IFIs) attach to their loans. The second looks at possible
changes in the IFIs’ procedures — altering their systems of governance, giving
developing countries or other donor countries (the Europeans’ combined vote is
double that of the United States) a larger say in the process or making the
institutions’ operational and decision making procedures more transparent and more
open to outside influence. The third category involves possible change in the
architecture of the international agencies — expanding or shrinking the IFIs’
scope of operations, shifting functions or tasks from one institution to the other, or
changing the way the IFIs coordinate their operations.
It is impossible to separate entirely the issues of policy and process from those
of structure. Nevertheless, the present discussion focuses on architecture or structural
issues, since this is the essential issue which underlies most discussion of mission
creep. What should the IFIs be doing and which of them should perform what tasks?
A variety of proposals might be considered.
Some people believe the IMF should be abolished, substantially reduced in size,
or limited to its original focus on macroeconomic concerns. Others want a clearer
line of differentiation between the IMF and the MDBs. Activities and functions
should be shifted or transferred between the IMF and World Bank, they say, in order
to reduce overlap and to give each a specific area of responsibility. Finally, some
believe that the idea of separating the functions of the IFIs into separate boxes is an
exercise in artificial clarity. The work of the IMF and the multilateral banks is
inextricably linked at the functional level, they argue. Better to put more effort into
policy and program coordination, they say, rather than stopping the World Bank from
promoting policy changes or prohibiting IMF from looking at institutional factors
that might precipitate or exacerbate a future financial crisis.
Not everyone agrees that these proposed changes are “reforms,” in the sense that they will
make things better. Many believe that some of the “reforms” proposed in each of the three
categories would be damaging to the IFIs, hurtful to people living in borrower countries, and
injurious to the world financial system. Others argue that their proposed “reforms” will be
beneficial. For a comprehensive bibliography on this subject, see Nouriel Roubini’s global
macroeconomic and financial site at [http://www.stern.nyu.edu/globalmacro/].
Abolish the IMF
Proposal. Shultz, Simon and Wriston wrote, in an opinion piece first
published in the Wall Street Journal, that “The IMF is ineffective, unnecessary, and
obsolete.” Once the Asian crisis was over, they said, it should be abolished.16 When
the IMF intervenes in a crisis, they said, governments and their foreign creditors are
rescued but not the people, who generally suffer massive declines in their standards
of living. Moreover, they argued, the IMF promotes moral hazard because it
insulates politicians and foreign creditors from the consequences of bad economic
and financial decisions. Because the IMF stands ready to protect them in times of
crisis, Shultz, Simon and Wriston write, lenders make risky loans and countries
pursue unsound policies and avoid real reform of their monetary and financial
policies. Moreover, they say, the IMF’s policy prescriptions make crises worse.
From their perspective, abolishing the IMF would force countries to change their
policies and to operate sound financial institutions. The private sector is better able
than governments or official institutions, they say, to monitor and discipline country
Assessment. This proposal assumes that governments will undertake real
reform only when they see that — absent the IMF — they will be punished, perhaps
severely, rather than rewarded if they continue to pursue unsound economic policies.
Some question whether governments — particularly those in developing countries
— are quite so pragmatic and whether policy reform in those countries is as easy to
adopt as Shultz, Simon, and Wriston seem to suggest. Without an international
agency to help encourage and facilitate the process, the dissenters say, countries may
be unable to muster the will and skills necessary to implement reform. Their record
before 1945 was not encouraging in that respect. Moreover, many analysts will argue
that Shultz, Simon and Wriston underestimate the temptation governments may feel
to pursue beggar-thy-neighbor policies or to adopt macro policies which preserve
monetary stability at the price of growth or opportunity for non-privileged groups.
It might be said, however, that the Shultz, Simon and Wriston proposal points
to concerns that many find valid. Questions remain how the IMF should relate to the
private sector, how it can promote open systems and sound financial institutions
while still remaining bound by the requirements of confidentiality and consensus and
where the world’s major governments have the final say (through the executive
board) about its policy and loan decisions.
George P. Shultz, William E. Simon and Walter B. Wriston. Who Needs the IMF? The
Wall Street Journal, February 3, 1998. Shultz is, among other things, former U.S. Secretary
of State, of the Treasury, and of Labor. Simon is a former U.S. Secretary of the Treasury.
Wriston is a former chairman and CEO of Citicorp/Citibank. Their article was republished
a n d i s avai l abl e t hr ough t he Ho o ve r In s t i t u t i o n ’ s w e b s i t e a t
[http://www.imfsite.org/abolish/needsshultz.html]. Rebuttal articles by Lawrence Summers,
former U.S. Secretary of the Treasury and President of Harvard University, Robert Solomon,
economics journalist, and others are also available on the same page.
Shrink the IMF
Proposal. In March 2002, the International Financial Institutions Advisory
Commission (IFIAC) published a report which sought to more clearly delineate the
functions of the IMF and the MDBs and to give market forces the principal role in
international and development finance.17 Its members agreed unanimously that the
IMF should restrict its lending to the provision of short-term liquidity and it should
cease making long-term loans for poverty reduction and other purposes.18 A majority
of the Commission, including Allan Meltzer, its chairman, also recommended that
the IMF’s role in the world financial system should be shrunk considerably.
The IMF would be a kind of “lender of last resort,” the Commission said. It
would also continue to be a source of data and provide advice to countries through
its Article IV consultation process. The Commission said that all IMF Article IV
consultation reports should be published.19 The Commission recommended,
however, that the IMF’s lending authority should be strictly limited. It should only
be able to make short-term loans — with little or no conditionality but at penalty
rates of interest — and its prospective borrowers would have to qualify in advance
(before any crisis occurred) by meeting “prudential” eligibility requirements.
Eligible countries would need to allow full freedom of entry and operation in their
domestic economy for foreign financial institutions; financial institutions would
need to be well regulated in order to assure adequate capitalization and prudent
behavior; and governments would need to publish regular data on their foreign debt
and other off-balance sheet liabilities. Countries would also need to meet IMF fiscal
requirements to assure that IMF loans do not support irresponsible budgetary
The Commission said that long-term development aid, policy reform, and
assistance to countries that do not qualify for IMF assistance should be the
responsibility of the World Bank, though it also proposed that the Bank’s scope of
action and its resources should be reduced. It said that the newly renamed World
Development Agency should replace its loan program with a program of grants —
funded by donor contributions — emphasizing poverty alleviation, education, health,
and the construction of physical infrastructure. It could also make subsidized loans
to promote policy and institutional change but crisis lending would not be allowed.
Borrowers would lose the interest subsidy and they would have to begin repayments
immediately if, during any one year, they failed to achieve the performance standards
specified in their loan.
Assessment. The arguments in support of the IFIAC plan are similar to
those for the proposal by Schultz, Simon and Wriston. The frequency and severity
Report of the International Financial Institution Advisory Commission, Allan H. Meltzer,
Chairman. March 2000. Commonly called the Meltzer Commission. Available at
They also agreed unanimously that the IMF, World Bank, and regional development banks
should write-off in entirety their claims against all heavily-indebted poor countries (HIPCs.)
As noted, Article XII says such information can be released only if the country assents.
of the recent financial crises raise doubts, the Commission said, about the system of
crisis management now in place and the incentives for private action that it
encourages and sustains. They maintain that IMF lending encourages moral hazard
and sends the wrong message to international lenders and borrowers. By providing
countries with funds they can use to pay off foreign creditors in times of crisis, the
Commission argued, the IMF implicitly assures international lenders and borrowers
that they can take inappropriate risks and pursue unsound policies and the IMF will
bail them out if they get into trouble. If the IMF did not exist, the Commission
asserted, the market would force countries and lenders to be more prudent in their
decisions and it would require that countries adjust more rapidly to changes in their
IMF loans let countries stretch out or delay the adjustment process, the
Commission said, thus prolonging the crisis and delaying the recovery which will
take place only after the needed policy changes have been put into effect.
Furthermore, the Commission argued, the IMF is deficient in its current form as an
instrument for providing liquidity during crises. Conditioned lending, it said, with
each stage disbursed over time as specified requirements are met, is not a very
effective way to respond to a liquidity crisis.
Despite its criticisms, the Commission did not recommend that the IMF should
be abolished. A more limited version of the IMF should be maintained, it said, in
case concerted action by major central banks and — to a lesser extent action by the
IMF — might be needed to address major financial crises with broad possible effects.
Many have questioned the feasibility and utility of the IFIAC plan. Some
members of the panel argued, for example, that, if the IMF lent without
conditionality, as the IFIAC majority proposed, “this would virtually eliminate any
prospect of overcoming the crisis” since countries would not be required to abandon
the policies which brought on the crisis when they resort to the revised IMF for crisis
finance. On the other hand, they said, the stipulation that countries must meet an
undefined IMF “proper fiscal requirement” in order to prequalify for loans would
seem to require the kind of perpetual IMF oversight and discipline of country
budgetary policies that the majority otherwise rejects.
Many doubt that shrinking the IMF is the right answer to the problem of moral
hazard. They dispute the assertion that the prospect of future IMF lending
encourages moral hazard. It is unlikely, they argue, that governments or lenders will
intentionally risk a financial crisis simply on the expectation that they will be “bailed
out” if things go wrong. As the Economist noted, “Few of those involved when a
country finds itself in financial crisis escape without penalty.”20 Most foreign
“Tricky moves for the Bank and the Fund; What now for the Bank and the Fund?” The
Economist, February 17, 2001, p. 1. Then Treasury Secretary Lawrence Summers wrote,
in May 2000, that concern about moral hazard is exaggerated and “it is hard to make the
case that investments in emerging markets have been heavily influenced by the expectation
of the availability of official resources for bailouts.” See his 2000 Richard T. Ely lecture,
printed as “International Financial Crises: Causes, Prevention, and Cures.” The American
Economic Review: Papers and Proceedings of the 112th Annual Meeting of the American
creditors and investors have lost substantially when crises occur, even though the
debtor or host country borrows from the IMF. Getting the large lenders of short-term
money to participate in these losses is an important issue, they agree. However, they
argue, new policy arrangements are likely to be a more effective approach. The
process of settling financial crises in developing countries will be more disorderly,
they say, if those countries are not eligible for IMF loans and it is more likely in such
situation that some creditors will be treated more favorably than others.
The Meltzer Commission says that the IMF should continue to be a source of
data and provide advice to countries through its Article IV consultation process even
though many of its member countries would not qualify for loans. Many doubt that
this would be feasible. The statistical data and the country reports which the IMF and
World Bank publish on a regular basis, are important sources of information for
government, academia, and business. Krueger noted in 1999 that other international
agencies, or perhaps even private firms, could provide this service instead.21
However, she said, the fact that the IMF and World Bank are undertaking other
activities probably gives them an edge in obtaining information from member
country governments. “It is at least as likely that, in the absence of the other
relationships between the multilateral institutions and individual governments,” she
said, “the data would be forthcoming later, in less reliable form, and be less
accessible for researchers and other users.” The same might be said — for countries
ineligible to borrow from the IMF — about their openness to IMF advice, during
Article IV consultations, or their willingness to discuss in detail their internal
economic situation or the underlying dynamics of their exchange rate regimes.
Many also question whether developing countries will be able to reform if they
are not eligible to borrow from the IMF. Presumably most countries will aspire to
the status of IMF eligibility. However, without international assistance to help them
cope with crises along the way, critics of the IFIAC plan argue, their path to that goal
may be hard. They note that the World Bank, under the IFIAC plan, would have
neither the mandate nor the resources to play the role of balance of payments lender
to the countries excluded from access to the IMF. It would be able to make loans,
under the IFIAC plan, to promote policy and institutional reform but monetary and
exchange rate policy would be outside its terms of reference and crisis lending would
be prohibited. The stiff penalty for failure (immediate repayment and termination of
the interest subsidy) might discourage countries from pursuing hard but important
changes in their policies and institutions and — unless they provide rapid infusions
of money — these loans would be of limited use to countries suffering a BOP crisis.
Even if the Bank had the funds and the mandate, some question whether it can
be simultaneously a monetary and a development institution. Monetary stability and
growth often have conflicting requirements. In a sense, the first requires a quick
readiness to put a foot on the brake when growth gets too fast while the second
requires continuous pressure on the economic accelerator. There is a tension between
Economic Association 90:2 (May 2000), p. 13.
Anne O. Krueger. “Whither the World Bank and the IMF?” Journal of Economic
Literature 36:4 (December 1998), p. 1997. She was then teaching at Stanford University.
the IMF and the World Bank because they have sometimes contradictory goals. If
the World Bank tries to play both roles in developing countries, it will take this
source of tension into itself and its operations.
Focus on Macroeconomics
Proposal. Many commentators have argued that the IMF should reduce the
scope of its activities and focus on its core responsibilities. The Meltzer Commission
found, for example, that the IMF has strayed from its core areas of competence and
it provides too many long-term loans with too much microeconomic conditionality.
Treasury Under Secretary John Taylor reiterated this view in 2002 when he told a
conference of bankers that “We need to narrow the focus of the IMF.”22
Others have expressed similar concerns.23 The Council on Foreign Relations
(CFR) said, in a 1999 task force report, for example, that “the IMF is losing its focus
and reducing its effectiveness by doing too much.24“ The Fund needed to go “back
to basics,” the CFR report concluded. It should limit the scope of its conditionality
to monetary, fiscal, exchange rate and financial sector policies. The Overseas
Development Council (ODC) concluded, in a 2000 task force report, that the IMF
should scale back its activities and focus on its core competency, which it said was
macroeconomic policy.25 The IMF should continue being a source of data and of
policy advice (through Article IV consultations) for member countries. However, the
ODC report said that (1) it should limit itself to providing short-term liquidity to
countries hit by macroeconomic crises, (2) it should stop providing long-term
development finance, and (3) it should cease its involvement with structural and
institutional issues and exclude them from its loan conditionality. The latter
discourages countries from coming to the IMF until they have no other choice, the
task force said. It also scares away foreign investors by giving them the impression
that the problems that caused the crisis in a country might be not be easy to fix.
The CFR and ODC reports recommended that the IMF should leave long-term
structural change and development finance to the World Bank and the other
development banks. The ODC says that structural and institutional problems take a
long time to fix and they are not easily addressed during the midst of a financial crisis
Under Secretary of Treasury for International Affairs John B. Taylor, “Improving the
Bretton Woods Financial Institutions” Remarks at the Annual Midwinter Strategic Issues
Conference, Bankers Association for Finance and Trade, Washington, DC. February 7,
For a summary of five reports on the IMF and the international financial architecture,
including the IFIAC report, see John Williamson, The Role of the IMF: A Guide to the
Reports, International Economics Policy Brief Number 00-5, Washington: Institute for
International Economics, May 2000. Available at [http://www.iie.com/publications/pb/
pb00-5.htm]. Also a available at [http://www.google.com]. Type title in search box.
Council on Foreign Relations Independent Task Force. Safeguarding Prosperity in a
Global Financial System: The Future International Financial Architecture. Washington:
Institute for International Economics, 1999.
ODC Task Force Report. The Future Role of the IMF in Development. Washington:
Overseas Development Council, April 2000.
The CFR and ODC reports also recommend, for many of these same reasons, that the
IMF’s concessional loan program for low-income countries, the Poverty Reduction
and Growth Facility (PRGF), should be transferred to the World Bank.
Assessment. The IMF’s operations would be clearer and easier to implement
if it only dealt with macroeconomic issues. It would only need to talk with the
officials from borrower countries who deal with those issues and it would not need
to negotiate with others about institutional and structural reforms. It could disburse
money more rapidly, since changes in fiscal, exchange rate, and monetary policy can
be accomplished much more quickly than can institutional change. If the MDBs also
went “back to basics” — if they stopped providing BOP aid to countries in the form
of structural adjustment or sectoral adjustment loans — the overlap between Bank
and Fund operations would be substantially reduced. Among other things, the IMF
would not need to be concerned that the macroeconomic conditionality of MDB
loans might conflict with its own conditionality.
This concept might be appropriate if balance of payments crises were caused
only by poor or poorly executed macroeconomic policy. However, many economists
believe that structural and institutional problems can also precipitate or intensify the
effects of financial crises. The IMF found in its study of the Asian financial crisis
(cited above)that the crisis of 1997-8 was due more to poor debt management
policies, unsound banking institutions and weak bank oversight procedures than to
any specific problems with macroeconomic policy. From this perspective, even the
best-laid macroeconomic policies will be ineffective in their execution if the
institutions which apply it are defective.26
The IMF’s Articles of Agreement do not specify, in Article I, what means the
IMF should use to “promote exchange rate stability” or how its loans will help
borrowers “correct maladjustments in their balance of payments.” Article IV does not
say how the IMF shall “exercise firm surveillance over the exchange rate policies of
members.” Macroeconomic criteria have been the means traditionally used to carry
out these tasks but there is nothing in the Articles prohibiting the IMF from
considering institutional and microeconomic issues as well if it finds these help it
accomplish its primary mission.
The CFR and ODC reports agree that the IMF should pay attention to structural
and institutional issues during its surveillance process. It is not clear from the two
reports, however, what the IMF should do if it finds that institutional or structural
problems in a country are threatening to undercut its monetary stability or precipitate
a crisis. Should the IMF simply mention its concerns in its Article IV surveillance
report or should it require countries to approach the World Bank or the regional
MDBs for loans to rectify the situation? If institutional and structural issues are
outside its core competence, how does it justify that requirement? What should the
IMF do if the development agencies proceed in ways other than those it prefers? If
the IMF has standards and guidelines to assure that the programs to revise a countries
economic institutions meet its concerns, then it will have to involve itself in the
For an introduction to the institutions and economic growth literature, see “Growth and
Institutions, in World Economic Outlook, April 2003, IMF, pp. 95-128.
details even if it does not fund the reform project. If it pays no attention, on grounds
that structural reform is outside its core competence, it might find that the final
results are unsatisfactory.
The CFR and ODC reports say that the World Bank and the regional banks
should bear the responsibility for promoting long-term policy reform and institutional
and structural change. However, if the MDBs stop making adjustment loans, in order
to leave the area of BOP lending entirely to the IMF, they may have difficulty
promoting the kinds of reforms the CFR and ODC envision. On the other hand, if
the MDBs continue making adjustment loans in order to promote policy reform, the
IMF may need some way of keeping the conditionality and timing of these loans
congruent with its own operations.
Streamline Loan Operations
There seems to be general agreement that the IMF’s surveillance function
should be retained. There is less agreement about the policies and tools the IMF
needs in order to carry out its duty to promote exchange rate stability in a world
where exchange rates are largely determined by market forces. Arguably, the IMF’s
resources are now too small, compared to the volume of international financial flows
and world trade, to undertake the stabilization role it played in the old fixed-parity
exchange rate system. Likewise, the IMF cannot stop countries from pursuing
policies that increase or diminish the value of their currencies even though this may
have serious destabilizing effects on other countries. If countries do not need to
borrow money from it, the IMF can do little more than give them advice and
publicize its concern in documents such as its World Economic Outlook and Article
IV consultation reports (if a country allows publication).
Proposals. Some experts believe the IMF’s loan operations could be
streamlined and its procedures simplified. Williamson27 and Bird28 contend, for
example, that the IMF needs only two loan facilities. One would lend, with little or
no conditionality, to help countries maintain liquidity when they are hit by exogenous
shocks.29 The other would lend, with conditionality, to help countries surmount
balance of payments crises caused by their own policies or performance. Williamson
says the IMF should address only monetary, fiscal and exchange rate issues in its loan
programs, though countries should also be required to stop servicing their foreign
debts when they apply for IMF aid. Bird says that structural and institutional
matters should also be within the IMF’s ambit of concern.
Williamson says that IMF rates should vary and countries should get better
terms from the crisis facility if they prequalified in advance by adopting
improvements in their domestic banking procedures, by maintaining transparency in
Williamson, “The Role of the IMF: A Guide to the Reports,” op. cit.
Graham Bird. “Restructuring the IMF’s Lending Facilities,” The World Economy 26:2
These are events beyond a country’s control, Williamson said, such as sudden changes in
key import or export prices, contagion effects from crises elsewhere or natural disasters.
economic data, and by achieving good marks in their most recent Article IV report.
Bird says the interest rate charged to borrowers from the crisis facility should vary
depending on the country’s condition and its relative compliance with specified
financial norms. He also says that conditionality for the crisis facility should be
relatively light by comparison with current standards but the IMF might restrict its
lending in the future if borrowers fail to adequately address their problems.
Caballero argues, by contrast, that the IMF needs only one loan facility to
address crises caused by exogenous events and poor policy.30 Instead of lending in
response to crises, however, he believes the IMF’s main function should be one of
preventing crises and stabilizing exchange rates through market arrangements.
Renamed by Caballero the International Market Facilitator, the IMF would create
hedge arrangements in private markets in order to insure countries against volatile
capital flows. It would also help countries design macroeconomic policy frameworks
consistent with those insurance mechanisms and, through its surveillance function,
it would assure that countries comply with their terms.
Buira also believes the IMF only needs one loan window and he says its
requirements can be very simple.31 As chief of secretariat for the Intergovernmental
Group of 24 (G-24), an association of developing countries, Buira believes the Fund
should lend with virtually no conditionality, just a pledge by the borrower — as is
currently the practice with IMF first credit tranche loans — that it will “make
reasonable efforts to solve its problems.” Under this proposal, more money should
be available to borrowers and it should be repayable over longer periods of time.
IMF staff should operate like outside advisors or consultants, Buira argues, helping
countries choose policies and programs consistent with their goals and consistent
with the Fund’s mandate. The IMF should limit itself to monetary and exchange rate
issues, Buira says, and should not use monetary crises as an opportunity to force
basic changes in the borrower’s domestic institutions or to open its economy to
Assessment. A two-tiered loan program would let the IMF differentiate
between countries whose crises were attributable to their own actions and those
whose crises were less of their making. Macroeconomic and structural conditionality
would not be necessary for countries buffeted by contagion effects, as is often the
current IMF practice. This assumes, however, that the IMF will be able to discern
accurately which exogenous shocks are only temporary and which herald permanent
changes in the world economy. In the latter case, countries may be lulled deeper into
debt through unconditioned liquidity loans and the eventual burden of adjustment
may be heavier than if they had begun the adjustment process earlier.
Ricardo J. Caballero. “The Future of the IMF.” The American Economic Review. Papers
and Proceedings of the 185th Annual Meeting of the American Economic Association.
Washington, D.C. June 3-5, 2003, pp. 31-8.
Ariel Buira. “An Analysis of IMF Conditionality,” in Buira (ed.) Challenges to the World
Bank and IMF: Developing Country Perspectives. G-24 Research Program. London:
Anthem Press, 2003, pp. 55-81.
The plan for an IMF market hedging facility would require considerable
amounts of operating capital — money which the IMF does not currently have — and
it presumes that the separate parts of the house built through hedging can stand even
though others may fall. It also assumes that IMF’s market traders can build a
financial network strong enough to withstand a crisis where everyone else is betting
against it. Many will dispute these assumptions. Some will also wonder why this
task should be done by an international agency rather than by private firms or
governments themselves. Long-term loans with little conditionality might be very
desirable, from the point of view of developing countries. However, with no
specific requirements, progress towards adjustment and policy change may be slow
or negligible. The rich countries may be unwilling to let the IMF lend large amounts
of their quota money for long periods without some assurance that conditions in the
borrower will improve and the money will be repaid.
Reassign Functions And Authority
Proposal. Gilbert, Powell, and Vines say there needs to be a new agreement
on the division of labor between the World Bank and the IMF.32 Overlap in their
functions is inevitable, they say, and there needs to be clear agreement about the
terms on which the two agencies share the common ground. Each should focus on
its own core mission — the IMF on macroeconomic and crisis resolution and macropolicy advice and the Bank on long-term development, including microeconomics
and trade and industry issues. The authors say there should be an agreed list of
competencies and a division of lead responsibilities, though in all areas there should
be an obligation to consult. In each area, one agency would have the final authority
and the other would have a right to be consulted and to give its views. In some
instances, for example, the IMF might have the final say regarding certain
macroeconomic aspects of World Bank and the Bank would have similar authority
regarding certain social or developmental aspects of IMF stabilization programs.
Assessment. A formal division of labor and authority may be useful,
particularly in areas where the Bank and Fund agree. It may be less workable,
though, when they disagree. Even if the IMF had final authority regarding balance
of payments aid, for example, the Bank might not be willing to let the Fund veto its
development policy loan or adjustment loan operations. Even if the Bank were the
final authority for growth and development policy, the Fund might not be willing to
let the Bank decide how rigorous the terms of its stabilization programs should be.
By itself, authority on paper may not be very durable. Agencies will likely define
problems or issues in such a way as to ensure that they fall within their area of
jurisdiction. Furthermore, if an agency has overall responsibility for a program, it
will probably follow its own judgment rather than acquiescing to decisions by others.
Likewise, if an agency sees a problem which impacts its core mission, it is more
likely to deal with the issue itself rather than ask someone else to do the job. The
IMF’s establishment of the EFF and the ESAF in the 1970s is a case in point.
Christopher Gilbert, Andrew Powell and David Vines. “Positioning the World Bank.” The
Economic Journal 109 (November 1999), F598-F633.
Some of the overlap could be reduced if functions were shifted between the
agencies. Transferring the PRGF to the Bank has already been discussed. This
would not solve the tension, but it would put all the agencies which deal with poor
countries under the World Bank President, who could settle disputes. Transferring
the IMF’s technical assistance functions elsewhere, as the Australian report
suggested, would be another possibility. However, the Fund would still need to talk
with them about common concerns. Alternatively, all the functions in the World
Bank and the regional banks which deal with banking, finance, and corporate
governance could be shifted to the IMF. It would then serve as advisor, regulator and
source of funding for projects to strengthen and improve institutions and policy in
these areas. However, this would make the IMF a development lending institution.
Better Bank/Fund Coordination
Proposal. Some would argue that dividing up the functions and putting the
World Bank and IMF into separate boxes may not be a practical design. The Bank
and Fund have different mandates but they have very many areas of common
concern. Stiglitz says that it is inevitable that the two agencies will have major
disagreements about economic policy.33 Instead of papering over their differences
by giving each agency total authority over certain areas of joint concern, he says, it
is more important to find ways they can effectively discuss their differences.
Writing in 1999, Stiglitz reported that the Bank and Fund have tried on several
occasions to reach an accord separating their areas of responsibility, but this has not
been successful. It is natural for the Fund to take a large responsibility for
macroeconomic issues and for the Bank to take lead responsibility for development.
However, he notes, issues of macroeconomics and microeconomics are intertwined.
Tight monetary policy, aimed at stabilizing a country’s currency and balance of
payments situation and strengthening the capital base of its banks, can lead to a credit
crunch that hampers the Bank’s efforts, undermines growth, and precipitates
widespread bankruptcy. The Bank and Fund may have very different views about
such situations. Likewise, the IMF found during the Asian financial crisis that
structural and institutional change can be essential — to head off crises and to lessen
their intensity — and it included them in its work program even though conceptually
they lay entirely within the jurisdiction of the MDBs. The Fund may put higher
priority on some of these concerns than does the Bank.
There are many areas where the Bank and Fund share responsibilities and have
common concerns, Stiglitz says. Open disagreement can be healthy, he argues,
particularly for situations where the competing policy choices have very different
possible results. Instead of the Bank and Fund hammering out an agreement which
they then impose on the borrower country, he proposes, the international agencies
should advice governments about the alternatives available and the consequences of
the choices and let them weigh the tradeoffs and risks and make the final choice.
Joseph E. Stiglitz. “The World Bank at the Millennium.” The Economic Journal 109
(November 1999), pp F577-F597.
In the 1980s, many economists came to support the so-called “Washington
Consensus,” the view that sound macroeconomic policies and open domestic and
international markets were crucial both for effective development and for sound
monetary policy. In 1994, some economists began saying that the earlier consensus
view embodied “first generation” reforms. They argued that another body of “second
generation” reforms, involving institutional and structural changes in developing
countries, was needed to consolidate and extend the development and monetary
stabilization process begun by the earlier reforms.34
In 2000, the Managing Director of the IMF and the President of the World Bank
issued a joint statement setting forth their shared vision for closer cooperation
between the two agencies.35 It stressed country ownership of programs to change
policies and institutions, a more coherent approach to setting and upholding
priorities for change, and better use of conditionality measures to improve program
success. In 2001, the executive boards of the Bank and Fund approved a framework
to promote consultation in the early stages of the policy process and greater
information sharing between the two agencies’ staff at both the country and
functional (“thematic”) levels of activity.
To prevent competing or duplicate conditionality between the two agencies, the
guidelines employ a “lead agency” procedure to clarify responsibility. The new
guidelines allow the IMF to draw on the advice of other international organizations
in the design of conditionality. This is important since in the Bank and Fund often
have their own separate assistance programs underway simultaneously in countries
and there is no assurance that their conditions and guidelines are compatible.
Under the new procedures, IMF and Bank staff are expected to coordinate their
policies for countries where they both have operations in effect. They are supposed
to harmonize their country strategies, identify key areas where policy and institutional
change will be sought, and implement a strict division of responsibilities in
promoting them, with one of the agencies assuming a “lead” position for each of the
goals. A series of interagency task forces were created to deal with issues such as
improved financial sector policies and institutions, standards and codes, the
suppression of illegal money laundering and terrorist finance, and various global
development issues. The IMF adopted new conditionality guidelines in fall 2002
which, among other things, increased and strengthened collaboration between the
IMF and the World Bank.36
For an introduction to the institutions and literature, see “Growth and Institutions,” in
World Economic Outlook, April 2003, International Monetary Fund, pp. 95-128. See also
discussion of this issue in CRS Report RL32364, International Monetary Fund:
Organization, Functions, and Role in the International Economy
For a description of the consultation process and two progress reports on its
implementation, see IMF. Strengthening IMF-World Bank Collaboration on Country
Programs and Conditionality -Progress Report. Two different reports with the same title,
one dated August 19, 2002 and the other February 24, 2004. Both are available from the
IMF web page at [http://www.imf.org]. Type first 10 words of title in inquiry box.
For more on the IMF’s new conditionality guidelines, see CRS Report RS21357, New
Assessment. Initial reports indicate that the coordination process is having
some success, both in facilitating country ownership of the programs to promote
institutional and policy change and in promoting interagency cooperation. The IMF’s
2004 report (cited earlier) on consultation process suggests, however, that there
continue to be problems stemming from differences in the two agencies mandates,
cultures, and structures. It recommended, for example, that the Joint Implementation
Committee (JIC) — a panel of senior staff created previously by the executive boards
of the two institutions and then allowed to lapse — should be revived and revamped
in order to monitor the consultation process more closely. Specifically, the report said
that “when needed” the JIC should “help country teams in the two institutions to
reach agreement on priorities so as to ensure coherence of policy advice and program
design.” It seems, from these remarks, that Bank and Fund staff continue to see
things differently and there continues to be problems eliciting cooperation between
them in the formulation of their country programs. This is the area where the
difference in their mandates, priorities, and expectations is probably greatest. Perhaps
top-down authority from the JIC (on a “when needed” basis) may be required to
secure closer collaboration between the two agencies at the operating level.
Improvements in coordination may help the Bank and Fund pursue the mandates
better with less friction and fewer occasions where they work at cross purposes.
Nevertheless, while this arrangement changes their format to a degree, no
fundamental changes in the scope of the Bank and Fund’ operations or the terms and
conditions of their assistance programs will likely result. Any possible gains in the
efficiency and effectiveness of their programs will likely provide little satisfaction
to those who want to reorganize the IMF in order to effect fundamental alterations
in its policies, procedures, and mandate.
Expand the IMF
Proposals. There have been proposals, from time to time, that the functions
and duties of the IMF should be expanded in various ways. In the late 1990s, before
the Asian financial crisis, for example, IMF top management suggested that the core
purposes of the IMF should be expanded to include the promotion and governance
of international capital mobility. Little has been heard of this proposal since 1998.
Many have recommended that the IMF take the lead to stabilize international
capital markets and to resolve international debt issues. Soros proposed in 1998, for
example, that an International Credit Insurance Corporation (ICIC) should be formed,
as an adjunct of the IMF, to provide countries with access to world capital markets
(at prime rates) up to levels guaranteed by the ICIC.37 In 1994, Sachs proposed that
the IMF should act like an international bankruptcy court, bringing creditors and
debtors together and implementing debt workout programs.38 Kreuger, the First
IMF Conditionality Guidelines, by Martin A. Weiss.
George Soros. “Capitalism’s last chance?” Foreign Policy, Winter 1998.
Jeffrey Sachs. “IMF, Reform Thyself.” First published in the Wall Street Journal, July 21
Deputy Managing Director of the IMF, later proposed a plan in which the IMF would
play a major role helping ensure the orderly and timely restructuring of unsustainable
On a different plane, Camdessus, a former Managing Director of the Fund (1987
to 2000), said after his retirement that he believed the IMF Interim Committee
(International Monetary and Financial Committee) should become a decision-making
council for the major strategic orientations of the world economy.40 The
responsibility for international economic policy coordination should be placed
squarely, he said, where most people believe it already rests.
In 2002, Soros proposed that the IMF should become a major new source of
funding for global public goods (such as education and health) and for
development.41 It should make a large ($27 billion) issuance of SDRs, he said, and
the proceeds should be used for these purposes. Stiglitz said, in a book review, that
Soros’ plan for a one-time issuance would not be enough.42 Much larger amounts
would be needed every year, he said, in order to achieve what he called modest
development goals such as the $50 billion annual effort to achieve the Millennium
Development Goals by 2015.
Assessment. These proposals, either to expand the IMF’s functions —
establishing it as a kind of international bankruptcy mediator or making it a new
source of development aid — might have useful effects. To date, however, there
appears to be no international consensus on their behalf and little support among the
major creditor countries. In terms of Camdessus’s recommendation, it seems very
unlikely that governments will be willing to surrender to an IMF inter-governmental
committee their power to determine their own economic policy.
In any case, it is unclear how these new functions would be integrated with the
IMF’s existing responsibilities. The internal strain within the organization would be
great, for example, if the IMF is making loans to help countries deal with BOP crises
at the same time that it is working to settle or write down sovereign debt. Securing
private sector cooperation with its stabilization programs for countries with
substantial debt might be problematical. Likewise, the IMF’s role as a monetary
1994. Available through the Hoover Institution’s international finance website at
Anne Krueger. “New Approaches to Sovereign Debt Restructuring: An Update on Our
Thinking.” Speech delivered at the Conference on “Sovereign Debt Workouts: Hopes and
Hazards.” Institute for International Economics. Washington DC, April 1, 2002. Available
through the IMF website at [http://www.imf.org]. Type title in inquiry box and find on list.
See also “Krueger Updates Two Track Approach.” IMF Survey. June 24, 2002, p. 196.
Michel Camdessus. “The IMF at the Beginning of the Twenty-First Century: Can We
Establish a Humanized Globalization?” Global Governance 7 (2001), 363-370.
George Soros. On Globalization. New York and London: Public Affairs, 2002.
Joseph E. Stiglitz. “A Fair Deal for the World,” reviewing Soros’ new book On
Globalization, in The New York Review of Books, May 23, 2002.
authority might be compromised if it issued large stocks of SDRs each year for
development purposes, assuming that sufficient majority support (85%) could be
garnered among its membership annually for that initiative. In any case, the IMF
lacks any special aptitude for selecting and administering the kinds of development
programs the SDRs would supposedly finance. This is far outside its core
competencies, no matter how they are defined. Transferring the funds and
responsibility to one of the development agencies would seem more appropriate.
The Role of Congress in Shaping the IMF’s Agenda
The role of the IMF is discussed periodically, often during major changes or
turning points in the institution. The 60th anniversary of the Bretton Woods
Agreements in 2004, the May 2004 election of Rodrigo Rato, as the first Spanish
Managing Director of the IMF and the pending conclusion of James Wolfensohn’s
second five-term in 2005 as the World Bank’s president present opportunities for
Congress to address these institutions and “take stock” of their effectiveness and role
in the international economy. This report has presented a sample of the wide
spectrum of options that experts have presented on what a “proper” role of the IMF
should be in the 21st century.
There are many avenues by which Congress can influence this debate. For
example, Congress has enacted legislation specifying what U.S. policy shall be in the
international financial institutions (IFIs) and how the U.S. executive directors at these
institutions shall vote and the objectives they shall pursue. The number of policy
goals or requirements enacted by Congress is large.43 For example, the
Anti-Terrorism and Effective Death Penalty Act of 1996 (P.L. 104-132) instructs the
Treasury Department to oppose any loan or other use of IFI funds to or for any
country for which the Secretary of State has determined is a state-sponsor of
terrorism. Congress also must authorize and appropriate any increase in IMF or
World Bank funding.
Congress has frequently made specific suggestions to the Administration
through Sense of Congress resolutions or language in committee reports
accompanying legislation suggesting specific goals and priorities the United States
ought to emphasize in the IFIs. Since the World Bank and the other multilateral
institutions are not agencies of the U.S. government, but rather international
institutions, their activities and policies are not subject to U.S. law.44
For a discussion of legislative requirements and efforts by the U.S. executive branch to
comply with them, see U.S. General Accounting Office. International Monetary Fund:
Efforts to Advance U.S. Policies at the Fund. GAO-01-214, January 23, 2001. See also
three reports to Congress from the Treasury Department discussing actions taken to meet
legislative requirements. Implementation of Legislative Provisions Relating to the
International Monetary Fund, October 2001, October 2002 and October 2003. Available
from the U.S. Treasury website at [http://www.treas.gov]. Type title in Search box.
See CRS Report RL32364, International Monetary Fund: Organization, Functions, and
Role in the International Economy, for further discussion of the role of Congress.
Changing the IMF
Any future changes in the structure of the IMF will be the result of a new
consensus among its stockholders. Authority among the IMF’s member countries is
widely distributed and an 85% majority is required to alter the Articles of Agreement.
Consequently, there is a strong built-in bias in favor of continuity and against
fundamental change. Most of the changes in the IMF discussed in this report would
require broad membership support. The Articles would need to be amended, for
instance, to expand the IMF’s oversight authority, to add new functions such as a
debt restructuring facility or a market hedging program or to change the IMF into a
world central bank. Likewise, the Articles would need to be changed in order to
rescind the language barring the IMF from releasing information about economic
conditions in a member country without its consent, to extend the loan repayment
period, or to alter the requirement that the interest rates and repayment periods must
be uniform for all borrowers. A 70% vote is needed to raise or lower the interest rate
charged for IMF loans. It may be difficult to get an 85% majority to effect these
proposals. Given its voting structure, all major groups of countries in the IMF have
veto power over changes in the Articles of Agreement, issuances of new SDRs,
approval of new quota increases, the sale of IMF gold, and other major actions.
Super-majorities would not be needed to effect some of the other changes
proposed by the various authors. Nevertheless, broad support among the IMF’s
major stockholders will still be required. Together, the United States, the other G-7
countries, and other advanced countries in Europe have nearly 56% of the vote. A
broad consensus among these countries might be sufficient to change IMF loan
policy, IMF procedures, or the structure of the organization. However, broad unity
among the major countries would be needed. Initiatives for change will likely fail
if the major countries split their votes. It seems doubtful that many potential borrower
countries would vote for initiatives that would restrict their future access to IMF
credit or disadvantage them in other ways.
Traditionally, the United States has exercised leadership in the IFIs. However,
other major governments often have views which differ substantially from those
advocated by the United States. They are not likely to support initiatives for change
unless they agree on the merits that they are desirable. Several of these countries
have expressed reservations about some of the alternatives discussed earlier in this
report. In the past, the United States often resolved disagreements of this sort through
a series of one-on-one bilateral talks with other countries. More recently, though, as
seen in some recent negotiations about World Bank issues, many countries have
preferred to discuss their differences with the United States in block (all at the same
time). The more advanced members of the European Union have about 31% of the
vote and there has been discussion among them in recent years about ways they could
pool their vote and exercise a larger leadership role in the international financial
Proposals to change or restructure the IMF can be offered at any time.
However, the most likely occasion for consideration will occur during future
negotiations about possible new IMF quota increases or other similar events. The
IMF is required by its Articles to consider every five years whether its resources are
adequate and whether a new quota increase is needed. In 2002, the United States and
other major countries decided that no increase was necessary. The next occasion for
formal consideration of this issue will likely occur in 2007. Those seeking to effect
change in the IMF may keep this timetable in mind as they formulate their proposals.