The IMF Today and Tomorrow: Some Civil Society Perspectives

Abstract

The question regarding the International Monetary Fund (IMF) for many civil society organizations is whether the organization is worth salvaging. Certainly the IMF is in trouble. This article offers a North-South perspective on current problems and future prospects of the Fund. Ugarteche presents different civil society arguments for shrinking the IMF and changing its role, while Griesgraber proposes far-reaching reform of the IMF toward a fair and effective system of global governance. The IMF Today: Troubled and Besieged At its origins in the 1940s, the IMF was designed to prevent a recurrence of the Great Depression of the 1930s. To this end, the institution was to provide short-term financial support to countries suffering a negative trade imbalance. The early Fund operated in a system of adjustable fixed exchange rates, with the US dollar as the central currency with its value pegged to gold. The world at the start of the twenty-first century could hardly be more different from that of 1944 when the IMF's Articles of Agreement were first written. Yet the Fund seems to be caught in a time warp. Its policies still tend to emphasize short-term stabilization, often at the cost of inducing recession. In spite of claims to tailor prescriptions to particular country needs, in practice the Fund still tends to recommend the same policies regardless of the context. Moreover, the IMF's governance structures continue to reflect the economic and military power distribution of the 1940s. (1) In the opening decade of this century the IMF has proven incapable of preventing or resolving the great global imbalance whereby China and several other East Asian countries have accumulated enormous amounts of US Treasury bills as reserves and created an Asian Monetary Unit (AMU), while the United States attracts approximately 70 percent of global investments to service its trade and fiscal deficits. Neither Japan nor the European Union (EU) has been able to grow at a pace sufficient to serve as the engine of the global economy, replacing the United States, or challenging emergent China. Central bankers live in fear of inflation, rising interest rates, the collapse of the dollar, and the slump of global demand resulting from the China-US-led global imbalances. The IMF has also lost credibility in respect of crisis management in the middle-income countries (MICs). Its promotion of capital account liberalization is largely faulted for encouraging endemic financial crises in these countries since the mid-1990s. Moreover, the Fund's responses to these situations have tended to make things worse. For example, during the Asia crisis of 1997-1998 the Fund almost provoked a greater problem with its standard policy recommendations of government belt tightening, even when the countries concerned had fiscal surpluses. (2) The onset of Argentina's crisis in 2001 was also largely attributable to the country's excessive adherence to IMF advice. (3) Yet, in the crunch, the Fund washed its hands of the affair. Former communist countries also received Fund advice that, instead of helping them move from central command economies to liberalized markets, often exacerbated their crises in the 1990s. With these problems, the IMF and its policies have suffered a widespread loss of faith, not only in civil society circles but also among debtor country governments and private bankers. Several MICs (including Argentina, Brazil, and Indonesia) have recently even repaid their loans from the IMF early as a declaration of independence from the Fund's conditions. As Charles Dallara of the Institute of International Finance (IIF) has recently noted, the number of countries having borrowing arrangements with the IMF declined from twenty-one in 1998 to six in March 2006. (4) These early repayments have also confronted the IMF with an unforeseen loss of income. Payments of charges and interest are projected to fall from US$3. …