Real IMF Reform: Carpe Diem
The International Monetary Fund (IMF) has been the focus of extended debate and criticism, yet reform has been hard to come by. Now, owing to changes in the global economy, the issue of reform has forced itself onto the official agenda. The Fundâ€™s management has responded with its own reform proposals, but they are too narrow. Instead, the IMF should be pressured to adopt bolder reform that incorporates missing social concerns into its mission.
IMF critics have long charged its policies prejudice equitable global growth. Despite the seriousness of these charges, IMF reform has been near impossible. In times of economic crisis reform is viewed as too risky, while in good times the case for reform melts away on the grounds of why rock the boat. However, very occasionally an institutionâ€™s business model breaks down, creating an internally generated case for reform. This has now happened to the IMF.
Previously, developing countries had limited access to financial markets and had to pay high interest rates. That created an opportunity for the IMF, which borrowed low and lent to needy developing countries at favorable rates, thereby providing an income for the Fund and cheaper loans for countries. For Fund critics, the big drawback was the IMF required countries to adopt neo-liberal economic policies to qualify for loans.
This business model has now collapsed. Growth of global capital markets means countries can access private capital at reasonable interest rates and without IMF policy strictures. Additionally, huge U.S. trade deficits have enabled developing countries to run trade surpluses, obviating need for funding. Consequently, demand for IMF loans has fallen, thereby undermining the Fundâ€™s purpose and financial viability.
The IMF is now trying to redesign its business model by proposing reform. However, its proposals do not go deep enough. In particular, they continue with the â€œsiloâ€ model of global governance whereby institutions act alone. A better model is the â€œmatrixâ€ model whereby institutions reinforce each other, which is what globalization needs.
The IMF has proposed two reforms. One is to increase developing country quota holdings and perhaps also representation rights in recognition of these countriesâ€™ increased contribution to global economic activity. The second is to transform the IMF into something akin to a global financial umpire. International economic integration means there can be adverse spillovers from country economic policies, particularly regarding exchange rates. Consequently, an arbiter is needed to help resolve policy disputes.
Both of these proposals deserve support. Politically, they recognize the new realities of the global economy. At the policy level, they seek to tackle the problem of strategic exchange rate under-valuation, whereby countries try to grow by draining demand from other countries.
However, the Fund refuses to recognize that globalization also creates adverse labor market spillovers. With the world increasingly one labor market owing to trade and outsourcing, labor conditions in one country can spillover and affect labor outcomes in another: hence, need for international labor standards also overseen by a global arbiter
This is where the matrix model of governance enters. The International Labor Organization (ILO) oversees international labor standards, but the IMF (and the World Bank too) also has an important role to play by officially and actively supporting the ILOâ€™s work. That means Fund policy advice should be obligated to encourage countries to comply with labor standards; Fund loan programs should not promote economic reforms that undermine labor standards; and Fund Article IV country reviews should spotlight failures to meet labor standards. Furthermore, countries borrowing from the Fund could be screened for compliance with labor standards. Those failing the screen might still be allowed to borrow, but they would require special approval and they would have to develop a strategy for future compliance. .
Globalization is suffering from lack of attention to the social dimension. The IMF has resisted any responsibility for remedying this weakness, claiming it is not part of its mission. The reforms proposed by IMF management do nothing to change this stance. That should not be allowed.
Todayâ€™s global economic system was stitched together in the last quarter of the 20th century, a period of labor weakness and laissez-faire revival. Consequently, labor and social issues were left off the table. It is time to remedy that omission, and the reform process underway at the IMF provides a good place to start.
Copyright Thomas I. Palley