Is the International Monetary Fund(IMF) Obsolete?
"Is the IMF Obsolete?"
“Is the IMF Obsolete?” discusses a question that would have seemed absurd to ask several years ago when the International Monetary Fund (IMF) was assumed to have unquestioned significance. The institution is no stranger to redefining its mission: in 1933, when the United States when off the gold standard, the IMF had to accept a new role in the international community. But, with the rise of Asia since 1998, it seems that the IMF will be forced to redefine its mission once again if it wants to remain a major player in the global economy.
With all of that being said, the IMF has “thrived over the years by constantly reinventing itself to meet the evolving needs of global financial governance” (The International Economy). The recent economic growth and expansion should thus “inspire creativity rather than panic.” Kenneth Rogoff, former Chief Economist and Director of Research for the IMF, agrees along with most economists that the IMF simply needs to evolve rather than disappear.
A few of the necessary reforms are widely agreed upon. Potentially the most important change involves the voting shares given to each country. Rogoff and several other economists involved with The International Economy argue that these revised voting shares must reflect “the changes in balance of global financial power.” Given their current economic proficiency, “Asia should gain votes at the expense of Europe to a far greater degree than is currently being contemplated.” The seconded needed reform is that, in order for the IMF to remain relevant, the Europeans need to relinquish their prerogative of appointing the Fund’s Managing Director. Furthermore, the United States should forfeit its right to appoint the head of the World Bank. With several countries in Asia catching up economically to the U.S. and Europe, it does not make sense for the U.S. and Europe to have such privileges – it creates inequality and a lack of credibility when dealing with countries outside those Western powers. Finally, the Fund needs to put the Institution’s financing on a sustainable basis in order to pay for the IMF’s surveillance and technical assistance activities. By selling off a portion of the Fund’s massive gold supply, Rogoff argues that the IMF could better balance its finances.
Outside of those three reforms, there is less agreement among the major economies. Notwithstanding the disagreement pass this point, most economists and key political figures have faith in the IMF’s ability to adapt, as they have done it time and time again. Given the past, Rogoff does not believe the IMF will ever become obsolete, but rather simply continue to adapt.
"Back to the Basics: The Great Recession and the Narrowing of IMF Policy Advice"
In “Back to the Basics: The Great Recession and the Narrowing of IMF Policy Advice”, André Broome discuses the role of the International Monetary Fund before and after the financial crash in 2008. Before the recession in 2008 – initiated by the overflow of Collateralized Debt Obligations (CDOs) and the crash of the U.S. stock market – there was a declining demand for IMF loan programs, and the Fund faced an uncertain future. During this time, there were a “wide range of external critics, as well as some IMF insiders” that pushed for “substantive changes in the organization’s lending policies and governance processes.”
Since 2003, which was the end of the recovery from the Internet bubble economic crisis in the early 2000s, the IMF’s income that is earned from loan interest and charges fell tremendously. By 2007, this income was less than “one-quarter of its average income during the period from 1998 to 2005,” which forced the IMF to lay off 15% of its staff. However, in 2008, the onset of the Great Recession boosted the level of demand for IMF lending as well as the size of its financial resources. So, Broome is essentially arguing that, while the rest of the world was devastated in 2008 – suffering from the single greatest economic crisis since the Great Depression in 1929 – it almost seems that the IMF breathed a sigh of relief. For instance, in November 2008, “Iceland became the first West European country to agree to a stand-by agreement loan with the IMF” since 1977. And, just five months later, a summit in London agreed to triple the IMF’s lending capacity to $750 billion. Within a year and a half of Iceland’s loan agreement, 18 more countries had negotiated stand-by arrangements and the IMF was back in business.
While Broome certainly recognizes the questioning of the IMF’s significance, he is quick to refute the claim that the IMF is completely obsolete. Rather, Broome argues that the IMF and the global economy have somewhat of a symbiotic relationship: the global economy needs the IMF in times of economic crisis, and the IMF needs these economic crises for loan interest and charges, so they can stay in business during the offseason, when the global economy is running smoothly.
"The Importance of IMF Reforms to Support Ukraine"
In “The Importance of IMF Reforms to Support Ukraine”, Anthony Reyes stresses the importance of the International Monetary Fund (IMF) in supporting individual countries’ economic crises and not just when the entire global economy is in disarray. Given the events that unfolded in Ukraine – with political revolutions that eventually led to a Russian takeover, likening to the days of Union of Soviet Socialist Republics (U.S.S.R.) – the role of the IMF has become even more urgent. In March of last year, President Obama called on Congress to approve legislation that would enable the U.S. and other international powers to intervene quickly with economic aid.
Given their tremendous influence over the IMF, the U.S. and Europe essentially determine the IMF’s capacity to lend resources to countries in need, in this case Ukraine. In his speech to Congress, Obama pleaded with the Congress to take a stand “so that [the Ukrainian Government] can weather this storm and stabilize their economy” and “make needed reforms.” President Obama’s speech did not go unheard: the U.S. developed a package of “bilateral assistance focused on meeting Ukraine’s most pressing needs.” It included $1 billion in loan guarantees and IMF quota legislation, which ensured continued U.S. leadership at such a critical time.
With its ability to appoint the Fund’s Managing Director, Europe also holds great influence in the IMF’s actions. Treasury Deputy Assistant Secretary for Europe and Eurasia Daleep Singh thus followed the U.S.’s lead, urging Congress to boost the resources of the IMF. Although the U.S. and Europe lived up to their prominent role in the IMF in the case of Ukraine, they have received large, and reasonable, amounts of criticism for not making the right move or acting too late in these types of crises.
Reyes argument is actually quite simple: if the U.S. and Europe want to remain at the helm of the IMF, they must continue to act and intervene when needed, if not, there needs to be reforms to ensure that countries like Ukraine receive aid quickly and efficiently.
Mixed Signals: IMF Lending and Capital Markets
In “Mixed Signals: IMF Lending and Capital Markets,” Terrence Champman, Songying Fang, Xin Li, and Randall W. Stone discuss the relationship between International Monetary Fund (IMF) lending and the strength of capital markets. In its essence, crisis lending is intended to restore confidence in capital markets. While the IMF has long claimed that its lending acts as a “seal of approval” on national economic policies, the “evidence about whether crisis lending succeeds in restoring market confidence is mixed.”
The recent debt crisis in the euro zone perfectly highlights the mixed results and effects. For instance, when multilateral actors lend to Greece, “the infusion of liquidity reduces the short-term risk of in-voluntary default.” This is a liquidity effect and should reassure bondholders. Additionally, any new commitments that Greece makes to “undertake fiscal reforms as a condition for receiving the loan should improve its prospects for long-term solvency.” This is a conditionality effect. And, Fang, Li, Stone, and Champman argue that both the liquidity and conditionality effect should reassure confidence in capital markets for the long run.
While the net effect of lending can certainly increase bond yields and the prominence of capital markets, IMF lending only increases when the borrowing country is less politically and economically developed. When the borrowing country is politically or economically significant, lending can actually cause a country’s market confidence to decrease. With this in mind, the design of International Organizations, such as the IMF governance structure, “which allows key share-holders to exert informal influence over lending decisions,” can have unintended and harmful consequences.
Champman, Fang, Li, and Stone are thus arguing that reforms must take place in the structure of the IMF, rather than in the overall mission of the Fund. With a more balanced structure – rid of corrupt share-holders – the IMF will be able to lend to both developed and less developed and succeed in its mission to restore confidence in global markets. If the IMF can effectively reform to these needs of the current global economy, they can remain significant.
"Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative"
The HIPC Initiative is a policy paper done by the International Monetary Fund (IMF) that was launched in 1996 by the IMF and World Bank. With an aim of ensuring that no poor country faces a debt burden it cannot manage, the international financial community has worked together to reduce the levels of burdens on the most heavily indebted poor countries.
In 2005, in order to “help accelerate progress toward the United Nations Millennium Development Goals (MDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). This was extremely significant given that the MDRI allows for “100 percent relief on eligible debts by three multilateral institutions,” including the IMF. With this supplementation in place, the HIPC initiative was able to make additions and reforms to its now comprehensive approach to debt reduction.
The 2015 version of the HIPC Initiative involves a two-step process to combat the issue of excessive debt burdens in poor countries. The first step, referred to as decision point, determines which countries are to be considered for HIPC Initiative assistance. In order to execute this step effectively, each country must fulfill four conditions: “be eligible to borrow from the World Bank’s International Development Agency, face an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms, have established a track record of reform and sound policies through IMF and World Bank-supported programs, and have developed a Poverty Reduction Strategy Paper (PRSP).” And, once a country has “met or made sufficient progress in meeting these four criteria,” the IMF will decide on its eligibility for debt relief. The second step is referred to as completion point and involves the decision of which countries will receive full and irrevocable debt reduction, after they have been deemed eligible. In order to receive the reduction a country must: “establish a further track record of good performance under programs supported by loans from the IMF, implement satisfactorily key reforms agreed at the decision point, and adopt and implement its PRSP for at least one year.” Once a country has met these criteria, it can receive full debt relief. With this two-step approach, the IMF hopes to better organize the process of debt reduction and ensure that the right countries get the right amount of aid.
With the supplementation by the MDRI in 2005 and the initiation of the two-step process in 2015, the HIPC Initiative highlights the IMF’s ability to constantly adapt to the changes in the global economy and redefine its mission. And, if the IMF continues use this adaptive approach with its other policy papers, they will certainly remain significant and effective in the global economy.
Broome, André. Back to the Basics: The Great Recession and the Narrowing of IMF Policy Advice. 2nd ed. Vol. 28. N.p.: Wiley Periodicals, n.d. Print.
Champman, Terrence, Songying Fang, Xin Li, and Randall W. Stone. "Mixed Signals: IMF Lending and Capital Markets." Mixed Signals: IMF Lending and Capital Markets (n.d.): n. pag. 24 Oct. 2014. Web. 29 Apr. 2015.
"Factsheet -- Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative." Factsheet -- Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative. International Monetary Fund, 15 Apr. 2015. Web. 29 Apr. 2015.
Reyes, Anthony. "Treasury Notes." The Importance of IMF Reforms to Support Ukraine. U.S. Department of the Treasury, 6 Mar. 2014. Web. 29 Apr. 2015.
Wamba, Henri. "LA GESTION DE L'INFORMATION DANS LES INSTITUTIONS DE MICRO-FINANCE EN AFRIQUE: LE CAS DU CAMEROUN." African Review of Money Finance and Banking (2004): 51-76. The International Economy. The International Economy, 2007. Web. 29 Apr. 2015.