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OXFAM INTERNATIONAL
Media Briefing
Reforming the IMF
Summary
IMF reform is back at the top of the international agenda, but for the wrong 
reasons. The new consensus, emerging from the US Treasury and the Meltzer 
report, is that the Fund should depart low-income countries, and focus on crisis 
prevention in financial markets. While some of the reform proposals now being 
debated are sensible, the thrust of the reform agenda is a source of concern for 
the following reasons: 
It reflects a growing disenchantment with multilateralism

It threatens to replace inappropriate IMF conditions with inappropriate 
conditions dictated by the G7 

It fails to address the real policy issues at the heart of the IMF's failure 
as a poverty reduction 

It does not address the politicisation of IMF loans, especially with regard to 
the US Treasury's 

It does not adequately consider the 'democratic deficit' which prevents poor 
countries from having an effective voice in the IMF

Background}
Reform of the IMF is back on the agenda. The Meltzer Report echoes many of the 
themes raised in Larry Summers' speech last December, including the call for a 
rapid departure of the Fund from low-income countries and a more specialised 
role in crisis prevention. This approach has broad appeal. It unites 
conservative Republicans who want to rid the world of "global government" with 
non-government organisations who attack the IMF for its disregard for poverty 
issues and transparency. Both regard the IMF as an abject failure. 
Unfortunately, the new consensus on the IMF ignores many of the more fundamental 
problems associated with its operation - and it is in danger of throwing the 
baby of multilateralism out with the bath water. 

Oxfam believes this new consensus is the easy way out and fails to address the 
fundamental problems with IMF policy. Of course, the IMF has failed to address 
the challenge of developing a poverty-focussed approach to macro-economic 
stabilisation. It is remote, unaccountable and undemocratic. It has also 
suffered from 'mission creep' on a grand scale, leading to overlapping mandates 
with the World Bank (which suffers from the same affliction) and inappropriate 
policy conditions being applied in areas where Fund staff are ill-qualified. 
However, these problems are the product of IMF management. To put it bluntly, 
the US and the G7 have got the IMF they want. After all, they control 57 per 
cent of its vote; and they oversee the loan conditions applied by IMF staff. 
The Meltzer report has little to say on the policy content of IMF programmes in 
low income countries, or on their implications for poverty reduction. Similarly, 
the report barely mentions the 'democratic deficit' at the heart of IMF 
operations. These are the very issues that most deserve public debate. 

*partie=titre ESAF and poverty reduction *partie=nil 
Much is being made of the call for the IMF to get out of long term development 
financing in low-income countries. In fact, the Fund does not do long term 
development financing in low income countries. Net resource transfers are 
negative in most years. The strength of IMF policy conditions derive not from 
its financial role, but from the premium placed by its major shareholders on 
fiscal stability. Simply abolishing the Fund would not necessarily change the 
policy environment. At best it would lead to major donors finding new mechanisms 
for imposing the same conditions that they currently insist on through the Fund. 
The real challenge is to integrate monetary policy into a broad macro-economic 
reform framework geared towards poverty reduction and enhanced equity. This 
means: 
Abandoning the current stabilisation model, which relies solely on demand-side 
interventions, and developing more expansionary fiscal frameworks (especially 
for countries with long-term aid commitments).

Ensuring that budget provisions are consistent with poverty reduction 
strategies (including the withdrawal of cost-recovery and support for 
marketing infrastructure in poor areas).

Paying more attention to the sequencing of 

Abandoning 'second generation' reform conditions in areas such as 
privatisation and trade liberalisation. 

If the IMF cannot make these changes, then a case could be made for shifting the 
responsibility for monetary and fiscal policy in poor countries to the World 
Bank. However, the Bank too has failed to prioritize poverty reduction in its 
policy advice and would need to change dramatically to incorporate equity and 
poverty goals into its policy lending. 

Our objective, as argued in our earlier report The IMF: wrong diagnosis, wrong 
medicine, should be a smaller, more focussed IMF. Stabilisation operations 
should be developed as part of national poverty reduction strategies, not as a 
set of narrowly-defined macro-economic goals devised in Washington. 

*partie=titre Private capital markets *partie=nil 
The IMF has been justifiably criticised for its response to the East Asian 
crisis. The emphasis on demand deflation to achieve balance-of-payments 
stabilisation, the 'Christmas tree' approach to loan conditions, failure to 
protect social sector budgets, failure to insist on debt reduction, all had the 
effect of prolonging and deepening the recession. There is also compelling 
evidence that the Fund's insistence on capital account liberalisation 
contributed to the crisis. This said, the loan conditions were drawn up in 
Washington under the gaze of the Executive Directors; and the proliferation of 
inappropriate loan conditions (i.e. opening up markets for car part 
manufacturers, foreign investment and foreign control of banks) reflected US 
Treasury demands. As for capital account liberalisation, this was brought on to 
the Fund's agenda by Secretaries Rubin and Summers, and the latter remains the 
most aggressive exponent of policy conditions linked to capital account 
convertibility.
 
Oxfam supports the call for a clearer focus on crisis prevention, and a 
streamlining of the lending facilities that have evolved in response to the 
various crises. Why not roll all non-concessional lending into one pool with 
access linked to national quotas, and loan duration/conditions determined by 
specific needs? Oxfam also supports the efforts of Summers and others to 
develop, through the IMF, more meaningful indicators to asses national 
vulnerability to financial shocks, including foreign currency claims on the 
private and public sectors. 

In addition we call for the IMF to: 
Develop more expansionary approaches to stabilisation and recovery, especially 
for countries not suffering large budget deficits.

Provide better protection to basic social sector budgets (thereby preventing a 
repeat performance of the disaster inflicted on Indonesian.

Oversee the development of orderly debt work-out rules and be willing to lend 
to countries in arrears.

*partie=titre Abandon any linkage between loans and capital account liberalisation *partie=nil  
More broadly, it has to be said that the Meltzer report (and the US Treasury 
position) suffers from some internal contradictions. The fund is supposed to act 
as a lender of last resort, but no new resources are envisaged. Loans will only 
be made to countries that have achieved "financial soundness", which raises the 
risk of contagion from those (such as Russia) that have not. Loans should have 
short maturities and penalty interest rates, which will exacerbate debt problems 
and add to instability. 

The more serious criticism is that the G7 have apparently abandoned any attempt 
at systemic action to tame global capital markets. In reality, no lender of last 
resort will be able to operate effectively unless this task is addressed, though 
the Fund will doubtless serve as a convenient scapegoat when the next crisis 
erupts. Finally, the Fund could have an important role to play in addressing 
issues of money laundering, harmful tax competition, and outright tax evasion. 
These issues need to be brought into the reform debate. 

*partie=titre Democratic control *partie=nil 
The real problem, studiously avoided by Meltzer, is the system under which IMF 
votes are proportional to its quotas, which are in turn linked - albeit 
imperfectly - to a country's weight in the global economy. The G7 plus the rest 
of the EU accounts for 14 per cent of the world's population, yet they enjoy 56 
per cent of the votes in the Executive Board. In effect, the IMF is not a 
'revolving fund', as its staff like to claim, but a financial institution 
comprising 'structural creditors', who dictate loan conditions, and structural 
debtors, who accept the said conditions.
 
At a time when issues of governance and accountability are at the forefront of 
dialogue between bilateral creditors and governments, the IMF is an anachronism. 
In the words of former Trade Representative Mickey Kantor, the voting structure 
has facilitated the development of the IMF as a "battering ram" for US 
interests. It is unacceptable that people in Africa, whose lives are arguably 
most affected by IMF programmes, account for only around 2 per cent of voting 
rights. And it is outrageous that loan conditions are used to promote policy 
reforms in poor countries - such as agricultural market liberalisation, rapid 
trade liberalisation, financial market deregulation - which would be rejected in 
G7 countries.
 
Recent moves towards a more inclusive structure have been derisory. For 
instance, the initiative to create a Group of 20 "systemically significant 
economies" in the Interim Committee still leaves the poorest countries without 
an effective voice. And it is not clear that the G20 countries have any real say 
in developing Fund strategies. 

The current shareholding based arrangement inevitably creates the impression 
that IMF programmes are not tailored to maximise the benefits for the countries 
receiving loans. If the G7 are serious about extending the principles of 
national ownership, increased representation for low-income countries should be 
an immediate priority.

Another problem is that the Board is only active in cases where the major 
shareholders have a direct interest. This leaves IMF staff with too much scope 
to define policy conditions in poor countries. As a result, the Fund is 
accountable neither to the populations of the countries operating its program, 
nor to the Interim Committee. 

The perception of many developing countries that the IMF suffers from the 
excessive influence of the US Treasury is justified. Politically motivated loan 
conditions are now the order of the day. While it is inevitable that the major 
shareholder will carry more weight than others, restricting the vote of any one 
country to 10 per cent would help to correct the current imbalance.

*partie=titre Some wider issues *partie=nil 
The Meltzer report includes recommendations for change in a wide range of areas, 
some of which are sensible. Unfortunately, many of the proposals are 
ill-conceived, and rooted in a perspective that reflects the subordination of 
human development concerns to financial market considerations. 
For instance, the report suggests withdrawing virtually all concessional 
assistance from middle-income countries that can attract private capital. But 
private capital is unlikely to fill the social and economic infrastructure gaps 
faced by the poor. 

Much is made of the need for the World Bank to convert IDA loans into grants. In 
reality, the grant element of IDA loans is already 70 per cent - and these loans 
can help countries graduate back into capital markets. 
The report says that the World Bank should pull out of Asia and Latin America, 
leaving these regions to regional development banks. But slimming down the Bank 
while fattening up regional development banks will not produce obvious 
efficiency gains. Moreover, the Asian Development Bank and the Inter-American 
Development Bank do not have distinguished records on poverty reduction. The IDB 
in particular has failed to come up with its share of funds for the HIPC 
countries in Latin America.
 
This said, there is clearly a case for slimming the Fund. This would be achieved 
by excluding 'second generation' reforms from its mandate, and by developing a 
clearer focus. Similarly, problems posed by the overlapping mandates of the IMF 
and the World Bank need to be tackled at source - and not through the cosmetic 
approach of simply transferring the Fund's responsibilities to the Bank without 
addressing the underlying incoherence. 

*partie=titre Conclusion *partie=nil 
The IMF has lacked a proper role since 1971, when the exchange rate system it 
was created to oversee collapsed. For the past three decades it has been an 
institution in search of a role. It has mishandled virtually ever crisis since 
acting as a debt collection agency for commercial banks in the 1980s - and it 
has singularly failed to advance the cause of poverty reduction and equity. 
There is now a real opportunity to recast the Fund as an agency that can 
contribute to human development. Abandoning multilateralism is not a good 
starting point. 
*partie=titre April 2000 *partie=nil