Why the IMF Needs Reform

At their next summit in Halifax this June, the leaders of the Group of Seven (G-7) industrialized nations have set themselves the task of revising the Bretton Woods framework, which is widely credited as a foundation of the postwar economic prosperity among Western nations. High on their agenda should be reform of one of its main components, the International Monetary Fund.

Why reform the IMF? The current international economic environment is more hopeful than ever before. For the first time, the overwhelming majority of the world's population lives in some form of market economy. The industrial world enjoys a rare combination of growth and low inflation; the "Washington consensus," a model of economic development that emphasizes macroeconomic discipline and open markets, is being adopted by more countries. The IMF played crucial roles in the 1980s debt crisis and in the transformation of former communist economies. Radical change, many might argue, is neither necessary nor desirable.

Such complacency is misplaced. There is a gulf between the rhetoric and reality of the IMF's role, a gulf that has been emerging since the fixed exchange rate system broke down in the early 1970s but which is proving increasingly hazardous. The growth of capital markets has rendered the organization impotent in industrialized countries; the world's richest economies neither borrow from the IMF nor are they required to follow its policy advice. Its role in the developing world is worrisomely unclear. The Mexican crisis earlier this year is a case in point. The IMF proved wholly inadequate at crisis prevention (it did not foresee the Mexican debacle), and its attempts at crisis resolution were dangerously improvised (it pledged a disproportionate share of its liquid resources to Mexico, breaking all existing rules on the limits of financial support).

In the world's poorest countries it has effectively become a development institution with a narrow macroeconomic focus. This role is a far cry from the original notion of providing countries with temporary financial support and raises the question of overlap with the World Bank. The IMF is floundering as it looks for a role.

THE MODERN FINANCIAL SYSTEM