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Last Updated: Friday, 21 April 2006, 12:29 GMT 13:29 UK
IMF faces new pressures to reform
Analysis
By Steve Schifferes
BBC News economic reporter

Woman and child in Niger
Poor countries want more of a say in running the IMF
Finance ministers from around the world will be gathering in Washington this weekend for the spring meeting of the the International Monetary Fund (IMF).

The IMF, along with the World Bank, are the international bodies charged with regulating the world economy.

The IMF has come under criticism in developing countries for forcing them to undertake painful economic reforms.

But now the institution is facing increasing pressure to reform itself in order to become more democratic and open.

The pressures for IMF reform are coming from two directions.

Currency reform

On the one hand, the rich countries, led by the United States, want the IMF to play a more active role in managing currencies around the world.

In the past, the IMF has only intervened in crises when a country's currency is facing pressure to devalue.

The IMF acted too long as a creditor collection agency and a defender of other US interests
Jeffrey Sachs, Columbia University

Now, however, the US wants the IMF to evaluate the problems of revaluing currencies more broadly - not least when they could instead be undervalued.

It is particularly concerned with the low level of the Chinese yuan, and some other Asian currencies, which has helped boost their exports - and led to a huge trade deficit in the United States.

The underlying concern is that this "global imbalance" could unwind quickly, with a run on the dollar, weakening the world economy.

Rodrigo Rato, the IMF's managing director, is sympathetic to some of these reforms, and hopes to reach an agreement to allow the IMF to start monitoring the currency rates and exchange policies of newly-emerging economic powers such as China and India.

"This will enable the Fund and members to propose actions to address vulnerabilities that affect individual members and the global financial system," he said.

"A disorderly unwinding of global imbalances would be very damaging."

But he rejected calls that the IMF should be an "umpire" in global currency disputes.

"We do not just stand on the sidelines and make calls. We are engaged in discussion with the players. This is at the very heart of our process of consultation." he added.

Democratic deficit

In return, developing countries are pressing for greater representation in the IMF,

The organisation's current system of governance relies on a complicated system of weighted voting based on the size of a country's economy, which effectively gives the US a veto over policy.

Chinese men on bicycles
China is becoming a major factor in the world economy
China and India would like to increase their voting power to ensure that they have a role in the IMF's decision-making process "that accords with their increased importance in the world economy", Mr Rato said.

And the low-income countries, whose voting power has been eroded, would like to change the system whereby whole regions are represented by a single delegate.

There is also pressure to change the informal system of selecting the head of the IMF. By custom and practice, the major European countries have been allowed to chose the head of the IMF, in return for the US choosing the head of the World Bank, since the two organisations were created in 1944 at Bretton Woods.

These changes are controversial, and will take some time to bear fruition. The last time the IMF looked at the voting rights issue, a committee actually recommended increasing the size of the US vote to make it more commensurate with its actual weight in the world economy.

Conditionality

A third set of radical reform proposals, which unites the left in developing countries with the libertarian right in the United States, calls for a reduction in the role of the IMF setting strict conditions for countries receiving short-term loans.

The IMF was widely criticised during the Asian financial crisis in the late 1990s for insisting that countries facing currency crises cut their budget deficits, thus increasing the suffering of their poor.

petrol queue in Indonesia
High oil prices are adding to pressure in poor countries

"(The IMF's) failures have mainly come about when the US abused its power in the IMF, by pressing the multinational organisation to serve narrow US short-tem interests,"Columbia University economist Jeffrey Sachs told the Financial Times.

"The fund acted too long as a creditor collection agency and a defender of other US interests."

The issue of how much conditionality the IMF insists on in return for loans is likely to become an even greater issue if foreign aid flows increase substantially, as promised in the G8 summit last year.

Developing countries are resisting calls for strings to be attached to the receipt of such aid.

But this demand is bound to be resisted by the IMF, which recently played a key role in evaluating countries' readiness to qualify for debt relief.

The spring meeting is likely to announce that the debt relief deal - which will see 100% debt forgiveness for 17 of the world's poorest countries - has finally been ratified and will be come into effect on 1 July 2006.

But the IMF sees itself as having a continuing role in advising poor countries on their macroeconomic policies and helping them to avoid accumulating excessive debt again.

Aid donors also want strict conditions to avoid corruption and ensure good governance - although some, like the US, doubt that the IMF or the World Bank are the right bodies to enforce such conditions.

All this adds up to the biggest set of changes to the IMF since it was founded 60 years ago.

And while many of these issues will be discussed this weekend, it is likely to be the IMF's annual meeting in Singapore in September where key decisions are made.




SEE ALSO:
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IMF approves $4.8bn debt relief
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Poor nations may tap new IMF fund
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IMF warns on cost of China's boom
21 Nov 05 |  Business
World Bank and IMF back debt deal
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