IMF: Reform, Downsize, or Abolish.

Key Points

* The Meltzer Commission Report, combined with street protests, has intensified the debate sparked by the IMF's handling of the global financial crisis.

* IMF critics loosely fall into three camps: abolitionists, progressive reformers, and the Meltzer Commission.

* The U.S. Treasury Department, arguably the principal influence on IMF policies, has offered a modest reform proposal that lacks a clear vision for change.

The global financial crisis that erupted in 1997 set the stage for the first genuine debate in several decades over the role of the International Monetary Fund (IMF). Most analysts agree that IMF-promoted policies to liberalize capital and financial markets in East Asia in the early 1990s at the very least aggravated the crisis. After rapid capital flight plunged the Asian countries into an economic tailspin, the IMF prescribed harsh economic measures in some countries that arguably made the impact more severe.

Because the U.S. government is generally accepted as the principal influence on IMF policies, much of the reinvigorated debate over the institution's role has been centered in Washington and in recommendations aimed at the Treasury Department and Congress. The introduction of legislation in 1998--authorizing $18 billion to increase the IMF's financial resources--provided a focal point for critics of the fund from across the political spectrum. Although the bill eventually passed, the debate has continued to grow in intensity. In March 2000, a congressionally appointed bipartisan commission issued a scathing report on the IMF and World Bank. The following month, tens of thousands of protesters converged on the IMF and World Bank semiannual meetings in Washington, demonstrating that the debate had extended far beyond elite circles.

The proposals of IMF critics fall roughly into three general categories. One set advocates the elimination of the IMF. These include conservatives who charge that the IMF is a waste of public funds in an age when private capital flows to the developing world have dramatically increased. This group also criticizes IMF bailouts for eliminating the discipline of risk in private markets. These staunch defenders of free markets are joined by some prominent individuals from the left who argue that the abolition of the IMF would, among other things, create more space for developing countries to pursue alternative economic policies that do not conform with the IMF's free market prescriptions.

A second set of proposals stems from the belief that there remains a need for a strong governmental role in promoting international financial stability and reducing inequalities. This approach attempts to achieve these goals by reshaping or replacing the IMF and the World Bank. Labor unions, a number of environmental groups, and other progressive analysts have called for deep changes in the institutions to curtail their power to impose draconian austerity measures while seeking ways for them to play a positive role in reducing poverty, promoting international labor and environmental standards, and placing controls on global capital flows.

A third set of proposals can be found in the recommendations of the International Financial Institutions Advisory Commission. This commission was created as part of the 1998 legislation that increased the IMF's financial resources. It is typically referred to as the Meltzer Commission, after the group's Chairman, Allan Meltzer, an expert on monetary policy at Carnegie Mellon University. The commission's majority report calls for the IMF to be scaled back to serve only as a lender of last resort to solvent member governments facing liquidity crises. It would eliminate the IMF's power to impose conditions on developing countries in return for long-term assistance. However, it would still require that countries meet a list of rigid, free market-oriented "preconditions" in order to be eligible for short-term crisis assistance.

Following the March 2000 release of the commission's report, Treasury Secretary Lawrence Summers firmly denounced it, arguing that, if implemented, it would "profoundly undermine the capacity of the IMF ... and thus weaken the international financial institutions' capacity to promote central U.S. interests." Hoping to prevent the commission's report from gathering support in Congress, Summers released his own more modest reform proposal. Nevertheless, several prominent members of Congress have indicated their commitment to enacting at least some of the commission's recommendations. In addition, Meltzer and other commission members have been meeting with officials of other governments to promote their proposals internationally. The IMF has not yet issued a formal response to the Meltzer Commission, although it has made a concerted effort in the past year to improve its global public image, in particular by announcing that poverty reduction is now the institution's overarching goal.

Sarah Anderson <[e-mail]> is the director of the Global Economy Project of the Institute for Policy Studies. She also served on the staff of the Meltzer Commission.