Problems With Current U.S. Policy.

In August 1997, the IMF released guidelines regarding its role in governance issues. According to then-Managing Director Michel Camdessus, "a much broader range of institutional reforms is needed if countries are to establish and maintain private sector confidence," and "every country that hopes to maintain market confidence must come to terms with the issues associated with good governance." The IMF announced plans to evaluate countries' governance practices and to condition its loans on good governance. The fund then flexed this new muscle when it withheld a loan to Kenya because of corruption concerns.

This new interest in good governance is ironic, given the fund's history. Kenya received IMF assistance throughout the early 1990s, and IMF lending may soon be resumed, despite protests from Kenyan civil society and political opposition leaders who claim that corruption continues. The fund loaned billions to Russia in the 1990s despite rampant evidence of corruption, as Russia's political and business elites reaped the spoils from IMF-mandated privatization schemes. The U.S. Treasury Department has strongly supported these IMF loans for its own political reasons.

The politicization of IMF lending decisions is created by its flawed voting structure, which is based on each member's contribution to the fund. As the largest financial contributor to the IMF, the U.S. has the largest share of votes--17%. Together the G-7 nations control nearly half the votes and thereby wield a heavy hand in setting the IMF's agenda. In addition, many of the IMF's most important decisions, such as amendments to its Articles of Agreement or use of the fund's gold reserves, require an 85% majority, thereby giving the U.S. veto power over the most critical decisions.

The U.S. has used its influence within the IMF as a way of promoting U.S. foreign policy through a multilateral facade. The IMF'S ever-expanding mandate--from macroeconomic stabilizer to development fund to good governance expert--has enabled the U.S. to exert its agenda in ever-increasing ways. In a break from the past, U.S. Treasury Secretary Lawrence Summers has recently acknowledged the IMF's expanding mission and has called for a "refocusing" of the fund's role. In practice, however, business seems to continue as usual, and debt relief for desperately poor countries is delayed by the mantra of preconditioned good governance reforms.

As an institution promoting good governance, the IMF itself is still too secretive. Many of its most important economic assessments of member country economies are confidential. Though loan documents are now generally available, they are released after board approval, when the public cannot influence decisions. The IMF's governing bodies are excessively secretive: the board of executive directors, the day-to-day decision-making body of the IMF, rarely takes recorded votes. Instead it negotiates a consensus behind the scenes and does not release its minutes.

Good governance at the IMF is also thwarted by the fund's flawed practices of audit and evaluation. The IMF has no independent evaluation unit or systematic appraisal process. Instead, it relies on ad hoc external reviews and on internal assessments. In addition, there is no mechanism that holds the IMF directly accountable for the quality of its advice and programs. For example, if a loan program is ill-designed or if consultation is flawed, civil society in a country has no mechanism to hold the IMF directly accountable for its mistakes. A credible accountability mechanism is central to any system of good governance.

Finally, IMF good governance criteria will never be credible as long as governance conditionality is imposed on member countries. Although the IMF has taken a very important step forward by agreeing to participate in national public forums with civil society, government officials, and other donors, the loan negotiation process is still too exclusive and secretive. According to Article V of its Articles of Agreement, the IMF negotiates directly only with the finance ministry and central bank of each member country. This article should be amended, and the IMF should work with a full range of government officials, including parliamentarians.

Key Problems

* The U.S. has used the IMF, including the fund's policy on good governance, as a way of furthering narrowly conceived U.S. foreign policy interests.

* The politicization of IMF lending decisions is created by its flawed voting structure, which is based on each member's contribution to the fund.

* Good governance at the IMF is also thwarted by the fund's flawed practices of audit and evaluation.

Carol Welch is an international policy analyst at Friends of the Earth in Washington, DC, where she specializes in international financial institutions.