Toward a New Foreign Policy.

Given that the increasing dominance of private financial flows relative to official flows has shifted power and influence toward private sector capital, the role of the IMF has come into question in the last several years. This identity dilemma has been fomented by the continued stagnation of the poorest countries, despite many years of structural adjustment. Now, since the IMF will have a new managing director for the first time in thirteen years, is a propitious time to examine the fund's role in the global economy of the twenty-first century.

Reform of the IMF must be a key component of U.S. foreign policy priorities. The reform agenda includes downsizing the fund's role and determining exactly how it carries out its more restricted mission. The IMF was created to monitor economic developments in the global economy and to address short-term external imbalance when necessary. Treasury Secretary Summers' recent call for a refocused IMF is welcome, and this should be the starting point for a new U.S. policy. The IMF should return to it original mandate and lend to countries (rich or poor) facing short-term balance-of-payments problems. Conditions would be few, dealing strictly with core macroeconomic problems and with repayment to the IMF. Longer-term development lending for the poorest countries is better left to agencies with the appropriate mandate and staff expertise, such as the World Bank and certain UN agencies.

A surveillance function should remain part of the IMF's mission, with one important change needed to ensure improved global economic governance: the monitoring of private capital flows, which played a major role in the crises of 1998. But though the IMF should track these flows, imbalance created by such flows may not warrant IMF assistance, nor can the IMF realistically expect to match the volume of private capital. In today's world of massive, volatile capital flows, the IMF should not step in and bail out banks and private lenders who knowingly took risks investing overseas.

Good global governance means that speculators and bankers should not get special treatment. An independent, rules-based system that equally balances the importance of meeting human needs and public services with meeting obligations to creditors is necessary to ensure effective global governance. Because it is dominated by the finance ministries of the wealthy countries (particularly the U.S.), the IMF is incapable of achieving this important balance. With respect to the problem of mounting third world debt, the creation of an independent debt adjudication board (similar to U.S. bankruptcy courts) outside IMF control would be one way to establish such a rules-based system. The U.S. should give such an alternative proposal due consideration.

But while the IMF reins in its activities, it must itself adhere to principles of global economic governance, and the U.S. should take a strong role in ensuring that this happens. One step would entail freer access to information. The IMF's annual economic surveys--the Article IV consultations--should be public documents, although certain sensitive information could be withheld. Currently, the IMF only makes available--on a voluntary basis--a brief, sanitized summary. Drafts of loan documents should also be made public, so that civil society has an opportunity to voice concerns about IMF loan programs.

In addition, IMF governance would be improved by making the board of executive directors more democratic and more accountable for its decisions. The executive board's process of reaching decisions by consensus makes it very difficult for outsiders to verify the position of a particular country's representative. The current U.S. executive director admitted in an April 1998 congressional hearing that, in 2,000 decisions, she has only formally voted about twelve times. At a minimum, minutes of board meetings should be made available expeditiously, and board votes should be public. However, improved democracy and representation will not be achieved without a significant change in voting power within the board. For example, population size should factor into voting share, and no one country should have veto power at the IMF.

To enhance its credibility, the IMF should establish an independent evaluation unit that can systematically assess the effectiveness and impact of IMF policies and programs. This unit should be independent of IMF management and should consult with all interested parties to determine the full effect of IMF operations around the world. These reviews should be public, and the executive board should issue a response or action plan for each review's recommendations. The IMF should also, establish a grievance office so that affected people have recourse to challenge a flawed IMF loan program in a country.

Finally, discussions between the IMF and a borrowing country must include the full range of government ministers and parliamentary leaders. Without the representation and agreement of a wide array of government authorities, IMF programs may not identify core problems, predict negative outcomes, and win broad support. Although broad public consultation is neither feasible for short-term lending nor absolutely critical if conditions are narrowly defined, the IMF should pursue opportunities, through its resident representatives, to establish more regular, informal contact between IMF officials, government officials, and the public in order to better assess the economic situation in member countries.

Key Recommendations

* The IMF should return to its original mandate of monitoring economies and lending for short-term stabilization; loan conditionality should be curtailed.

* The U.S. must play a leadership role in reforming the IMF, such as making the fund's executive board more transparent and enhancing accountability through an independent evaluation unit.

* The U.S. must give up its veto power at the IMF and work to increase the voting power and representation of poorer countries.

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