Reforming the IMF

Here’s a thought-provoking article by journalist and international development expert Thomas Palley regarding the reforms that are necessary for the Bretton Woods institutions (i.e.: the World Bank and the IMF), and no, he’s not referring to Paul Wolfowitz’s high profile ethical lapses or weak human rights record as an ambassador.

Palley argues that the IMF’s policies prejudice equitable global growth, a situation that has heretofore been impossible to change because initiating reform has been near impossible. The problem, as he diagnoses it is that “In times of economic crisis reform is viewed as too risky, while in good times the case for reform melts away on the grounds of why rock the boat.”

But the silver lining is that the functioning of these institutions have become so compromised, its policies so antithetical to its mission to help stabilize the economies in the Developing Nations, that the for reform is now impossible to hide under the carpet. Or, as Palley argues: “Very occasionally an institution’s business model breaks down, creating an internally generated case for reform. This has now happened to the IMF.”

Palley explains how and why the IMF’s business model has finally collapsed: Because of growth of global capital markets, countries now have access to private capital at much lower interest rates without having to abide by rigid and counterproductive) IMF conditionalities. He also notes that huge U.S. trade deficits have enabled developing countries to run trade surpluses, lessening the amount of money they need to borrow to finance economic growth. This, im turn, has led to a falling demand for IMF loans, thereby undermining the Fund’s purpose and financial viability.

The article goes on to discuss some of the Fund’s ongoing reforms that, while they are necessary and worthy, he argues don’t go far enough. He also makes the case that the IMF’s leadership still have not adequately addressed the challenges to international development policy wrought by globalization. He says:

The Fund refuses to recognize that globalization also creates adverse labor market spillovers. With the world increasingly one labor market owing to trade and outsourcing, labor conditions in one country can spillover and affect labor outcomes in another: hence, need for international labor standards also overseen by a global arbiter. . . .

Globalization is suffering from lack of attention to the social dimension. The IMF has resisted any responsibility for remedying this weakness, claiming it is not part of its mission. The reforms proposed by IMF management do nothing to change this stance. That should not be allowed.

Today’s global economic system was stitched together in the last quarter of the 20th century, a period of labor weakness and laissez-faire revival. Consequently, labor and social issues were left off the table. It is time to remedy that omission, and the reform process underway at the IMF provides a good place to start.

I agree that this is a key challenge that needs to be addressed by these multilaterals and the wealthy nations such as the US, Japan and others that provide the most funding to them. Read the whole article, it’s well-written and presents, I believe, an effective case against the current trajectory of the IMF.