Can the World Be Governed?: Possibilities for Effective Multilateralism

Slipping into Obscurity: Crisis and Institutional Reform at the IMF

What a difference a decade can make. Ten years ago, the International Monetary Fund (IMF) was seen as one of the most influential international organizations. Today, top policy makers warn that the IMF might “slip into obscurity” (King 2006, 3). A far-reaching debate about the IMF’s future role and purpose is now under way. In the background to the reform debate is the perception that the IMF is losing its influence. Why are IMF reforms being demanded and who is supplying the reform ideas? Are the current reform proposals focused more on process issues or on changes in outcomes?Are they best described as palliative, corrective, or transformative? And how would the Fund be changed by these reforms? This paper attempts to provide some tentative answers to these questions. In the first section, we argue that two developments are particularly important in explaining why IMF reforms are being demanded: the declining use of IMF loans to middle-income borrowers in the past few years and the increasingly critical view of US policy makers toward the institution since 2000. These developments have prompted Fund management, key Eric Helleiner and Bessma Momani * * * We would like to thank Daniel Bradlow, Miles Kahler, Steve Miller, Arthur Stein, and other participants of the Global Institutional Reform workshop for their helpful comments. Slipping into Obscurity: Crisis and Institutional Reform at the IMF shareholders, and the concerned policy community to supply a number of reform proposals. In the second section, we seek to make sense of these numerous reform proposals, their efficacy, and limitations. The most politically prominent proposals include both process-oriented reforms that focus on governance issues and outcome-oriented reforms that address the Fund’s performance. None of the prominent proposals can be described accurately as transformative; instead, the reform debate to date has focused more on proposals that are of the palliative and corrective kind. We conclude by briefly exploring future scenarios of reform implementation, potential roadblocks to reform, and the implications of the current crisis for scholarly debates about the IMF’s role in global governance. What Explains the Demand for IMF Reforms? The IMF has waned in and out of a position of influence in the international financial system. It has also faced historical moments when its role and purpose have been seriously questioned, and it has adapted to new international economic circumstances. When the IMF was created at the 1944 Bretton Woods conference, it was meant to be at the center of global financial governance, yet US officials almost immediately sidelined it. After the late 1950s, the IMF began to assume a more important position in international financial affairs. This role was short lived, however. The Bretton Woods exchange-rate regime system broke down in the early 1970s, and the IMF’s rationale became less clear. After the outbreak of the international debt crisis in the early 1980s, the IMF re-emerged with a renewed mandate that placed it at the center of international financial crisis management vis-à-vis developing countries. The Fund held its influential position in the international financial system through the 1990s, playing a lead role in advising post-communist states in their transition to capitalist economies. At the dawn of the new century, however, the IMF faces yet another crisis of legitimacy and purpose. Declining Use of IMF Loans Why are there demands for IMF reform today? One reason is that the use of Fund loans has been rapidly declining. While the IMF still has loans 354 l Eric Helleiner and Bessma Momani outstanding to dozens of low-income countries, three of its four largest borrowers—Argentina, Brazil, and Indonesia—recently announced they would repay their loans early and would not renew their borrowing from the Fund. Many countries in east Asia have also indicated their disinterest in using the Fund’s financial assistance, and have been accumulating large reserves of foreign exchange to protect their countries from future currency crises. In total, the IMF’s outstanding lending has declined from US$107 billion at the end of 2003 to US$35 billion in mid-2006 (Snow 2006). As use of its loans declines, the IMF faces more than a loss of influence, utility, and legitimacy. The Fund’s financial balance sheet is affected adversely because its organizational costs are financed by the interest and fees it charges on its loans. The early loan repayments have already triggered budgetary shortfalls for the...