Following Mexico's liquidity crises and the subsequent 50 billion dollar rescue package for Mexico in early 1995, it was suggested that the IMF should be reformed to allow it raise emergency money from capital markets in order to combat the threat of global financial crises.
The Bretton Woods Project was set up in 1995 to facilitate the work of UK non-government organizations (NGOs) concerned about the social and environmental impacts of World Bank and IMF financing in developing countries. The Project circulates information to NGOs in the UK and across the world, identifies lobbying or campaigning opportunities, organizes meetings with officials and prepares briefings on important issues. It tracks key policy statements and reports, and provides critiques and early warnings.
The IMF is not equipped to deal with new international realities. IMF resources are not suited to dealing with the threat of destabilizing capital flows of a short-term nature. The IMF needs to transformed because of the new environment of globalized financial markets.
The IMF's overwhelming preference for high interest rates and fiscal austerity, even in the absence of any economic justification, has caused unnecessary recessions, reduced growth, hindered economic development, and increased poverty throughout the world. The IMF's recent intervention in the Asian financial crisis actually worsened its impact. Many believe that the Fund bears the primary responsibility for turning the financial crisis into a major regional depression.
IMF policies have mandated mass layoffs and changes in labour law to facilitate or encourage mass layoffs. IMF policies regularly force countries to lower wages, or often undermine efforts by governments to raise wages – as, for example, in Haiti in recent years.
IMF policies encourage and frequently require the lowering of environmental standards and the reckless exploitation of natural resources in debtor countries. The export of natural resources to earn hard currency to pay foreign debts under IMF mandates damages the environment while providing no benefit to poor and working people in debtor countries.
The policies of the IMF have undermined the ability of developing countries to provide for the needs of their own peoples.
The International Monetary Fund needs to change, but not into a world central bank. The IMF's record in foreseeing global financial crises and heading them off is spotty at best. It does not have a mandate to be the lender of last resort to the world, nor should it be given such a role.
The IMF is a toy of the United States to pursue its economic policy offshore.
The IMF needs to make its policy reviews and decision-making more public and inclusive, and it needs to monitor more closely global short-term money flows. This will enable it to perform the role of global watchdog and to build international support for its operations.
The IMF is arrogant. It doesn't really listen to the developing countries it is supposed to help. It is secretive and insulated from democratic accountability. It's economic "remedies" often make things worse – turning slowdowns into recessions and recessions into depressions.
The IMF's inertia is so hard to stop because, with everything going on behind closed doors, it was impossible to know who are the real obstacle to change. Are the staff pushing the executive directors, or are the executive directors pushing the staff?
In theory, the IMF supports democratic institutions in the nations it assists. In practice, it undermines the democratic process by imposing policies. Officially, of course, the IMF doesn't "impose" anything. It "negotiates" the conditions for receiving aid. But all the power in the negotiations is on one side – the IMF's – and the fund rarely allows sufficient time for broad consensus-building or even widespread consultations with either parliaments or civil society. Sometimes the IMF dispenses with the pretence of openness altogether and negotiates secret covenants.
When the IMF decides to assist a country, it dispatches a "mission" of economists. These economists frequently lack extensive experience in the country; they are more likely to have firsthand knowledge of its five-star hotels than of the villages that dot its countryside. They work hard, poring over numbers deep into the night. But their task is impossible. In a period of days or, at most, weeks, they are charged with developing a coherent programme sensitive to the needs of the country. Needless to say, a little number-crunching rarely provides adequate insights into the development strategy for an entire nation.
How can smart – even brilliant – people create such bad policies. One reason is that these smart people were not using smart economics. The mathematical models the IMF uses are frequently flawed or out-of-date and out-of-tune with reality. For example, microeconomic phenomena such as bankruptcy and the fear of default were at the centre of the East Asian crisis. But the macroeconomic models used to analyse these crises were not typically rooted in microfoundations, so they took no account of bankruptcy.
The IMF uses a cookie-cutter approach to economics. Country teams have been known to compose draft reports before visiting. In one unfortunate incident when team members copied large parts of the text for one country's report and transferred them wholesale to another. The "search and replace" process had not worked properly, leaving the original country's name in a few places. IMF experts believe they are brighter, more educated, and less politically motivated than the economists in the countries they visit. In fact, the economic leaders from those countries are pretty good – in many cases brighter or better-educated than the IMF staff, which frequently consists of third-rank students from first-rate universities.
If the IMF invited greater scrutiny, their folly during the Asian financial crisis might become much clearer, much earlier. Against many of its critics the IMF has insisted its policies are beyond reproach – and with no institutional structure to make it pay attention the criticisms were of little use. More frightening, even internal critics, particularly those with direct democratic accountability, were kept in the dark.
In the 1997 financial crisis, the Asian country that did best was Malaysia, which rejected outright the advice of the IMF.
Tanzania’s Julius Nyerere observed: “The IMF … makes conditions and says, ‘if you follow these examples, your economy will improve’. But where are the examples of economies booming in the Third World because they accepted the conditions of the IMF?”
The IMF does not need any new powers. It just needs to do its homework better, to listen more closely to all of its members, and to get into a better position to see trouble coming.
IMF should continue taking a pre-emptive approach and should move early to head off budding financial crises through early intervention, as it did with Brazil.