Beyond the IMF
Devesh Kapur and Richard Webb
Paper for G-24 Technical Group Meetings, March 2006
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The purpose of this paper is to examine the governmental and market
mechanisms that are being developed in the world financial community as
ways to complement and substitute for the gap created by IMF deficiencies.
This review has two objectives in mind. The first amounts to a stock-taking:
an assessment of what defenses, in addition to a weakened IMF, are in place
to prevent and to deal with financial turbulence. The second objective is
more pro-active; the discovery of non-IMF, alternative defenses against
instability would provide a basis for measures and policies that could reduce
the risk and costs of instability, independently of IMF reform.
The paper reviews the core IMF functions - crisis resolution, exchange rate
management, financial policy coordination and surveillance - and finds
examples of non-IMF organizational arrangements in all cases. However, the
paper focuses in particular on the insurance role of the Fund and argues that
developing countries are developing alternative insurance mechanisms, from
a higher level of reserves to regional co-insurance facilities to remittances as
a counter-cyclical source of foreign exchange. The de facto exit of its
clientele, driven by the combination of high political costs associated with
Fund borrowing and growing availability of alternatives, now poses an
unprecedented challenge for the Fund, in particular pressures on its income.
Given the close link between exit and the Fund’s high borrowing costs,
linked in turn to its high administrative expenses, the paper also examines
the options available to the Fund if it is to reverse its loss of clientele. In
particular, in addition to governance reform, the Fund’s future seems to
require significant cuts in its administrative budget, using budget savings to
lower borrower interest rates. We conclude with an assessment of the
systemic implications – stability and possible deflationary bias – of a
continuing non-reformed IMF accompanied by a continuing move towards
B. IMF PERFORMANCE AND LEGITIMACY AND ITS DECLINING
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The IMF is rudderless and ineffective.1 It is suffering from an identity
crisis2, waning influence3 and a reduced role. It is on the brink of
irrelevance.4 As a result, the world economy, basically, isn’t managed at all.5
The IMF has long since lost its role as the world’s central banker,6 has lost
sight of where it wants to go,7 and suffers from a mismatch between
aspirations and authority and instruments. No single step will restore the
Fund to its prior respected position.8 Each of the preceding statements was
made publicly over the last two years by a respected international financial
analyst. Each statement was followed by a call for IMF reform, in many
cases, by specific proposals. For several years, the reform debate has
concentrated the attention of senior international finance specialists.
Meanwhile, however, markets and governments and civil associations have
been developing alternative solutions to the various functional deficits that
result from the lack of an effective IMF.
In the late 1990s, the Fund appeared to be at the zenith of its influence. Its
attempt in 1997 to change the Articles of Agreement to make capital account
liberalization a formal goal, and its subsequent role in the financial crisis that
began in Asia in 1997-98 and spread to Russia and Brazil in 1998-99 gave
the Fund an unprecedented global role. New forays such as the Poverty
Reduction and Growth Facility (PRGF) drew the institution into core
development issues hitherto the preserve of the multilateral development
banks. But these initiatives did not reverse the underlying trend to
irrelevance of the institution, while the PRGF may have turned out to be a
Today, just a few years later, the Fund’s future appears much bleaker. Not
only is demand for its resources at a historic low, but borrowers are rushing
to prepay the institution. In 2003, Thailand finished paying off its
obligations two years ahead of schedule while in 2004 Russia prepaid its
$3.3 billion debt to the IMF. Then in December 2005 and January 2006,
2 Ted Truman, interview in Finance and Development. October 31, 2005, p. 321.
3 Ted Truman, op. cit., p. 321.
4 Martin Wolf, Financial Times, February 22, 2006.
5 John Williamson, “Reforms to the International Monetary System to prevent Unsustainable Global
Imbalances,” in World Economic Forum, The International Monetary Fund in the 21st Century: Interim
report of the International Monetary Convention Project, p.22.
6 Rawi Abdelal, comment at IIE Conference on IMF Reform, September 23, 2005.
7 Ted Truman, op. cit., p. 321.
8 Ted Truman, Background paper prepared for the IIE Conference on IMF Reform, September 23, 2005, p.
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Argentina and Brazil announced their decision to repay their entire debt to
the Fund ($15.5 billion in the case of Brazil and $9.8 billion in the case of
Argentina). Pakistan, which owes $1.5 billion and is currently the third-
largest debtor, has said that it is seeking to cut its dependence on the Fund;
Ukraine, the fourth largest debtor, has declined any further assistance; and
Serbia has announced that it would not increase its borrowings. In fiscal year
2005 just six countries had Stand-by Arrangements – the lowest number
since 1975. The volume of lending rebounded in the current fiscal year, but
almost entirely due to one country – a $10 billion loan package to Turkey).
A charitable interpretation is that the current decline in the demand for Fund
resources is part of cyclical process. The Fund, to quote Barry Eichengreen,
is “a rudderless ship in a sea of liquidity.” If that were the case, the raison
d'etre of the Fund would be justified. After all, the importance of insurance
is not diminished if insurance agencies are called in only occasionally.
However, it is worth contrasting the global payment systems in the aftermath
of the oil price shocks of 1973-74 and 1979-80 with 2005-06. In stark
contrast to the earlier two shocks which created major global disequilibria
and led many developing countries to avail of the Fund’s facilities, there is
little demand this time around. To be sure, this reflects structural and
epistemic changes in developing countries, in which the Fund played an
important role. And greater liquidity in capital markets has given many
middle-income developing countries alternatives, while low interest rates
have made new financial emergencies less likely.
But there is more to the story. The Fund no longer has the mystique and its
imprimatur no longer carries the weight previously associated with the
institution, despite the continuing appearance of an all-powerful and non-
For some time there has been a broad consensus on the need to reform the
IMF. Ideas for reform cover virtually every aspect of the Fund, from its
surveillance role to its role in debt management and emergency lending, to
the nature of its advice and the roles it needs to add or discard to its
governance (for a recent elaboration see Akyüz (2005), Buira (2004), Woods
(2005). However, there is little agreement when it comes to the details of the
reforms. In the past quarter century, developing countries have been
periodically afflicted by financial crisis. Each flurry of activity has resulted
in an expansion in the scale and scope of Fund itself. Consequently the
institution has been blasé with the reality that its principal shareholders will
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ensure that the institution will “evolve through a series of ever more bland
communiqués and meaningless statements.”9
But today the Fund faces perhaps its gravest crisis, the result not of
opprobrium but of irrelevance. The realization that if the Fund is not “kept
up-to-date… [it] risk[s] suffering a lengthy senescence,”10 may well prompt
real reforms. However, as this paper argues, while developing countries
should continue to press for reforms, they should take heed of just how little
past calls for reforms have advanced. Consequently, they must complement
the focus on reform with exploring alternatives outside the IMF which hold
the potential to not only give developing countries greater bargaining
leverage with the Fund but also, by increasing competition, spur the
institution to better performance.
C. ALTERNATIVES TO THE FUND
Several factors have contributed to the development of alternative
mechanisms to carry out particular IMF functions. Perhaps the most
important has been the rapid growth of financial markets, and especially
bond markets, which in turn has driven the expansion of institutions that
monitor and carry out continuous market surveillance, notably rating
agencies and other private and governmental institutions that track financial
conditions. A second factor has been an equally impressive expansion in
networking and local or regional cooperation and integration. Bryant 
has pointed to the “Multiplicity of institutional venues – consultative groups
and international organizations – [that are] involved in surveillance of
financial standards and prudential oversight. Similarly heterogeneous and
complex institutions are involved in the nascent supranational surveillance
of all other types of economic policies.” 11 Cerny  makes a similar
point, speaking of the “privatization of transnational regulation” through the
expansion of “webs of governance,” of “epistemic communities,” and
“multi-level governance” involving government and private sectors and civil
associations. The third development, closely related to the above, has been
modern communications technology which has brought about a
9 Mervyn King, Governor, Bank of England, quoted in Financial Times February 21, 2006.
10 Martin Wolf, “The world needs a tough and independent monetary Fund,” Financial Times, February
11 Bryant, pp. 10-11.