Introduction

Over the 1990s, in an effort to improve both its effectiveness and its public image, the IMF began to take steps to make itself more transparent, more accountable and more participatory. This chapter investigates how accountable the institution has become and what ‘accountability’ might and should mean for an international institution such as the IMF. Curiously, although great strides have been made in improving transparency and in better understanding concepts of participation and ownership in the implementation of the institution's programmes, a rigorous definition and concept of ‘accountability’ has been slow to emerge. Indeed, most contemporary proposals for the reform of the institutions use the term regularly without ever developing who should be accountable to whom and for what.

Section 2 of the chapter discusses why accountability is now so prominently on the agenda and why the traditional structure of the IMF no longer meets expectations as to how accountable the institution should be. Section 3 examines the demands of new actors to hold the institution better to account, focusing in particular on the rise of non-governmental organisations (NGOs) and their engagement with the IMF. Section 4 critically examines the role of the United States in reforming the Fund and evaluates the recommendations of the Meltzer Commission.

The emergence of the current global architecture

The starting point of our discussion is the global frameworkof international institutions, set up at the 1944 Bretton Woods Conference. The IMF was perhaps the chief element of this framework and passed its initial two decades within its confines. In this framework, the IMF helped to manage balance of payments adjustment within a global system of pegged but adjustable exchange rates. The IMF now does something looser than this – it exercises surveillance over and influence on macroeconomic policies worldwide. In this section we set out how and why this change came about, describing how the Fund's role has changed as the overall framework has changed. In subsequent sections we consider the role for the Fund within this new framework. Its central role has come to be that of helping to manage macroeconomic stability in developing countries, and, in particular, the management of international financial crises. Crucial to this is its role in responding in appropriate and differentiated ways to liquidity and solvency crises. A discussion of this role will form the focus of this chapter.

The global architecture of the golden age

The post-war world into which the Bretton Woods' twins (the IMF and the World Bank) and the GATT were born was one in which the main issues were: to prevent a collapse in economic activity and employment; to promote growth; to avoid the emergence of payments imbalances; to promote the growth of international trade and avoid a slide back into the protectionism of the 1930s; and to promote economic development through international lending.

It is a distinct privilege for me to have been invited by the manager of the Cyril Foster Fund at Oxford University to give this year's lecture.

Of course, the impressive list of my predecessors for the occasion makes me very modest, as I am far from displaying comparable talents and achievements. But I also feel immensely rewarded by what is very peculiar in this invitation: the wish of Mr Cyril Foster that such lectures deal with the ‘elimination of war and the better understanding of the nations of the world’. To devote our thoughts to these two essential objectives of humanity could bring us to the heart of the intense debate we are having now, all around the world, about globalisation. This is a debate about its opportunities, of course, but also its risks, which are so clearly demonstrated by the new breed of economic crises the world suffered during the 1990s, the instability of the world finances, the threat of marginalisation of the most vulnerable and rising inequality.

This debate about globalisation is striking by its intensity and even more by the contrast between the optimism of officials in charge who pretend that their efforts to adapt the system to the new realities should end up by making globalisation an opportunity for all and the total rejection of this view by many protesters in our streets, including here, I suspect.

Introduction

The financial crises of 1997 and 1998 have had a profound effect on East Asia's view of international financial and monetary arrangements, including the role of the International Monetary Fund (IMF) in international policy dialogue and financial cooperation. There has been a tectonic shift in the policy landscape of the region. While there are differences between and within countries, no longer is East Asia content to rely almost exclusively on global forums, mechanisms and institutions; it now wants to develop a complementary regional structure. The process of developing a regional economic and financial architecture may be in its early stages but the political and policy dynamics under way make it irreversible.

There are many elements to the expansion of regional arrangements – ranging from strengthened policy dialogue, greater financial cooperation, deeper economic and trade integration and even common currency arrangements. Much of the content of the evolving debate and policy on regional financial arrangements is tied directly to the region's discontent with the IMF and its concomitant, disillusion with the way the United States dealt with the financial crisis in East Asia. It is also motivated by a profound sense that deep economic and financial integration in East Asia can be of substantial benefit, both nationally and internationally, to countries in the region. At the same time, the European experience is seen as compelling.

In 1994, the UK Economic and Social Research Council (ESRC) launched the Global Economic Institutions (GEI) Research Programme, with the objective of funding academic research on the functioning of multilateral economic organisations and about the global institutions within which economic activity takes place. The IMF and the World Bank are the two major global institutions established at the 1944 Bretton Woods Conference, and they have now been joined by the World Trade Organization (WTO). An earlier volume (Gilbert and Vines, 2000) arising out of the GEI Programme was devoted to the World Bank. In this volume, which will be the final publication from the programme, which ended in 2000, we move to the IMF.

This book began with a conference on the future of the Global Economic Institutions, held at the Bank of England, in May 2000 at which a number of the papers included as chapters in this volume were presented. We are very grateful to the Bank of England for hosting the conference. The conference discussion suggested to us that it would be valuable to bring together some of the presenters of papers at that conference and others to produce a book on the future of the IMF within international financial architecture.

The process of assembling the book has been overtaken by the crisis in Argentina. This crisis has hardened attitudes about the IMF, in that all wish to avoid repeat events like the Argentine crisis.

Introduction

Since the mid-1990s, the incidence of financial crises among emerging-market countries appears to have increased (Hoggarth and Saporta, 2001). In response, governments and international financial institutions have worked intensively on ways to reduce the likelihood and virulence of crises. This is the debate on the so-called ‘international financial architecture’ (see, for example, Eichengreen, 2002, for an overview).

There is now a fairly widespread consensus within the official community on appropriate crisis-prevention measures (King, 1999; Eichengreen, 2002). For example, the best defence against financial crises is to establish sound macroeconomic fundamentals and to have a credible policy framework in place to deal with economic and financial shocks. A broad international consensus has also emerged on the importance of prudent balance sheet management, with a particular focus on the balance sheet positions of governments and the financial system. Considerable work has also been done by international groups to establish codes and standards of best public policy practice. The official community should not be prescriptive about the adoption of standards. But it should promote transparency about the degree of country compliance with them (see Drage and Mann, 1999).

Even with such prevention measures in place, however, crises will still occur from time to time. Moreover, there is less consensus among policy-makers on appropriate crisis-resolution measures in these circumstances. This fact is well recognised by, among others, the IMF (Krueger, 2001). The IMF has responded to crises by providing often large-scale lending packages, conditional on the implementation of macroeconomic and structural reform.

Introduction

In the sad economic history of Argentina since the 1950s, the 1990s encompassed a remarkable transition. Rising from the ashes of yet another episode of economic chaos and hyper-inflation at the end of the 1980s, the surprisingly orthodox policies of the new Perónist President, Carlos Menem, brought a decisive end to decades of monetary instability and launched the Argentine economy into four years of unusually rapid expansion. Those economic policies featured a hard peg of the Argentine peso at parity to the US dollar, backed by the Convertibility Plan, which strictly limited domestic money creation under a currency board-like arrangement. Many doubted whether the new policy regime would survive, especially as tensions rose during the ‘tequila crisis’ initiated by the Mexican devaluation of December 1994. But it did survive; and after a sharp recession in 1995, the Argentine economy resumed rapid growth from late 1995 until the spillover effects of the Brazilian crisis hit Argentina in late 1998. Indeed, with most of the economies of emerging Asia collapsing into crises from mid-1997 to early 1998, Argentina became the darling of emerging-market finance – able to float large issues of medium- and longer-maturity debt on world credit markets at comparatively modest spreads over US Treasuries. And, in the official international financial community, especially the International Monetary Fund (IMF), many of Argentina's economic policies were widely applaudedand suggested as a model that other emerging-market countries should emulate – international approval that was dramatised by President Menem's triumphant address to the IMF/World Bank Annual Meeting on 4 October 1998.

Introduction

IMF lending to countries is generally conditional on the government and Central Bank carrying out specified policies and achieving specified outcomes. Some of these conditions might be prerequisites for an initial disbursement, while others will be requirements for subsequent drawings on a standby arrangement. In discussions of the appropriate conditions, IMF and country officials often disagree, sometimes diametrically. Economic programmes supported by IMF resources usually are negotiated compromises between the policies initially favoured by the Fund and those favoured by the country's authorities. In some cases, having gone through this process of negotiation, the authorities might be reasonably happy with the outcome and may be said to ‘own’ the programme even though it was not their original preference. In other cases, they might be swallowing a bitter pill simply because it is the only way to get the IMF to cough up the money. This chapter tackles two questions raised by the distinction between ‘owned’ and ‘imposed’ outcomes. Is the distinction empirically meaningful? If so, what can be done to operationalise it?

First, it is necessary to define ‘policy ownership’. Several definitions have been offered in the literature, but it is not easy to devise a definition that is empirically relevant. For a government to own a set of policies does not require that officials think up the policies by themselves, nor that the policies be independent of conditionality.

Introduction

There are several different strands in the current economic literature regarding the role of IMF. In this chapter, I develop one particular theme, namely the role of the IMF in assisting countries that have serious international payments difficulties. One characterisation of this debate is that between the ‘moral hazard’ school and the ‘liquidity’ school. The former stresses the classic perverse incentive problem created with insurance-type interventions in capital markets leading lenders to bet on being ‘bailed out’ at some future date if things go wrong – especially in countries that might be considered ‘too big to fail’.

Adherents to this school point to the sheer size of IMF-led packages to emerging economies, the very low emerging-market spreads after the assistance to Mexico in 1995 and the ‘lending boom’ to emerging economies, including the Asian economies, that then followed as evidence of the potential importance of moral hazard. In figure 13.1, we plot the EMBI spread from 1994 as an illustration.

Some have labelled this as a ‘theory of plenty’: a theory of too much private lending, on the one hand, and too little discipline on the other. This lack of discipline might result in countries contracting large amounts of debt (either in the public or private sectors or in the private sector with implicit or explicit guarantees) while, at the same time, failing to address structural weaknesses or not adjusting quickly enough to negative shocks as they arise.

Introduction

The subject of this chapter is macroeconomic policy coordination among developed countries. The chapter covers both the findings of theoretical models of policy coordination and the historical experience of coordination between policy-makers in different countries. Most importantly, the chapter assesses the extent to which models of policy coordination capture the key features of practical experience. For areas where the models and experience diverge, we attempt to draw some lessons for both modellers and policy-makers.

The past few decades have seen the development of theoretical and empirical models designed to explore the benefits of international macroeconomic policy coordination. The models highlight the fact that macroeconomic policy actions in one country affect economic welfare in other countries; that is, they have externalities for other countries. The key insight of the models is that coordination of policies among countries that takes into account these externalities may lead to higher welfare for all countries. Starting with this key insight, the modelling of international policy coordination has moved in many different directions addressing such issues as the types of problems that coordination is best suited to address, which policies are best suited to address which problems, the means of enforcing international agreements, the roles that uncertainty and information sharing play in the coordination process and the measurement of the gains from policy coordination.

When the US Congress approved $18 billion of additional funding for the International Monetary Fund (IMF) in November 1998, it authorised a study of international financial institutions. Congressional concerns included the growing frequency, severity and cost of financial disturbances, the fragility of the international monetary system, the ineffectiveness of development banks, and corruption in Russia, Indonesia, Africa and elsewhere. But Congress also expressed concern about whether international financial institutions (IFIs) had adapted appropriately to the many changes since the Bretton Woods Agreement in 1944.

In July 1999, Congress completed appointment of the members of the International Financial Institution Advisory Commission (usually called the Meltzer Commission). Between 9 September 1999 and 8 March 2000, the Commission met twelve times and, in addition, held three days of public hearings. On 8 March 2000, it presented its Report to the Speaker and the Majority Leader of the House of Representatives (International Advisory Commission, 2000). The Report stimulated active discussion of issues that might have been addressed at the fiftieth anniversary of the Bretton Woods Conference, in 1994, but were not.

Discussion was overdue. As the US Congress recognised, the world economy and the international financial system are very different from the world envisioned at Bretton Woods in 1944. The principal international financial institutions responded to many past changes and crises by expanding their mandate and adding new facilities and programmes. New regional institutions opened to serve the needs of regional populations.

Introduction

In mid-1997, the IMF's Interim Committee issued a statement announcing that the time had come ‘to add a new chapter to the Bretton Woods agreement’. The statement called for the establishment of a ‘multilateral and non-discriminatory system to promote the liberalization of capital movements’. The Committee invited the Executive Board to complete work on a proposed amendment of the IMF's Articles that would make the ‘liberalization of capital movements one of the purposes of the IMF’ and extend the IMF's jurisdiction to enforce those obligations on its members.

The timing of this statement was not propitious. The massive reversal in capital flows to East Asia that followed the floating of the Thai baht on 2 July 1997, and which accelerated in the months after the IMF statement was issued, turned out to be unprecedented in its speed and scale. Although the crisis initially centred on the East Asian economies, the turbulence in emerging markets was much more widely felt. In June 1998, Russia was added to the critical list when its announcement of a debt moratorium prompted an unwinding of positions in Russian and other emerging markets. And in January 1999 the Brazilian government abandoned the peg on its exchange rate, a move which was prompted by rapid capital flight and which precipitated a large currency depreciation and further capital withdrawal. These crises prompted economists once again to take a harder look at the risks as well as the benefits of an open capital account.

Introduction

The decade of the 1990s saw a series of international financial crises on a scale and frequency unprecedented in the post-war period. The economic costs were high, spillover effects were widespread and the political and social consequences were severe. Not surprisingly, calls for the reform of the international financial architecture mounted.

Since 1998 there has been a plethora of international conferences devoted to this general theme. To those who expected them to result in a new ‘system’, comparable in its coherence and comprehensiveness to the Bretton Woods arrangements, the outcome of these deliberations is no doubt a disappointment.

But this would be to set the wrong standard. There is no brand new ‘system’ waiting to be discovered. What has been achieved (inter alia through programmes such as the one sponsored by the ESRC), however, is a better understanding of the strengths and weaknesses of current arrangements. From this flows an agenda of incremental reforms that, if carefully pursued, should result in a stronger and more efficient international monetary system.

There is no realistic alternative to an economic system based on decentralised market forces. This has been virtually universally accepted at the national level since the collapse of centrally planned economic systems in the late 1980s. And it applies equally at the international level. When governments attempt to control decisions about the allocation of real resources, they typically introduce rigidities and inefficiencies that outweigh any benefits stemming from the pursuit of social objectives in economic decisions.