The International Monetary Fund : a framework for assessment

The International Monetary

Fund:

A Framework for Assessment

Bachelor’s thesis by Noah van der Vaart

10254870

Supervised by Luara Ferracioli,

29

of January, 2015

Introduction

Over the last couple decades, the International Monetary Fund (IMF) has come to be the subject of intense criticism. Established after the Bretton Woods summit in 1945, it was supposed to function as a safeguard of international monetary stability, by providing quick loans to countries that were dealing with temporary balance of payments deficits (Vreeland, 2007: 7). Although these aspirations were laudable in theory, the IMF was soon accused of being just another tool by which western geopolitical interests, particularly those of the United States, were pursued. This implied that it was more concerned with opening recipient nations’ economies to the penetration of Western capitalism (Escobar, 1992) than with actual crisis management. Moreover, in the public eye it was perceived to be a secretive institution with insufficient democratic accountability to both its major shareholders as to the citizens of nations that were subjected to IMF policies. Consider these remarks by Nobel prize laureate and former chief economist of the World Bank, Joseph Stiglitz:

“The IMF likes to go about its business without outsiders asking too many questions. In theory, the fund supports democratic institutions in the nations it assists. In practice, it undermines the democratic process by imposing policies. […] Sometimes the IMF dispenses with the pretense of openness altogether and negotiates secret covenants. (Stiglitz, 2000: 4)” This is only a small selection of IMF criticism, and I will provide a more extensive overview of these grievances later on. In this thesis, I want to delve deeper into those criticisms and ask: what one can expect from an international institution such as the IMF? How accountable is the IMF for the economic consequences of its policies within the national context of a

recipient country? By asking these questions, I aspire to create a framework through which we can systematically scrutinize the proceedings of the Fund. I will argue for a set of criteria that investigates whether the IMF’s intentions are genuine and devoid of perverse incentives, and whether the consequent policies are carried out in a manner that is accountable and

transparent.

Many scientific articles that attempt to analyse the quality of an IMF program in a given national context, usually revolve around detailed technical discussions regarding economic nuances and statistical questions of correlation and causation. With the creation of my framework, I hope to transcend many of these debates by examining what raison d’être the IMF intrinsically has. I believe that this is an important question ask, because it facilitates proper scrutiny of one of the world’s most powerful financial institutions. In my view. questions on the macro-economic sophistication of a certain set of IMF policies, which obviously carry large societal significance, should be preceded by an examination of whether the IMF is really an institution that is designed to protect the monetary stability of all its member nations. Furthermore, one should ask whether it carries out its policies in an accountable way, even regardless of the actual economic consequences.

The power and influence of the IMF is not to be underestimated. Over the last decades it has lent over five hundred billion dollars to countries in need, making it the single most important last-resort lender in the world (Copelovitch, 2010: 50). With this in mind, the extensive body of literature that exists on the various aspects of its operations is of undeniable importance. The societal significance of my thesis lies in the fact that it supplements this literature with a systematic way to interpret the normative implications of empirical findings. Furthermore, although it surely is problematic to discuss the World Bank along with the IMF as one coherent entity, there does exists a degree of intra-typological familiarity between these

institutions with the World Bank having similar institutional shortcomings (see for example Fleck & Kilby, 2005). This leads me to assume that the lessons drawn from my thesis are also useful for an analysis of the IMF’s Bretton Woods sister.

In the first part of my analysis, I will provide a concise overview of what the IMF actually is and how it operates. I will explicate the goals on which it was originally founded, as well as the evolution of these goals in relation to the changes in the global geopolitical context. I will find that from the various activities that the IMF utilizes to pursue these goals, its policies of conditional lending are the most important, as well as the most controversial. The various perspectives on the shortcomings of IMF conditionality will thereafter be outlined.

Consequently, I will create a set of ideal principles, via which we can think about what the IMF in its ideal form looks like. For a large part, these principles rest on the assertion that the Fund, in its original purpose, served the desirable goal of contributing to the stabilization of the world economy. This is laudable not only because this is beneficent for western

international trade, but for the development of fragile economies worldwide.

In the second part, I will bridge the gap between the ideal and the actual conceptions of the IMF. Here, I will demonstrate how these conditional lending policies come to being by providing a detailed overview of the institutional structure that facilitates the construction of these policies. At this point we are able to assess to what degree the institutional architecture constrains the IMF from reaching its ideal form. This analysis will be based upon the

following question: “What constrains exist within the organizational architecture of the IMF, that prevent it from materializing its ideal principles?” In doing so, we can get a better insight in the likeliness of the IMF actually acting in line with its so desirable original purposes.

Four main examples of interests that distract the IMF from this purpose are identified. First, there is the risk of institutional overstretch, where the scope of the Fund’s activities increases and a tense relationship with national sovereignty arises. Second, there is the problem of member countries who utilize the Fund as a tool to pursue their own geopolitical interests. Third, you have the interests of private banks and corporations who manage to influence Fund’s decision-making process. Fourth, I acknowledge the interests of bureaucratic actors who aspire to maximize their institutional power. I will demonstrate how the institutional structure of the IMF creates a space for these interests to manifest themselves and I will underpin this argument with a variety of empirical studies. At this point, we have mapped out the original purpose of the IMF, as well as the degree to which the institutional arrangements within the Fund allow this purpose to actually being pursued.

However, before we can really speak of the IMF as a truly legitimate institution that

adequately pursues its core goals, I contend that there is a fifth criterion that should be taken into account. Therefore, I will also address the question of accountability. This is based on the assumption that through its nature as an international institution, the IMF is required to

actively justify its operations to its member states. Here I will mainly examine the degree to which IMF accounts for its actions, not only to the citizens of developed countries, but also to the citizens of the countries that receive IMF loans. I will establish that despite that the fact IMF’s inherent nature as an international institution reduces its space for tangible democratic accountability, there still exists significant room for improvement. Especially with regards to paying larger attention to grassroots organization and accurate institutional representation of the third world, there are plenty of battles to be won. I will finish with the conclusion that

there exist several institutional constraints that prohibit the IMF from fulfilling its original purpose as a true guardian of international monetary stability.

Part one: what is the IMF?

The first of my thesis will be devoted to explicating the role of the IMF in the global

economic order from a historical perspective. Mainly building forth on contributions made by Ngaire Woods (2001) and James Raymond Vreeland (2007), I will start by describing the Fund as it was originally envisaged at its creation at the Bretton Woods conference of 1944. The original purpose will subsequently be contrasted to the IMF after the dissolution of the Bretton Woods system, when the focus was shifted from away short term lending to a broad approach where long term development was emphasized more clearly. This change of emphases will then be problematized, following a large and diverse body of literature on the subject. The section will conclude with the assertion that the Fund serves a legitimate and desirable purpose, but only in its original role as a guardian of monetary stability via short term conditional lending.

Both the International Monetary Fund and the World Bank are commonly known together as the Bretton Woods Institutions. The anarchy of World War II, which was still going on at the time, provided the elites of several countries with the political space to create a system that would safeguard prosperity and peace through economic collaboration (Peet, 2009: 29). Roughly speaking, the system comprised of two key features. First, it maintained fixed exchange rates of the participating nations’ local currencies, which was tied to gold. Second, it abolished competitive currency devaluations, allowing exchange-rates to flow only within narrow, predefined margins. Global competitiveness and stability would hereby be ensured. James Raymond Vreeland (2007: 9) writes that within this context, the IMF assumed two major roles: to monitor the economies of the member countries, and to act as a short-term lender when a country was facing a balance of payments crisis.

Ngaire Woods notes that the original charters of the IMF and World Bank both spoke highly of the realization of growing international trade, rising employment and incomes and the deployment of productive resources in all of the participating countries (Woods, 2006: 2). Indeed, the principle of uniformity was held in high regard in the IMF’s early days. As was codified in its founding charters, the operations of the Fund revolved strictly around monetary economics. The relationships with member countries were thus limited to Central Banks and Finance Ministries, as these were the only departments over which the Fund had a legitimate jurisdiction (Bradlow, 2001: 3). The parsimony of these characteristics had two large

advantages. First, the fact that the IMF displayed a restraint in dictating domestic policies allowed recipient states to maintain a large degree of sovereignty within the context of its conditional lending agreements (Polak, 1991: 29). Second, in contrast to the World Bank and the WTO, the IMF did not distinguish between its members based on economic performance or geopolitical interests etc. (Bradlow, 2001: 7). This induced a sense of fairness because all members were equally interested in the IMF’s services.

As the Bretton Woods system dissolved in the early 1970’s however, the IMF found itself without its original and primary raison d’être. It is a widely held conception that it was at this point that the IMF really started to get actively involved in the business of global development (Vreeland, 2007: 9). To understand this, one should take note of the Second Amendment to the IMF’s Articles of Agreement, in which it was formally announced that international currencies would no longer have to be pegged to gold: “By legalizing a member’s freedom to

choose whatever exchange arrangement it wished—including floating—the Second

Amendment represented a complete departure from the par value system, which had been the central feature of the Articles (IMF, 2006: 1).” The amendment then speaks of the broad requirement that member states “endeavor to direct its […] economic policies toward the objective of fostering orderly economic growth with reasonable price stability (ibid, p. 13).” After a precise deconstruction of those statements, Daniel Bradlow (2001: 5) convincingly argued that by de-emphasizing its fixed currency rate-regimes, the IMF effectively gave itself carte blanche to interfere in a much wider range of policy subjects, namely anything that would facilitate ‘orderly economic growth.’ Jahangir Amuzegar described this evolution as follows: “A limited-purpose organization, conceived in 1944 to deal with 1930s-style exchange and payments problems, the Fund has recently been pushed by circumstances into becoming a superagency in charge of the global debt and development problems. (Amuzegar, 1986: 98)” Developing countries, aware that the impact of a potential IMF intervention had been greatly enlarged, had to pay much larger attention the views of the IMF staff.

Conversely, the developed countries who did not expect to use the Fund’s services in the near future, basically no longer viewed the Fund as useful tool via which the domestic monetary constellation was to be shaped (Bradlow, 2001: 6).

As we have seen, the ambiguity of the Second Amendment quoted earlier left ample space for various interpretations of the nature of the IMF’s proceedings. However, there is little room for doubt regarding the scale and depth of post-amendment lending conditionalities. Due to the fact that the IMF was no longer only a lender of last resort, high lendings (in relation to quotas that member states paid) with greater conditionality became more prevalent (Kapur, 2000: 209). During the last three decades of the century, Kapur (p. 216) observed an average number of lending criteria of 23 between 1997 and 1999, whereas the 1970’s averaged only at six and the 1980’s at eight. Ngaire Woods and Amrita Narlikar go as far as to characterize these policies as ‘deeply intrusive,’ arguing that “the conditionality of both [the WB and the IMF] has broadened and deepened dramatically, delving into areas which were previously inconceivable such as good governance, the rule of law, judicial reform, corruption and corporate governance (Woods & Narlikar, 2001: 570).”

It is my contention that the lion’s share of the many criticisms the IMF currently gets can be traced back to this increased depth and breadth of its conditionality policies. These include remarks by Catherine Lee, who argues that the heavy conditionalities lead to an erosion of economic and political stability (2003: 903-904), as well as the criticisms such as the ones made by Sarah Babb and Bruce Carruthers, who find that the policies are illegitimate because “The advanced industrial economies that disproportionately govern the IMF seldom taste the bitter economic medicine prescribed to others (2008: 25).” Before building forth on these grievances to come forward with a set of ideal principles for an international institution such as the IMF, it is important to delve just a little bit deeper into this plethora of IMF criticasters. In a review on the prominent positions that have been taken with regards to the politics of the IMF’s conditional lending, James Raymond Vreeland came forward with an analytically useful left/right-distinction to classify the available scholarly critiques. In essence, the distinction came down to questions of compliance and political prudence: “People from the left tend to criticize the policies imposed through IMF conditionality. People from the right tend to criticize the loans provided through the IMF. One side assumes compliance with incorrect policy conditions hurts countries, while the other side assumes noncompliance and

believes that IMF loans subsidize the incorrect policies that were in place in recipient countries to begin with (Vreeland, 2007: 113).”

The unvarnished criticisms by Joseph Stiglitz, cited earlier in the introduction, fall into the former category. Stiglitz accused the Fund’s economists of only being interested in ‘number crunching’ and imposing austerity programs regardless of the contextual nuances of

individual cases (2000: 4). Moreover, he even contends that the mathematical models that was utilized to perform all this are out of date (p. 5)! Another prominent voice is that of the

Colombian anthropologist Arturo Escobar, who sees international financial institutions such as the IMF as part of an apparatus that manages the construction of knowledge about the Third World within the discourse of Development (1992: 413). Using a neo-Marxist

approach, he calls the notion of development a ‘fairy tale’ which has lead global periphery to subject itself to systematic and minute interventions by the West (p. 433).

On the right side of the Vreeland’s political spectrum, we find observers who perceive that due to recipient state’s lack of ability (or willingness) to comply with loan conditionalities, the IMF is de facto subsidizing bad policies. This view is a prominent one among U.S

policymakers, with for example the Meltzer Commission arguing that IMF loans are causing recipient governments to delay necessary reforms (Vreeland, 2007: 122). This is notion is also supported by the sheer longevity of the Fund’s loan programs, with over fifty loan programs lasting over a decade (p. 58). Subsequently, Allen Meltzer called for a resolute ending to the IMF’s lending policies in order to prevent an even bigger (Asian) crisis in the future (Melzer, 1998: 272). Calomiris also found the bailouts like the ones in Mexico and Asia to be

counterproductive. His ultimate advice was that the IMF “best contribute to global financial stability by committing not to insulate foreign or domestic creditors from loss (Calomiris, 1997: 291).”

Paradoxically, the grievances from both the left and the right eventually culminate in a set of largely similar recommendations. Vreeland (2007: 113) summarizes these as follows:

“Despite disagreements […], there exists a strange consensus among the IMF’s critics from the left and the right about how the IMF should be reformed. They agree that a major problem has been a lack of transparency, and they argue that the operations of the IMF should be scaled back.” Indeed, regardless of which assumption on (non-)compliance one takes, one still has to deal with the problematic fact that it has sometimes been very unclear what the architecture of a particular loan agreement actually looks like. Its letters of intent (a non-legal document in which IMF and recipient state agree upon the macro-economic targets to be pursued) are only being made publicly available for the last fifteen years. Moreover, Vreeland (2007: 40) notes that even the available ones are ‘numerous and unclear,’ making analyses of compliance with IMF requirements extremely difficult. The call for the IMF to scale down its operations is furtherly strengthened by the fact that there is now a considerable amount of evidence that IMF programs are detrimental to macro-economic growth (See for example Butkiewicz & Yanikkaya, 2005).

Principles of an ideal IMF

Based on the grievances outlined above, I will now proceed to construct a set of ideal

principles to guide our thinking of what desirable IMF operations should look like. My main aspiration is to look for the ideal form of the IMF as an international institution (IFI). There are several voices who subscribe to the view that international institutions in general are not something to be desired. A recent exponent of this group from the Netherlands is Thierry Baudet (2012), who argues that international institutions exist on a trade-off basis with the sovereignty of nation-states, thus leading to an erosion of national rights to

self-determination. Although one could surely make a case for such a standpoint, I will assume that a small degree of sovereignty-loss is acceptable against the backdrop of ensured international monetary stability.

I take it to be self-evident that in theory, the idea of an institution that promotes ‘peace and prosperity’ through monitoring and short-term lending, as described by Woods (2006: 3) is a desirable one. Regardless of the economic system that a nation chooses to install, I contend

that the interconnectedness of the 21st century global order warrants a mechanism that

stabilizes international economic interactions. My perception of an ideal International Monetary Fund embodies such a mechanism and it rests on five pillars: conciseness,

uniformity, freedom from private interests, bureaucratic integrity and finally accountability. These principles will each be substantiated separately after which we will once again arrive to the conclusion that in its original mandate, the IMF approached that ideal painfully well. First and foremost, I contend that an international financial institution works best when it consciously applies a concise approach to its interaction with member states. As we now know, the IMF was envisaged to be an institution that promoted peace and prosperity among all its participating nations. Richard Peet observed that at the Bretton Woods conference in 1944, the economic philosophies of Adam Smith and John Stuart Mill were utilized to

perceive the global economic order as a so-called ‘politically neutral’ market, which consisted of autonomous and sovereign nation-states (2009: 42). However, if left to its own whims, free market trade between nations actually becomes a tool through which dominant states exert power in context of large inequalities (Hirschman, 1945). This is an important assumption that will also prove salient for the justification of the other pillars. Because countries dealing with severe economic downturns face an inherent power imbalance when resorting to an IFI for loans (Woods, 2001: 91), they run an immediate risk of becoming subjected to such power-exertions. Furthermore, James Vreeland has demonstrated that once IMF loan programs are in place, the risk of recidivism increases drastically, which causes the effects of these exertions to be felt over a prolonged period of time (2007: 57). Because of the significant losses of national sovereignty that such a course of events entails, much greater than the ‘small degree’ that we spoke about earlier, the scope of IMF interactions should be limited.

It then follows that ideally, and IFI such as the Fund should strictly limit its focus to providing short-term assistance when a country is facing balance of payments deficits. At this point, one would notice that such a principle strongly resembles the ideas of the IMF’s founding charters in the 1940’s. Moreover, they were created in line with the explicit requirement that IFI’s are not allowed to intervene in matters that essentially fell within the jurisdiction of a sovereign state (Woods, 2006: 570). The IMF thus created lending programs that were based on non-legal binding Letters of Intent that solely provided a set of macroeconomic targets, leaving recipient countries free to decide on the means to achieve these (Bradlow, 2001: 14). I

therefore argue that IMF’s purpose as a guardian of international monetary stability is only legitimised if it minimizes the trade off-relationship that exists between conditional lending and national sovereignty. I concede that developing an objective set of requirements that materialize the limits of IMF conditionality is an immensely precarious task. There will always be interpretational space when evaluating whether a countries economic policy is important enough that should be subjected to international sanctions via conditionality, or that it is simply something to be recommended. In principle however, the scope and depth of the lending requirements should be kept to the lowest degree possible.

In close relation the principle of conciseness is the idea of uniformity. I believe that no large ethical leap of faith is required to agree with the desirability of assured monetary stability. Regardless of one’s preference qua ideal state/economy-configurations, the

interconnectedness of the contemporary global order warrants a degree of stability in order for each state to effectively pursue its particular interests. Because of the large plurality of

state/economy configurations, an ideal IFI safeguarding monetary stability should be required to apply the principle of uniformity to its member states.

As a child of the immediate post-WWII political climate, the IMF was originally set to overcome the all-defining global cleavages of that time (Peet, 2009: 37). Daniel Bradlow found that the principle of uniformity played a decisive instrumental role in doing so: “Since the IMF was designed to be a monetary and not a development institution, it operated on the basis on uniform treatment for all member states. The justification for this was that all states were participants in the same monetary system […], [were] influenced by the same variables […] all vulnerable to the same types of balance of payments problems (Bradlow, 2001: 4).” As we established earlier, an ideal IMF needs to not meddle itself into broad questions of global development and strictly limit its business to the resolution of short-term balance of payments crises. It then follows that the ideal IMF is not the appropriate platform for the pursuit of geo-political interests by member states. The principle of uniformity plays an important role in discouraging this, as it is supposed to eliminate the space for such interests to manifest themselves.

Although the active discouragement of geopolitics in the operations of the ideal IMF is an important factor, I do not think that it suffices as a normative guideline. Even if the Fund strictly limits its business to temporary lending, those actions would still have a decisive influence of the economic climate of a recipient nation. Therefore, we cannot allow the direct interests of private banks or corporations from developed countries to distort the process of macroeconomic adjustment. This is not to say that private actors from peripheral nations, nowadays the primary subjects of IMF programs, should be excluded from the policy process; these are direct stakeholders within state/IMF-interactions (Woods, 2001: 96). Whether or not stake holding businesses from peripheral nations get a fair say in the formulation of the policies they are affected by, is a question I will deal with when discussing the accountability-principle. For now, I want to focus on private actors from the global economic core.

I think it goes without saying that state actors are not the only ones interested in maintaining global monetary stability. So when the Fund chooses to engage with a country seeking monetary assistance, this creates a strong opportunity for private actors from the global economic core to place investments in that country as well (Vreeland, 2007: 47). Although it is beyond the reach of this thesis to scrutinize the consequences of private foreign investment, I would like to underscore the fact that a conditional lending program is ideally a matter between a state and an IFI. I therefore contend that the ideal IMF would not adjust the

nuances of a particular program due to the direct influence of private banks or corporations from the global north. These private interests should only express themselves through the domestic channels of representative government.

Fourth, the principle of bureaucratic integrity needs to be taken into account. As we have now seen, normative judgments require that an institution serves a common global purpose, and does so in a way that strikes the appropriate balance between national sovereignty and monetary stability. I believe that one would only need a tad of common sense morality in order to also ask that an ideal IFI puts these requirements into practice in a sincere manner that is devoid of perverse organizational interests. This principle is not to be underestimated: despite the fact that the governments of the IMF’s biggest contributors generally call the shots, the IMF staff enjoys considerably influence due to its prime role in the negotiation and design of loan programs (Copelovitch, 2010: 50). In an ideal world, the IMF’s bureaucracy functions solely as the instrumental mechanism through which recipient nations get their appropriate loan programs. However, several authors have demonstrated that there are additional forces at play. Building forth on principal-agent theory, scholars such as Vaubel (1991) emphasize IMF staff’s incentives towards rent-seeking the exploitation of information-asymmetries for personal gain (Copelovitch, 2010: 54). In an ideal IFI, opportunities for such perverse incentives to flourish are eliminated.

Last but not least, I propose that an ideal International Monetary Fund adheres to the norms of accountability. Two distinct conceptions are relevant in this respect. First of all, there is the notion as put forward by Ngaire Woods, who characterizes the value of accountability within the context of international institutions as follows: “The aim is to ensure that political actions are predictable, non-arbitrary and procedurally fair, that decision- makers are answerable for their decisions, and that rules and limits on the exercise of power are enforced. For all these reasons, accountability within public institutions […], is a desirable thing (Woods, 2001: 84).” As we already know, the ideal IMF boasts an bureaucratic apparatus that works with integrity in a way that is predictable and fair. For this reason, it also able to offer complete transparency into its operations.

In order to further substantiate our theoretical understanding of accountability, Woods’ notion is supplemented with the conceptual definition by Leif Wenar (2006), who examines the concept through the lens of development aid. He argues that due to the structural power imbalances that exist between donor and recipient nations, there barely exist any opportunities for the global periphery to scrutinize the global core on the effectiveness of the aid that is provided to them (p. 9). It is my interpretation that international financial institutions are of key importance if we still aspire to implement a mechanism of accountability against the backdrop of these power imbalances. Weinar characterizes this duty as follows: “intermediate institutions [ought] to become more accountable for the effectiveness of projects either to the rich individuals who fund them or to the poor individuals who are meant to benefit from them (Weinar, 2006: 25).”

At this point, it is important to repeat that I do not suggest that the business of development aid falls under the jurisdiction of the ideal IMF. Nonetheless, fact of the matter remains that over the recent decades, the clientele of the IMF has narrowed down to the developing countries (Polak, 1991: 13). This makes the Fund of the prime actors in the process of the reallocation of capital along the global core/periphery-distinction. As we already noted in our discussion of the principle of freedom private interests, businesses from the global periphery are seen as main stakeholders in Fund programs. With this in mind, I posit that accountability

requires that within the proceedings of an ideal IMF, grassroots actors should get a direct say into the formulation of the policies they are affected by.

This is requirement is especially salient, since Woods and Narlikar, among others, have demonstrated that mechanisms of representative accountability are usually inadequate: it seldom happens that citizens of recipient countries directly punish their government officials for actions taken within IFI’s (Woods & Narlikar, 2001: 574). As a (partial) solution, the authors call for independent agencies that provide horizontal accountability by scrutinizing the actions of an IFI, similar to ombudsmen in national political environments. The notion of transparency plays an essential part in this respect: “A clear prerequisite for this kind of accountability is information and […] transparency. Public officials or agencies must provide information about their actions and decisions, as well as justifications to the public and to any relevant specialized agencies to whom they must account (Woods & Narlikar, 2001: 574).” The ideal International Monetary Fund should therefore be required to provide full information about its operations. In doing so, it simultaneously enables stakeholders from the global periphery to actively engage in the formulation of conditional lending policies, and it allows the general public to ensure the Fund is operating in a predictable and procedurally fair way.

To summarize, the principle of accountability demands that an ideal IMF goes about its business in a predictable and controllable way. As one Leif Wenar convincingly argued, the global periphery has little means to hold the global core accountable for the reallocations of capital it receives. An ideally accountable IMF can play an essential function within this relationship by not only responding to the pressures of governments, but also through direct engagement with the grassroots stakeholders during the formation of loan programs. Both mechanisms of vertical (via representative government) and horizontal (via independent evaluation agencies) accountability ought to be in place. Building forth on Woods & Narlikar (2001), I argue that the ideal IMF realizes such accountability by operating in a fully

transparent manner. In doing so, it is able to justify its operations not only to the governments of member states, but also to the direct stakeholders within the loan programs.

Constrains of an actual IMF

Now that we have mapped out the contours of the ways and purpose of the International Monetary Fund in an ideal world, we are finally able to investigate to what degree to which it can live up to its expectations. This section will be structured around the question “What constrains exist within the organizational architecture of the IMF, that prevent it from

materializing its ideal principles?” In order to provide a thorough yet comprehensible answer to this question, I will first provide a brief outline of the institutional hierarchy by which the current IMF operates. Using the five principles from the previous section as a guideline, I will then systematically point out where the room for IMF improvement actually lies.

At the heart of the contemporary IMF’s daily proceedings lie the activities of the staff and the Executive Board. The staff carries out the double function of negotiating loan agreements with recipient countries, as well as monitoring the performances of member nations’

economies (Vreeland, 2007: 38). The staff report the Managing Director who, although his function is only sparsely defined in the Fund’s articles of agreement, is seen as the chief of the operating staff (Mountford, 2008: 21). The Managing Director in turn also serves a dual function, namely as head of the technical staff and as chairman of the Executive Board. This gives him the initiative in proposing the main policies to the board (ibid, p. 21).

Subsequently, the Executive Board can be seen as the most important decision making organ within the IMF. It formally selects and oversees the Managing Director, and represents all of the 188 member states (Website IMF, 2014). Five of the 24 members are directly appointed by the members with the largest quota, which are derived from the size of a country’s economy (Mountford, 2008: 10). The other directors are elected by the remaining countries, with each director representing a group of constituent members. The size of this group is once again related to the aforementioned quotas (ibid.). Some directors therefore represent as little as three countries (one for Russia, China and Saudi Arabia for example), and some as much as 24 (for most of the African members). On its website, the IMF states that “The

Board discusses everything from the IMF staff's annual health checks of member countries' economies to economic policy issues relevant to the global economy (Website IMF, 2014).” Decisions are usually made on a consensus basis.

On top of the Executive Board lies the additional hierarchical layer of the Board of

Governors. This is the ultimate political authority in the Fund. Alexander Mountford lists the explicit powers of the Board of Governors as follows: “Acceptance of new members and establishment of their quotas; suspension of membership; general and ad hoc increases in the quotas of existing members; and amendment of the Articles of Agreement. The governors have explicit powers to appoint, or nominate and elect, the executive directors. (Mountford, 2008: 6).” Each participating nation gets to delegate one governor, which is usually a minister of finance or the head of the national bank. They meet once a year, and decisions are made via weighted voting procedures which are once again dependent on the particular quotas (ibid.). The only nation with a weighted voting share of over 15% is the United States (17%). This is important as this makes it the only nation with the capacity to veto important decisions which require a 85% majority (Vreeland, 2007: 41). For the sake of clarity, the organizational hierarchy of the actual International Monetary Fund is summarized in the scheme below (source: website IMF, 2014)

Now that we have mapped out the structure of governance by which the actual IMF operates, I will proceed to analyse the degree to which this structure facilitates the materialization of the five principles as described in the previous section. The discussion of each of those principles will be guided by the following question:“What constrains exist within the organizational architecture of the IMF, that prevent it from materializing its ideal principles?” Building forth on an extensive and diverse range of secondary sources, I will raise various questions and challenges regarding the shortcomings that the IMF has in these respects. I will also pay attention to the efforts that the Fund has already put forward to ameliorate these problems. We start off with the principle of conciseness. James Raymond Vreeland has noted that there now exists a consensus among observers from both sides of the political spectrum that it would be wise for the IMF to scale down its operations and limit itself to temporary monetary readjustment in times of severe crisis (2007: 131). As early as 1945, heavyweight in the discipline of economics Albert Hirschman noted that within the context of severe global inequalities, international trade becomes a tool of power exertion. This seems to have been exactly the course of events for the contemporary IMF. Earlier in this thesis, we saw that the reinterpretation of the Fund’s role after the second amendment in the late seventies effectively gave the developed countries a blank check to pursue their independent monetary policies. We also saw that these nations still maintain a strong prevalence within the decision-making structure of the fund, due to their larger quotas. Daniel Bradlow summarizes this tension as follows: “The G-7 have continued to support the IMF because they find its influence over poor […] and middle income countries undergoing transformations or experiencing serious debt useful. […] They value having an international organization that can focus on the problematic areas of the global financial system while they are free to shape that system to suit their own needs. (2001: 11)”

Within the current structure of governance, the role of the IMF as an instrument for G-7 power exertion is likely to persist. A practicable solution is put forward by Vreeland, which basically entails a sharp reduction of the IMF’s activities (2007: 124). Unfortunately, the IMF displayed disagreement with these imperatives and has as of yet shown no signs of scaling down (p. 124). The large majority of countries receiving IMF loans still get several follow-up programs despite weak results (Adams, 2006: 137). Woods & Narlikar also observed that the functions of the Fund have expanded deeply into recipient societies, causing a direct impact on a wide set of peripheral stakeholders. This is a worrisome course of events, not only

because the Fund does not properly accommodate these stakeholders into the policy process, a point to which I will return later. I therefore highly recommend a thorough reconsideration of the scope and purpose of Fund conditionality by IMF officials.

Although I have serious doubts with regards to the prudence of such an IMF-overstretch, one could reasonably argue that its operations are at least based on the good intentions of reducing global poverty (Boorman, 2008: 9). I reject such a position because the overstretch also interferes with another key pillar of IFI functioning: uniformity. First of all, we have already seen that the extensive functions that the IMF ascribes itself lead to an illegitimate distinction between its member states. This results in an increased possibility for member states’

geopolitical interests to structure the formation of IMF lending policies, and several scholars have demonstrated that this is indeed the case. By far the most influential of many studies on U.S political influence is the one by Strom Thacker, who utilized considerable statistical evidence to prove that a move towards the United States in for example UN Voting Patterns, drastically increases a nation’s likeliness of receiving a generous IMF loan program (Thacker, 1999: 67). Likewise, Jacques Polak established that although the staff regularly disguises

political considerations as economic arguments, there have been several observable cases of high-profile nations – Argentina, Egypt etc. - receiving loans against the staff’s better judgment (Polak, 1991: 42). Finally, another important contribution comes from Mark

Copelovitch, who elaborated on Thacker’s findings and showed that in high-profile cases, the IMF acts as a political servant not only to the U.S, but to all of the largest shareholders (2010: 74). This finding is nuanced by the fact that despite the significant influence of political considerations, the IMF staff still largely bases its policies on country-specific

macroeconomic indicators (p. 53).

At this point, there is no denying the actual International Monetary Fund is utilized by

member states as a means of pursuing their particular geopolitical interests. One could ascribe this deficiency to the prevalence of voices from the global core within the proceedings of the Fund’s Executive Board, as well as within the Board of Governors. This would then warrant an organizational reform in which developing or middle-income countries get a larger say. And while I do think that such a reform is necessary (I will further elaborate on this in the forthcoming discussion of the IMF’s actual accountability), it would not eliminate the problem of countries pursuing geopolitical interests through the Fund. In his analysis, James Raymond Vreeland comes to the cynical conclusion that such a shift of influence would only change the particular country that uses the IMF as a means of political leverage: “There is no question that the IMF is abused for the purposes of international politics. But changing vote shares at the IMF would not change this. It would simply change whose political interests the IMF would serve (Vreeland, 2007: 135. Emphasis added).” It is my perception that these findings also grant extra urgency to the need for the IMF to scale down its business.

The issue of private actors interfering with the IMF policy process was also raised by several authors. As was discussed in the previous section, I assume that an IFI lending program should ideally be a matter between Fund and state, without private banks or corporations being able to influence this process to fulfill their own individual desires. Such a course of events is especially problematic with respect to private actors from the global core, as they are not be direct stakeholders in IMF programs. They would not be subjected to the policies they influence.

An important contribution on the role over private interests is made by Erica Gould. She provides a sophisticated explication on the mechanisms by which private financial institutions systematically influence IMF loan policy. She explains that the Fund is usually able to

provide only a fraction of the funds that are needed to manoeuver a recipient state out of an economic crisis. Supplementary finance from private institution is therefore needed, and these institutions use this leverage to impose bank-friendly conditionality via the IMF (Gould, 2003: 553). It turns out that the IMF actually as an interest in influential private actors, as these are needed for the success of the Fund’s programs, as well as for bargaining leverage over borrowing countries (p. 581). Another mechanism is put forward by Broz & Hawes (2004), who find that American banks acting through the political channels of the United States are also able to influence IMF lending policy. They observe that in a given nation, the relative amount of lending by American banks in that nation is a significant predictor of the likeliness and size of IMF loans there (Broz & Hawes, 2004: 21). However, it remains debatable whether the problem of susceptibility to U.S banks lies within the IMF, or simply within American politics. Nonetheless, it remains an undeniable fact the actual IMF currently does not live up to its ideals of being autonomous from private financial interests.

Next up is the matter of bureaucratic integrity. We established earlier that the IMF bureaucracy is required to fulfill its mandate in a manner that is sincere and deprived of perverse organizational interests. Although the staff remains a body of well-intentioned and highly qualified professionals, there do remain a few problems. Jack Boorman, former

director of the IMF’s Policy Development and Review Department, perceived an undue focus of the staff on the particular problems and goals of their respective departments, leading to a lack of synergy and integration when dealing with critical problems (Boorman, 2008: 7). More serious deficiencies were described by Roland Vaubel. He theorizes that “international bureaucrats have the same utility function as national bureaucrats […]. Both try to maximize their power in terms of budget size, staff and freedom of discretion and appreciate some leisure on the job. Both enjoy some freedom to pursue these objectives because […] they have acquired an information monopoly and politicians need their cooperation. (Vaubel, 1986: 52)” According to Vaubel, this has led to a growth of IMF staff that is disproportionate in relation to the growth of global capital flows. There is also the problem of so-called ‘hurry-up lending,’ where the staff displays a tendency to provide larger loans (larger loans warrant a greater need for more bureaucrats) as soon as one of the quinquennial quota review meetings is coming up (Vreeland, 2007: 40).

I agree with Vaubel in the sense that these are problems that are not necessarily unique to the International Monetary Fund. Furthermore, I believe that there are feasible paths to be taken to ameliorate these shortcomings, mainly by imposing more extensive mechanisms of accountability. We now turn to this final principle. In our discussion of the ideal IMF, we found that the role of accountability entails three requirements. First, it must go about its business in a predictable and controllable manner. Second, it must provide room for the direct engagement of grassroots actors into the IMF policy process. Third, the Fund should strive towards a maximum degree of transparency in order to facilitate such scrutiny. Let us investigate the degree to which the IMF lives up to these suggestions.

Not for the first time in this thesis, an important objection with regard to the IMF’s functioning is brought by James Raymond Vreeland. His argument is as follows.

Notwithstanding the fact that the Fund derives its ultimate mandate from its member states, which implies a degree of representative accountability, the chain of command is very long (Vreeland, 2007: 38). “Average citizens do not appear to influence the IMF. The chain of command is long and circuitous, and at each link in the chain, some degree of control is lost. […] At any point in the chain of command, accountability can break down. Considering the chain of command as a whole, there are ample opportunities for accountability to fall apart. (ibid.)” The behavior of the Fund in the public eye thus becomes less predictable. Another problem is that the division of roles within is not always as clear cut as the official governance structure suggests. For example, even though the executive board is officially designated to oversee the proceedings of the staff and managing director, the Board very rarely vetoes negotiated deals that the staff has put forward (Polak, 1991: 42). Moreover, Daniel Bradlow raises the important point that the IMF, in contrast to the World Bank, does not provide to the public an operations manual that defines its rules and procedures (2001: 16). The net effect of this is that it provides the IMF a large amount of discretion (p. 17), reducing the ability of citizens to hold the fund to account.

Second, there is accountability as seen in the context of the Fund’s role as prime reallocator of capital along the global core/periphery-dimension. The good news is that the Fund has indeed made work of more actively engaging local actors into its operations. Since the beginning of the millennium, the IMF has launched the so-called Poverty Reduction Strategy Papers

(PRSP), in which entities such as local consultants, civil servants, church groups and and NGO’s are incorporated (Craig & Porter, 2003: 66). In response to the various criticisms, the Fund has also established various evaluation agencies to oversee the staff. Based on the earlier mentioned desire towards more horizontal accountability, such agencies undeniably serve a laudable purpose. However, Woods & Narlikar have already noted that many of the

evaluations are still unavailable to the public, and that there generally exists a lack of follow up measures when staff performance is perceived to be lacking (2001: 575).

I acknowledge that it is difficult to examine whether incorporations such as the one realized by the PRSP’s are sufficient in order to speak of true accountability by grassroots actors. Woods & Narlikar already posed that the internalization of NGO’s and consultants may appear desirable but still warrant the question: who do they represent (p. 581)? It goes to show that the incorporation of civil society from the global periphery into the governance process of IFI’s is a complex and precarious question. Further research on this subject is definitely required.

Implementations such as the PRSP and the evaluation offices are steps in the right direction, yet one important deficiency remains: the IMF’s Executive Board provides too little

representation for the countries that are at the receiving end of loan programs. Bradlow eloquently substantiated this point as follows: “There is no obvious reason why the IMF, when it descends unto the national policy-making processs, should be less accountable to those people directly affected by its decisions than other actors in this process (Bradlow, 2001: 16).” The current structure of the EB however fails to accommodate these imperatives. Whereas developed nations such as the US, Germany, Japan an England, who pursue their domestic monetary situations completely independent from the Fund, each have their own executive director, the Anglophone African countries get a combined voting share of a mere 3.26% (Woods, 2006: 85). There exists a enormous gap of accountability between the actors that make the policies and the ones that are subjected to them. With this in mind, it is no surprise that IMF programs tend to attract so much hostility from the general public.

Finally, there is the matter of transparency. This is perhaps the principle that facilitates all the other forms of accountability, and thus it is logical that the vast majority observers has been stressing its salience (Vreeland, 2007: 133). Over the last years, the IMF has been publishing a large amount of its documents on its website, with over 80% of its Letters of Intent now publicly available (Woods, 2006: 90). The fact remains however that the documents of its internal review commissions are still not made available, which Ngaire Woods rightfully calls out to be a huge shortcoming: “These omissions are important, for the outside scrutiny of such documents not only adds to the external accountability of the organizations, but also ensures that such reviews are taken seriously within the institutions themselves (Woods, 2006: 91).” By not publicizing these documents, the IMF misses a crucial opportunity to ameliorate one of its few mechanisms through increased accountability can be achieved. I therefore recommend that the scrutiny of the IMF’s internal operations should be emphasized more heavily in the future.

Conclusion

Now that we have contrasted the actual operations of the International Monetary Fund with the ideal image we sketched earlier, we are able to take stock and assess the fund in its operations. First, I will briefly explicate the five principles that constitute an ideal IFI such as the IMF. These will then be contrasted to the IMF in its current form, in which its institutional overstretch and lack of accountability from recipient nations are identified as the main

problems. I will conclude this thesis by once more underscoring the several deficiencies that the Fund currently has, and that a drastic reassessment of the Fund’s contemporary purpose is needed.

In the ideal-section of my thesis, I have depicted the five principles that the International Monetary Fund should have. In this analysis, the IMF should be a concise institution that stays close to its core purpose as defined at its birth at Bretton Woods: safeguarding global monetary stability through the provision of temporary conditional loans. The

interconnectedness of the global system leads to the assumption that the maintenance of global stability serves the shared interest of all member nations. The IMF should therefore treat its members in an uniform manner, since they could all be subjected to the same crises. This also implies that the Fund should never be used as a vehicle for the pursuit of

geopolitical interests. Also, in the ideal IMF the influence of private banks and corporations, whose interests may be in dissonance with the common global one, are kept to a bare

minimum. Moreover, the staff of the IMF should play a strictly instrumental role in the

realization of the IMF’s goals, and should go about their business sincerely and with integrity. The fifth criterion holds that the staff be able to demonstrate this to the general public via mechanisms of both vertical and horizontal accountability. Full transparence plays a key role in this respect, as it facilitates the Fund’s behavior as being predictable and procedurally fair. The aforementioned, utopian IMF was then used as a guideline to assess the current IMF on each of the five principles. The main observations are summarized as follows:

 Conciseness: We have examined how the Fund evolved from a relatively small

institution with a strict institutional mandate into one of the world’s prime reallocators of capital along the core/periphery dimension. The depth and scope of its

conditionalities have increased drastically, resulting in increased tensions with regards to the national sovereignty of member states. This increase also created more room for developed states to influence developing states within the context of global

inequalities. James Raymond Vreeland (2007: 133) demonstrated that both sides of the political spectrum called for a scaling down of the funds operations, but the IMF have displayed problematically little intentions of actually doing so.

 Uniformity: After the dissolution of the Bretton Woods system, the larger role of the

IMF within global economics lead to a de facto distinction between its member states. Whereas developed countries can now independently control their particular

macroeconomic constellations, developing countries have to play close attention to the IMF. The space for geopolitical power exertion has thus increased sharply, further diverting the IMF from its core goals once.

 Private Interests: Authors such as Erica Cold and Mark Copelovitch have

demonstrated that the Fund relies on external financiers to make loan programs work, which has led to private actors having a disproportionate influence into the IMF policy process.

 Bureaucratic Integrity: The Fund is generally staffed by able and well-intentioned

the sense that it is subjected to similar perverse incentives. Principal-agent theory provides a nice guideline for an understanding of these problems.

 Accountability: Over recent years, the Fund has made several steps towards

improving its service record on accountability. However, there are severe doubts whether these will suffice: developing countries are still hugely underrepresented in the executive board, which places great constrains on the practice of accountability towards these countries. Moreover, because there are still important documents not available to the general public, it remains difficult to assert whether the actions are procedurally fair. In this sense, it has not reached the Woodsian ideal of “fair and predictable behavior (Woods & Narlikar, 2001: 84) which we so badly desire. Finally, we have to assert that there are many truths in the various criticisms that the IMF receives. Once devised as a parsimonious yet crucial leviathan that safeguarded global monetary stability, the Fund as drastically overstretched its operations. It has thus become subjected to the exertion of a variety of perverse interests and severe accountability-gaps, leading to an understandable delegitimization in the eyes of much of the developing world. I therefore conclude that is imperative for the fund to critically reassess its operations within the contemporary global order. As an IFI, it definitely has a certain raison d’être, but only of it goes back to something resembling its original form.

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