The financial crisis calls for a reform of the international monetary system and its institutions, so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. This paper presents some contributions to the debate on the reform of the International Monetary Fund and international financial system.IMF, international monetary system, reform

Ramona ORASTEAN

English

Research Papers in Economics

Nr. 1 2 (49)/2010 
 
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Ramona ORĂŞTEAN Ph.D. Associate professor  
“Lucian Blaga” University of Sibiu 
 
 
IMF REFORM – AN OPEN AGENDA  
 
 
 
Abstract:  The  financial  crisis  calls  for  a  reform  of  the  international 
monetary system and its institutions, so that they can more adequately 
reflect changing economic weights in the world economy and be more 
responsive  to  future  challenges.  This  paper  presents  some 
contributions  to  the  debate  on  the  reform  of  the  International 
Monetary Fund and international financial system. 
 
Key words: IMF, international monetary system, reform  
 
JEL classification: E42, F33 
 
 
In  the  years  since  its  creation,  the  International  Monetary 
Fund has changed substantially. Founded on the belief that markets 
often functioned poorly, this institution now defend their supremacy 
with ideological fervor (Stiglitz, 2003, p. 41). Based initially on the 
idea that international pressures on world countries determine them 
to  adopt  expansionary  economic  policies,  the  IMF  currently 
provides  funds  only  if  those  states  adopt  restrictive  policies.  In 
some  cases,  recommendations  or  policies  of  the  IMF  have  been 
shown to have adverse effects on the economies concerned, further 
deepen their crisis.  
In the past 25 years, the Bretton Woods institutions (IMF and 
World Bank Group) have been confronted with a series of financial 
occurrences.  They  have  induced  systemic  imbalances  and 
vulnerabilities that were evident in financial crises in Mexico and 
East Asia and financial disturbances due to "contagion effect" in Revista economică 
 
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various markets in different countries, such as during the Russian 
crisis.  
The first major systemic crises - the collapse of the monetary 
system based on gold exchange standard and fixed exchange rates - 
were  surprising.  Unlike  in  `30  years,  monetary  relations  did  not 
degenerate into total chaos, under the auspices of the IMF while 
preserving a degree of cooperation. Later, the international financial 
and monetary system has been exposed to a series of crises in the 
early `80, but the IMF has been sentenced for his role in financial 
crises of the mid 90's.  
Given such differences of these crises, there is the temptation 
to classify them by generations (Aglietta, 2001, p. 186). The `80 years 
crises  were  considered  first-generation  models.  Increasing  public 
debt financed by banking capital has become unsustainable after the 
acceleration of inflation and overestimation of the exchange rates. 
Driving  factors  of  such  crises  were  macroeconomic  ones,  their 
sources being found in the public sector, namely the incompatibility 
between the imbalance of public finances and external constraints. 
The crises of the second generation (e.g. bond crisis in 1994) have 
been  market  crises,  their  dynamics  being  independent  of  the 
observed macroeconomic dimensions. Asian crisis is a part of the 
third  generation  models,  this  findings  the  origin  in  the  financial 
system itself.  
The  mechanism  devised  for  first-generation  crisis 
management  has  been  validated  by  the  Washington  Consensus  - 
established  between  the  IMF,  World  Bank  and  U.S.  Treasury  – 
regarding "good policies" for developing countries, consensus that 
marked  a  different  approach  of  the  development  and  economic 
stability problem (Stiglitz, 2003, p. 46). It is a doctrine that glorifies 
financial liberalization, simultaneously with the accreditation of the 
IMF as a guardian of economic policies and provider of funding for 
the structural adjustment. IMF has developed a range of financing 
facilities,  extended  maturity,  broadened  continuously  the  access 
limits  to  its  resources.  Thus,  it  awarded  the  role  of  financial 
intermediar that has proved incompatible with the crises of the third Nr. 1 2 (49)/2010 
 
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generation.  The  management  of  these  crises  do  not  involve  the 
substitution  of  private  funding  stopped  for  long  periods,  but  the 
markets confidence regain and contamination prevent. 
The common feature of these crises was theirs weaknesses 
increasing  in  the  national  economic  policies,  stressed  by  the 
international capital flows and often in combination with fixed rates 
unsupported regime. In many of these cases, the IMF surveillance 
had not a prevention role (ex ante) and was not a transparent one, 
stressing the weaknesses of the national economy and the financial 
sector or wondering about the inconsistency of economic policies in 
a regime of fixed rates.  
Academics,  policy  makers  and  nongovernmental 
organizations alike criticized the IMF for having supported rapid 
capital account liberalization and policies that served primarily the 
interests of creditors, for failing to give due consideration to the 
interests of stability and growth and that was not enough open to 
advice from outside. Although some criticism is justified, but we 
can not exaggerate - what would have happened if the IMF had not 
existed? Moreover, the Fund has reacted and changed some of their 
policies, such as those regarding the capital account liberalization.  
After the crises in Asia and Russia it was restored in question 
the problem of rethinking the international financial and monetary 
system. In this sense it was formed the Financial Stability Forum 
(FSF),  led  by  the  highest  official  position  in  the  Bank  of 
International  Settlements,  but  the  fervor  that  characterized  the 
period after the crises faded rather quickly.  
In 2001, Peter Kenen reviewed the reform effort and assessed the 
results,  showing  how  the  effort  to  change  the  international  monetary 
system  was  influenced  by  the  Asian,  Russian  and Brazilian  crises.  He 
compared the results of the effort with the more radical recommendations 
of  outside  experts  and  of  the  Meltzer  Report  and  examined  the 
implications of the reform effort for the role of the International Monetary 
Fund (Kenen, 2001). 
The  effectiveness  of  external  assistance  depends  on  the 
credibility of this process. International institutions can add weight 
to local voices. In its supervisory mandate, the IMF faces a number Revista economică 
 
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of  critical  limitations.  In  an  attempt  to  provide  appropriate 
assistance, the Fund is constrained, for example, by the country's 
economic  progress  and  the  goodwill  of  authorities  to  follow  its 
advice. Based on the experience of several countries has emerged a 
consensus on the general orientation of the various policies, which 
serves  the  purpose  of  sustainable  economic  growth  and  helps 
prevent  crises.  These  policies  include,  among  other  factors, 
supporting micro and macro economic environment, developing a 
competitive market economy, openness to international trade and 
investment,  price  and  exchange  rate  stability  (Oesterreichische 
Nationalbank, 2004). 
A number of criticisms of the IMF were revived in 2000 in 
the  Meltzer  Report,  which  described  the  "conditionality"  for 
financing as forced and ineffective. Fund sought to take account of 
these differences in 2001, when under the leadership of the General 
Director Horst Kohler has issued new principles to limit the number 
and purpose of economic policy conditions in individual programs. 
"Conditionality" has not found place in the Fund agenda, in spite of 
such  attention  to  the  need  for  structural  reforms  in  emerging 
countries, particularly in the financial sector.  
More  and  more  voices  argued  over  time  reforming  the 
institution and its adaptation to the new conditions in the global 
economy. In this respect, the IMF and World Bank Group began an 
evaluation of policies in the member countries in following areas - 
data quality, transparency of monetary and financial policy, fiscal 
transparency,  banking  supervision,  insurance,  payment  systems, 
securities,  combating  money  laundering,  corporate  governance, 
accounting, auditing, insolvency and creditors' rights - in terms of 
standards and codes of good practice (Reports on the Observance of 
Standards and Codes). These reviews are intended not only to assist 
countries in identifying weaknesses of their policies, but also help 
market participants to make the best investment decisions.  
Recommendations  for  reform  have  seen  the  exchange  rate 
flexibility and change in the system for votes allocation in the IMF's 
governing  bodies  by  increasing  the  representation  of  Asian Nr. 1 2 (49)/2010 
 
  35 
economies, reducing the votes of Europeans and an additional vote 
for Africa. 
There  were  also  proposals  for  a  radical  reform  of  international 
financial  and  monetary  system:  George  Soros  (1997)  to  create  an 
international investment insurance agency; John Eatwell and Lance Taylor 
(1998) to establish a global regulatory authority.  
The current financial crisis brought back IMF into the light, after it 
was involved in countries such as Hungary, Ukraine and Romania. In this 
context, the reform of the IMF and World Bank Group is needed to meet 
new global circuits of capital and to reflect the importance of China and 
the financial strength of the Gulf Arab states.  
G20  Summit  in  London  on  April  2,  2009  established  a 
comprehensive plan to reform the international financial system in two 
major directions being recognized that a global crisis requires a global 
solution. The first direction concerns the strengthening of the international 
financial system, the participants agreeing with the transformation of the 
Financial Stability Forum (FSF) in the Financial Stability Board (FSB), 
with  an  expanded  mandate  to  promote  financial  stability,  having  as 
members G20 countries, members of the FSF, Spain and the European 
Commission. Financial Stability Board must work with the IMF to create 
an  early  warning  system  for  macroeconomic  and  financial  risks  and 
determine  actions  necessary  to  counter  the  negative  effects  of  future 
crises.  The  second  direction  aims  to  reform  the  international  financial 
institutions to overcome the current crisis and prevent new crises. In this 
respect,  it  was  decided  to  review  the  IMF  system  for  attracting  the 
resources and the financial instruments used, strengthening supervision 
and  improving  representation  in  IMF  of  the  emerging  and  developing 
countries  and  to  explore  ways  to  restore  emerging  and  developing 
countries’  access  to  credit  and  resume  private  capital  flows  which  are 
critical  for  sustainable  growth  and  development,  including  ongoing 
infrastructure investment.  
In the G20 Summit in Pittsburgh on September 24-25, 2009 was 
drafted a reform plan of international financial institutions to meet the 
challenges of XXI century. The member countries have pledged to change 
the system of IMF quota subscription settting for a better representation of 
developing countries, to transfer shares toward developing countries and 
emerging markets and to a dynamic modernization of the IMF and World Revista economică 
 
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Bank Group as a key element of the effort to improve the credibility, 
legitimacy and effectiveness of these institutions.  
The main discussions at the Annual Meeting of the IMF and World 
Bank Group in Istanbul on October 6-7, 2009 focused on reforming the 
IMF  and  the  social  impact  of  financial  crisis.  The  decisions  taken  in 
Istanbul provide reform to ensure that in its new mandate, the Fund will 
work more effectively to prevent financial crises and will give more a 
greater voting power for under-represented countries. Such reform should 
aim  at  increasing  flexibility  in  financing  developing  countries  and 
multilateral monitoring of international financial and monetary system.  
IMF  Director  Dominique  Strauss-Kahn  plans  to  transform  the 
institution into an insurance fund to which shareholders can appeal when 
they need it. It is difficult for such a proposal to obtain the agreement of 
186  member  states,  given  that  many  of  them  consider the  Fund  as  an 
entity controlled by rich countries. Moreover, the IMF has an insurance 
scheme  -  flexible  credit line  -  which  have  benefited  countries such as 
Poland, Mexico and Colombia.  
The financial role of the IMF should be a catalyst, subject to its 
limited resources. There are concerns about the prolonged use of Fund 
resources, which it is contrary to its mandate. Countries that benefit from 
the Fund support programs for years or decades does not show the success 
of the institution. Thus, the IMF should try to prevent situations like those 
in  which  the  world  countries  to  become  dependent  on  funding  that  it 
offers.  
Taking into account the new international financial and monetary 
architecture  that  takes  shape,  the  IMF  should  play  a  different  role  as 
lender  of last  resort  and  to  position itself  as  arbitrator  in  international 
financial markets. It is necessary to provide further financial assistance, 
preferably in collaboration with other credit institutions, for the countries 
that promote economic and financial policies, but suffers a temporary loss 
of investor confidence. But it must do more than a "firefighter" and less 
than a "policeman". It also requires increasing the role and involvement of 
the IMF as coordinator of the restructuring negotiations of the member 
countries.  IMF  should  encourage  more  credit  institutions  to  finance 
together different sectors of the global economy. Therefore it can be 
said that further development is needed and not a revolution.  
 
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References:  
1.  Aglietta, M. - Macroeconomie financiară, Ed. Coresi, Bucureşti, 2001 
2.  Kenen, P. - The International Financial Architecture: What's New? 
What's Missing?, 2001 
3.  Stiglitz,    J.  -  Globalizarea  –  speranţe  şi  deziluzii,  Ed.  Economică, 
Bucureşti, 2003 
4.  Oesterreichische Nationalbank - 60 Years of Bretton Woods – The 
Governance of the International Financial System – Looking Ahead, 
Proceedings of OeNB Workshops, No. 3, 2004  
5.  World  Economic  Forum  -  The  International  Monetary  System,  the 
IMF and the G20 - A Great Transformation in the Making?, Palgrave 
Macmillan, 2007 
6.  G20 Working Group 3 - Reform of the IMF, 4 March 2009 
7.  G20 Leaders’ statement, Pittsburgh Summit, 24-25 September 2009 
 
 

IMF REFORM - AN OPEN AGENDA

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