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IMF mandate review, will it deliver for the poor?

02 June 2010

By Nuria Molina

In the wake of the Great Recession, the IMF has resurged as the lender of last resort, with its resources effectively trebling since April 2010. With boosted resources has come a decision to review its mandate- covering the areas of surveillance, crisis prevention and the international monetary system.

Critics have argued that the Fund's failure to deliver in these areas before the global financial crisis questions its suitability for addressing some of these issues now. Furthermore, as explored below, critics argue that the Fund may be dressed in new rhetoric, but to a great extent is advising the same old policies. Below, Eurodad and Third World Network present some alternative macroeconomic policies that could work for development and the world's poorest people.

The IMF mandate review

In October 2009, the IMFC communiqué asked the Fund to review its “mandate to cover the full range of macroeconomic and financial sector policies that bear global stability and to report back to the Committee by the time of the next Annual Meetings” (October 2010). Following the IMFC call, the Fund staff published, in January 2010, a “chapeau” paper – “The Fund’s mandate, an overview” – covering the areas of surveillance of the international monetary system in the context of crisis prevention; lending capacity and lending facilities for crisis response; and the role of the Fund in providing alternatives to the reserve buildup in providing “systemically preferable approaches, including the use of a global reserve asset.”

Evaluating the chapeau paper, Bretton Woods Project, in the article “ Rethinking the IMF again: but will it do any good?” highlights that “IMF shareholders will likely clash over the issue of capital controls and how the Fund can become more even-handed in its surveillance.” Also of particular concern is the lack of attention by the IMF to its most numerous users – low income countries (LICs), to whom the IMF devotes just one paragraph, and yet, “they [LICs] have just as much to fear from bad policies in the rich world’s as the large emerging markets”, says Collins Magalasi, executive director of Afrodad.

Piecemeal change won’t do

More concerning is the limited reach of recent policy reform at the IMF. Whilst the Fund strived hard to appear progressive in its crisis response, rethinking its macroeconomic stance, including on capital controls , IMF critics are profoundly sceptical of the Fund’s “Keynesian turn.”

“Has the IMF abandoned neoliberalism?” questions Terry McKinley, director of the Center for Development Policy and Research at the School of Oriental and African Studies. The jury is still out there, but critics fear that this mandate review will be little more than a facelift, with McKinley claiming that “the IMF is engaging in only a rhetorical opening up, at best, of any “policy space” for developing country governments to determine their own macroeconomic policy framework.” Regarding monetary policy, for example, despite the Fund’s statement that 4% inflation rates may be more reasonable than the overly stringent old inflation targets of 2%, it still refuses to even contemplate that inflation in the higher single digits, never mind between 10% or 15%, could be compatible with output stability or growth.

Kavaljit Singh, from the Indian NGO Public Interest Research Group, is also concerned that the changing stances of the Fund on capital controls, despite being “a positive development,” only represent a temporary, short-term, quick-fix solution to deal with volatile capital flows. Rather, he maintains, “capital controls should be seen as one of the policy instruments in the hands of governments to pursue independent economic policy making, growth and financial stability.”

IMF stays true to old dogmas

Other research shares concerns on the IMF’s reluctance to change its advice to the world’s poorest countries. A recent report by Eurodad and Third World Network, “ Standing in the way of development? A critical survey of the IMF’s crisis response in low income countries” concludes that early signs show that the IMF does not seem to be abandoning its guiding neoliberal tenets.

A UNICEF brief, “ Prioritising expenditures for a recovery with a human face”, assesses 86 recent IMF country reports and finds that if the Fund did ever support fiscal stimuli in low income countries in 2008 and 2009, by 2010 and 2011 it is already advising fiscal tightening. The IMF's main rationale behind fiscal tightening appears to be concerns about fiscal and debt sustainability. However, the Fund turns a blind eye on the fact that “curtailing of public expenditure in 2010-2011 will likely incur potentially irreversible long-term human costs.”

The UNICEF’s brief notes that “many low income countries reviewed are low or lower to middle income countries with limited linkages to international markets, [which] raises the question of whether the preoccupation with the need to reduce fiscal expenditure to ensure “market confidence” is justified in light of the continued need for fiscal policy to support economic and social recovery.”

IMF advice harmful to the world's poor

The Fund dismisses any serious role for discretionary fiscal policy, still preferring automatic stabilisers, such as social insurance, whereby expenditures automatically rise during a recession. Such a fiscal policy stance is therefore grossly inadequate for providing fiscal stimuli to the world’s poorest countries, which barely count on any of such mechanisms.

Furthermore, in most countries reviewed by UNICEF’s study, the IMF advises cuts in subsidies, wage bills, and social expenditures. However, “targeting designs and implementations often have limitations that may have the unintended effects of excluding vulnerable children and women, particularly where poverty is widespread.” This is particularly the case in LICs with severely limited administrative capacities.

LICs better equipped to tackle the next crisis?

In it recent paper “ Coping with the Global Financial Crisis: Challenges Facing Low-Income Countries ”, the Fund identifies main challenges ahead for LICs, including “realigning fiscal policies towards medium-term sustainability…(by) increasing the efficiency of public spending,” “redoubling efforts to improve the business environment,” and bringing down barriers to trade, so that “countries are in a much better position to tackle the next crisis when it comes.” In a nutshell, a good deal of replication of old policies regarding trade openness and excessive reliance on external flows which have thus far hindered more than helped developing countries' long term growth and resilience to weather the effects of the global crisis.

Eurodad and Third World Network advocate for more policy space so that developing countries can implement growth and development-oriented macroeconomic policies, including:

- A more active use of fiscal policy to compensate for the shortfalls of the private sector during economic downturns and to support public investment to build up essential economic and social infrastructures, on which private investment inevitably relies.

- Ensure adequate money supplies through low real rates of interest, rather than ineffectively trying to keep inflation low with high interest rates.

- Manage exchange rates so they can foster broad-based export competitiveness and lead to greater structural diversification of the domestic economy.

- Regulate capital accounts to confront the continuous outflow of domestic private capital from their economies, i.e. “capital flight”.

In December 2008, the IMF Chief economist Olivier Blanchard said “In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times…” The IMF must recognise when conducting their mandate review that these times are still far from normal. After the great financial and economic storm of the last two years the world needs radical change in the global financial architecture. Nothing less will do.