Wednesday, July 16, 2008

Reforming the IMF

The International Monetary Fund was created in 1944 to encourage policies that lead to macroeconomic stabilization and in particular avert spillovers on other countries. A crucial part was the management of a sound exchange rate system. That was 64 years ago, ans since the role of the IMF has fundamentally transformed itself. As a consequence, it is time to reform it.

While the IMF was initially serving a set of countries that could need its services: countries could be borrowers or lenders. Nowadays it is only serving developing and transition economies, with the developed economies only providing funding. This means that latter cannot be disciplined by the IMF. Furthermore, developed economies can through the IMF set conditions on troubled economies that they would not put on themselves, as they would never get into such a situation. In other words, the initial IMF was working on a principle of symmetry that is lost today. Hence the need for reform.

The solution: give developing and transition economies more voting rights. Currently, they are roughly proportional to the provided funding. The formula needs to be substantially tilted against the rich countries. The latter will be then more reluctant to impose on others what they would not impose on themselves.


Independent Accountant said...

I disagree. Liquidate the IMF. We don't need it.

Vilfredo said...

independent accountant: "We" being the US I suppose. The US currently needs it, for its politicking. Guess why Pakistan got all this sudden funding from the IMF at the end of 2001? The trouble is that this is not the role of the IMF. Hence a reform.