Abstract

Remarkable efforts were made at international institution building toward the end of World War II. In addition to the establishment of the United Nations, the global political organization, they involved the creation of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the General Agreement on Tariffs and Trade, the forerunner of the World Trade Organization (WTO). They became the key institutions in the financial, developmental, and trade fields. Today, nearly six decades later, the world’s trade and financial systems have been fundamentally transformed with the pervasive postwar controls abandoned in favor of a system closer to one of globalized free markets. At the same time, the community of nations has become vastly more diversified. The number of independent countries has tripled or quadrupled and these countries demonstrate remarkably different cultural identities, levels of development and welfare, and experience with self-determination.

Remarkable efforts were made at international institution building toward the end of World War II. In addition to the establishment of the United Nations, the global political organization, they involved the creation of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the General Agreement on Tariffs and Trade, the forerunner of the World Trade Organization (WTO). They became the key institutions in the financial, developmental, and trade fields. Today, nearly six decades later, the world’s trade and financial systems have been fundamentally transformed with the pervasive postwar controls abandoned in favor of a system closer to one of globalized free markets. At the same time, the community of nations has become vastly more diversified. The number of independent countries has tripled or quadrupled and these countries demonstrate remarkably different cultural identities, levels of development and welfare, and experience with self-determination.

As global integration progresses, there will be a growing need for regional and international cooperation and for institutions to ensure the availability of public goods and services. The case for an International Environment Organization, as well as that for strengthening the International Labor Organization, has repeatedly been made. The recent establishment of the Financial Stability Forum was a step toward much needed collaboration to improve the soundness of financial systems worldwide. In addition, the case has been put forward for creating an Economic Security Council within the United Nations, as an overarching body to consider the global aspects and interlinkages among economic, financial, and social issues.1

However, the political constituency and public support for new or stronger international organizations is not large. While it is generally agreed that the international financial institutions made a major contribution over the past decades to the unprecedented integration and growth of the world economy, the question has increasingly arisen in the 1990s whether the institutional arrangements and rules of the game have developed sufficiently to give all countries a fair opportunity to participate effectively in equitable trade and financial organizations. A key issue is whether the mandates of the existing organizations remain relevant, and their legitimacy and governance structure are adequate to serve the needs of the global community in the early twenty-first century. This is not universally accepted: many leaders in developing countries, and in civil society groups, decry the perceived lopsidedness of international financial governance, in the IMF and the World Bank as well as in the WTO, which they see as instruments of the rich countries. Moreover, the Asian crisis of 1997-98 raised questions regarding the benefits of financial globalization, particularly for emerging market economies, while the perception—right or wrong—that the IMF’s adjustment remedy caused social suffering put the searchlights of official and academic circles and of the media on IMF governance and accountability.

One group of IMF critics essentially argues that, in the present globalized environment, the community of nations does not need the regulatory function and the surveillance of the IMF and that IMF advice and financing are often misdirected and a source of “moral hazard.” The report to the U.S. Congress of the Meltzer Commission (see p. 41) published in 2000, essentially proposed to eliminate the muscle of surveillance and the IMF’s authority to negotiate policy reform.

A much broader spectrum of critics has argued that the IMF charter and its purposes remain relevant in the context of the progressive global integration of the early twenty-first century but that, nevertheless, the IMF should be reformed to make it more democratic, more transparent, more accountable, and more participatory. The following are some of the main themes of recent literature on the governance of the international monetary system:

  • The IMF is considered undemocratic because the large majority of the membership, the developing and transition countries, who are in practice the borrowers from the IMF, are minority shareholders, while the relatively small group of industrial countries holds 60 percent of the voting power.

  • The selection process for the Managing Director should be reformed because it has been shown to lack procedural guidelines and transparency.

  • The industrial countries are seen to be dominant in the oversight of the IMF through the Executive Board, while there is perceived to be inadequate representation of the developing countries.

  • It is difficult to grasp how the IMF’s rule of decision making by consensus works and whether it adequately protects the rights of minority shareholders.

  • At the political level, there is no effective counterweight to the power of the Group of Seven major industrial countries, and the oversight role of the International Monetary and Financial Committee (or of its predecessor, the Interim Committee) should be more participatory and more effective on systemic issues.

  • In its relations with the developing countries, the IMF does not give adequate attention to the objective of growth and to equity issues, including the protection of the poor from the burden of adjustment policies.

  • Apart from its accountability to member governments, the IMF should strengthen its dialogue with civil society and show a greater sense of accountability to public opinion.

This pamphlet is intended to provide an overview of the major aspects of governance of the International Monetary Fund. It is structured as follows.

  • Section II deals with the structure and evolution of quotas and voting power in the IMF and reflects on the need to reduce distortions in the system and to make it more equitable, as well as on the importance for the IMF as a financial institution to maintain the confidence of its creditors.

  • Section III examines the checks and balances in the governance of the IMF and reflects on the importance of harmonious collaboration among the Executive Board, the Managing Director, and the staff for the effective functioning of the institution.

  • Section IV focuses on the work methods and decision making of the Executive Board and highlights the origin and rationale of the rule of decision making by consensus through which Board members seek to find common ground in their deliberations. Several instances of consensus building are described to illustrate this collaborative work method, which plays a key role in safeguarding the rights of the minority shareholders who are the vast majority of the members.

  • The political oversight of the IMF by the Board of Governors through the Interim Committee and its successor, the International Monetary and Financial Committee, is examined in Section V. The effectiveness of—and the deficiencies in—this political oversight need to be seen in conjunction with the activities of groups of member countries—both from industrial countries and from developing countries—as well as the influence that individual member countries and regions attempt to exert on the agenda and decision making of the IMF.

  • A case study of IMF governance in a financial crisis, specifically the Mexican crisis of 1994-95, is presented in Section VI.

  • Section VII deals with strengthening the architecture and the transparency of the system, collaboration with civil society, and the refocusing of the IMF in the aftermath of the crises of the 1990s.

  • Finally, an appraisal of IMF governance is contained in Section VIII.

Decision Making, Institutional Oversight, Transparency and Accountability
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