Front Matter

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FINANCE & DEVELOPMENT A QUARTERLY PUBLICATION OF THE INTERNATIONAL MONETARY FUND

September 2004 • Volume 41 • Number 3

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Finance & Development is published quarterly in English, Arabic, Chinese, French, Russian, and Spanish by the International Monetary Fund. English edition ISSN 0015-1947

Laura Wallace

EDITOR-IN-CHIEF

Jeremy Clift

SENIOR EDITOR

Camilla Andersen

Elisa Diehl

Christine Ebrahim-zadeh

Jacqueline Irving

ASSISTANT EDITORS

Prakash Loungani

BOOK EDITOR

Luisa Menjivar

CREATIVE DIRECTOR

Lai Oy Louie

ART EDITOR

Lijun Li

Niccole Braynen-Kimani

EDITORIAL ASSISTANTS

Raghuram Rajan

CONTRIBUTING EDITOR

Graham Hacche

SENIOR ADVISOR

ADVISORS TO THE EDITOR

Francesco Caramazza

Adrienne Cheasty

Paula De Masi

Domenico Fanizza

Andrew Feltenstein

Paul Hilbers

Mark Plant

Eswar Prasad

Thomas Richardson

Jerald Schiff

Arvind Subramanian

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FEATURES

  • IMF AT 60

  • IMF at 60

    • Reflections on reform at the IMF and the demands of a changing world economy

    • James M. Boughton

  • The IMF Story—a time line

    • The IMF was created to promote monetary cooperation in the wake of the Great Depression and World War II

  • Forces Shaping the IMF of Tomorrow

    • Picture This peers into the crystal ball

  • Rethinking IMF Governance

    • Former IMF Secretary advocates overhauling the Executive Board to make it more effective and representative

    • Leo Van Houtven

  • Why Developing Countries Need a Stronger Voice

    • Running faster at the IMF, but where’s the progress?

    • Cyrus Rustomjee

  • Putting a Stop to Self-Fulfilling Crises

    • A proposal to make the IMF a lender of first resort

    • Daniel Cohen

  • How Should the IMF Be Reshaped?

    • Three former IMF Managing Directors discuss hot issues facing the IMF

    • Jacques de Larosière, Michel Camdessus, and Horst Köhler

DEVELOPMENT ISSUES

  • Avoiding Banking Crises in Latin America

    • It is time to give supervisory authorities the independence to do their job

    • Agustín G. Carstens, Daniel C. Hardy, and Ceyla Pazarbaşioğlu

  • From Vision to Action

    • How to put some oomph into the Millennium Development Goals

    • James M. Boughton and Zia Qureshi

  • Foreign Aid: Grants versus Loans

    • Why a shift of development aid from loans to grants should be accompanied by institutional strengthening in developing countries

    • Benedict Clements, Sanjeev Gupta, Alexander Pivovarsky, and Erwin R. Tiongson

DEPARTMENTS

  • Letters to the Editor

  • In Brief

    • News from international agencies

  • People in Economics

    • Laura Wallace profiles Amartya Sen

  • Point-Counterpoint

    • Reform: What Pace Works Best?

    • John McMillan says gradual; Oleh Havrylyshyn says rapid

  • Back to Basics

    • Liberalizing Capital Account Restrictions

    • M. Ayhan Kose and Eswar Prasad

  • Book Reviews

    • Why Globalization Works, Martin Wolf; Open World: The Truth About Globalization, Philippe Legrain; How Soccer Explains the World: An Unlikely Theory of Globalization, Franklin Foer; The IMF and Economic Development, James Raymond Vreeland

  • Country Focus: Nigeria

  • Straight talk

    • Raghuram Rajan explores the pitfalls of relying on orthodox economic models for policymaking

Photography: Cover and p. 8, IMF Photo, United Nations, and U.S. National Archives and Records Administration; table of contents and p. 14, Hulton-Deutsche Collection/Corbis; table of contents and p. 30, Reuters/Corbis; table of contents and p. 5, Denio Zara/IMF; p. 3, Ali Burafi/AFP; p. 11, Toru Yamanaka/AFP; p. 14, Hulton-Deutsche Collection/Corbis and IMF Photo; p. 15, Bettmann/Corbis, Denio Zara/IMF, and David Brauchli/Reuters/Corbis; p. 18, IMF Photo; p. 24, Enrique Macarian/Reuters; p. 34, John McMillan; p. 35 and p. 39, AFP; p. 38, IMF Photo; p. 46, George Mulala/AFP; pp. 52-53, Michael Spilotro/IMF; and p. 56, IMF Photo.

Illustration: Table of contents and p. 21, Massoud Etemadi.

FROM THE EDITOR: Gearing up for 2050

WHAT MIGHT the IMF of tomorrow look like? That’s a question now stirring up debate inside, as well as outside, the institution as it marks its 60th anniversary. Of course, it’s impossible to predict the future, but it is possible to consider the implications of some of the forces that seem likely to shape the global economy—and thus the IMF—over the next 25–50 years. For example, one key reason why the IMF might need to ready itself for even greater demands on its financial resources is the growing importance of emerging market economies—newcomers to global financial markets—that seem likely to face especially high risks of financial turbulence. As Picture This reports, an IMF study shows that their share of world GDP could jump from 10 percent today to about 33 percent by 2025.

How can the IMF prepare itself for the demands ahead? The key surely lies in the answers to four critical questions: How can the IMF strengthen its surveillance, so that it can provide more effective early warnings when economic trouble looms and better voice the interests of the global community when countries pursue questionable policies? How can it better help resolve financial crises so that countries are able to regain access to capital markets and resume their economic growth? How can it better help low-income countries—the bulk of which are in Sub-Saharan Africa—emerge from extreme poverty? And how can the IMF improve the equity of voting power and the effectiveness of the way it is governed, so that it retains its political legitimacy?

To gain insights and stimulate debate, this issue of F&D sought the views of a few distinguished outsiders, many of whom were former insiders. On governance, we turned to Leo Van Houtven, who served for nearly 20 years as Secretary of the IMF’s Executive Board, which runs the IMF on a day-to-day basis. Citing what he refers to as the increased intrusiveness by the Group of Seven major industrial countries and the need to reform IMF quotas, he calls for a package of measures that would overhaul the Board, including reducing its size from 24 Executive Directors to 14 and giving those Directors more decision-making authority. Cyrus Rustomjee, who used to be an Executive Director (for a constituency that included about half of the African countries), also argues that dramatic changes are needed on the Board, particularly to give developing countries a greater and fairer say. He also calls for a radical rethink of the IMF’s lending facility for the poorest countries.

F&D also turned to three past Managing Directors for their advice. They have many suggestions for the IMF of tomorrow. But on one crucial issue—the suggestion of slimming the Executive Board by consolidating the European Union’s representation into one chair (now spread over 10)—the lack of consensus among them is no doubt quite telling about the likely debates ahead to reshape the IMF.

Laura Wallace

Editor-in-Chief