Reforms needed to IMF, World Bank

This week the International Monetary Fund and the World Bank meet in Singapore to discuss possible reforms to their voting structure. It is an attempt of these institutions to remain relevant, as developing countries have lost confidence in their policies and are turning to other sources of financing.

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The annual meeting of the International Monetary Fund and the World Bank, which is taking place in Singapore this week, is another opportunity to examine the reform of these international financial institutions.

The meeting comes nine years after the start of the Asian financial crisis in July 1997. That traumatic crisis shook the faith of Asia in the IMF and World Bank. Firstly, these institutions had promoted the kind of financial liberalisation that contributed so much to the crisis.

Secondly, the policies that the IMF in particular imposed on the countries that had to borrow from it made the situation worse, converting what was essentially a cash-flow and currency crisis into a full blow real-economy recession, with economic growth going from positive 7-8% to negative 6-9 per cent.

In Africa and Latin America the IMF-World Bank policies have also contributed to long-term stagnation or recession. They include high interest rates, open financial flows from and to the world, fiscal austerity, open trade flows.

After almost three decades of these policies, most countries failed to grow properly and some went into long-term recession, with declines in per capita incomes.

The IMF and the Bank insisted their policies were right but that the governments did not implement them properly. However, the Asian crisis brought about a sea-change in the way the world sees these institutions.

It became obvious that the same policies imposed on the affected Asian countries were wrong, and the medicine had made the patient more sick, almost to the point of death.

Today most Asian countries have rejected not only the IMF policies, but vowed never again to return to the Fund to borrow. They have built up larger foreign currency reserves and taken steps to avoid another financial meltdown.

Many Latin American countries have similarly reduced or eliminated their dependence on the IMF. Argentina and Brazil have pre-paid their loans, not wanting to have to follow advice which they believe is often wrong.

As a result, the IMF has little business to do these days, and is becoming irrelevant as a loan-maker. Many countries prefer to borrow from the market or from other institutions.

This has forced the IMF secretariat to face up to the grumbles of developing countries that they have little say in the decisions of the organisation, which as everyone knows is really run by a few developed countries, especially the United States.

This is because of the voting rights system, in which votes are weighted by the share of equity that countries have in the Fund and the Bank. The developed countries have the overwhelming share of the equity and thus of votes.

The Singapore meeting will discuss a proposal by the IMF secretariat to alter the voting rights

by allowing a few developing countries – China, South Africa, Brazil, Turkey – to purchase more equity.

Critics say that the countries are too few, for example the Africans as a whole will have even less share of total equity after the proposed restructuring. And that the dominance of the developed countries will remain.

The proposal is merely aimed at pacifying the bigger developing countries so that they will not abandon the Fund and Bank, say the critics.

The Singapore meeting will decide what to do. However it is being marred by actions of the Singapore government in preventing several NGO representatives from entering, even though these have been accredited by the Bank and Fund to take part in official NGO events.

Hundreds of NGOs are now protesting against the actions, and the row over democracy and transparency of the IMF and World Bank threatens to overwhelm the official events.

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