The United Nations Monetary and Financial Conference held at Bretton Woods sixty years ago led to the establishment of the IMF and World Bank. This was a foundational moment. As the most powerful financial institutions of our times were created, hopes ran high of a better world, in which international cooperation through the IMF would sustain economic activity and prevent the adoption of measures destructive of national and international prosperity. The Bank was to assist reconstruction of war ravaged countries and finance the development of the less developed world. For a number of decades, the institutions created in Bretton Woods and the system based on them seemed to work well.

Today, the Bretton Woods Institutions (BWIs) play a diminished role and suffer from a loss of legitimacy and credibility. Several factors account for this diminished role. Among them the expansion of financial markets, the rapid growth of emerging market economies and the rigidity of a governance structure which reflects the political accommodation reached at the end of World War II; an outcome that has become increasingly obsolete and dysfunctional. The current governance structure of the IMF and World Bank fails to take into account the fact that today, the developing countries and economies in transition account for half of the world's output in real terms, for most of the world's population, encompass the most dynamic economies and hold about two-thirds of all international reserves.

Abstract:

Sixty years after their creation, the Bretton Woods institutions face a crisis of legitimacy that impairs their credibility and limits their effectiveness. At the roots of this crisis lies the unrepresentative nature of their structure of governance, which places control of the institutions in the hands of a small group of industrial countries. These countries consider the developing countries and economies in transition as minor partners, despite the fact that they now account for half of the world's output in real terms, most of the world's population, encompassing the most dynamic economies and the largest holders of international reserves. Over time, the effects of the unrepresentative nature of the governance of the BWIs have become aggravated by two trends: First, a growing division among member countries, on the one hand, industrial country creditors who do not borrow from the institutions but largely determine their policies and make the rules and on the other, developing country debtors or potential debtors, subject to policies and rules made by others. Second, the rapid increase in the economic size and importance of developing countries, particularly, emerging market countries in the world economy. This has made the governance structure of the institutions, which reflects the political accommodation reached at the end of World War II increasingly obsolete.

The first part of the paper reviews the existing governance structure of the institutions, the foundations on which it rests, the main formal proposal to reform quotas, its shortcomings and major issues that were not addressed by it.

Abstract

Introduction

Conditionality is perhaps the most controversial of the IMF's policies. Among the traditional criticisms of Fund conditionality are that it is short-run oriented, too focused on demand management, and does not pay adequate attention to its impact on growth and the effects of the programs it supports on social spending and income distribution.

Abstract

What is the nature and purpose of IMF conditionality, and is it required to safeguard Fund resources? This chapter reviews these issues and then poses some key questions. For example, can program ownership by a country be made compatible with externally imposed conditionality? To what extent is conditionality of the international financial institutions (IFIs) power without responsibility? What, if any, are the consequences for the IMF of imposing programs that fail more often than not? It looks into the reasons for increased conditionality during the 1980s and 1990s and reviews the recent debate on conditionality. As the number of conditions – in particular structural ones – grew rapidly during the 1980s and the 1990s, the rate of compliance with IMF-supported programs saw a parallel and sharp decline. The chapter also presents an analysis that distinguishes between different types of external crises: short-term imbalances that result from excess demand and expansionary policies; mediumterm structural disequilibria such as those resulting from time lags in production (future supply) from investment spending (current demand); and currency and external crises resulting from sudden reversals of capital flows, noting that different types of underlying causes of imbal-ances call for different sets of policy conditionality.

Abstract

The chapter reviews the elements that constitute the power structure (basic votes, quotas and the qualified majorities) by which the IMF is governed, following the commitment made by all participants in the Monterrey Consensus to increase the voice and participation of the developing countries and transition economies in the Bretton Woods institutions.

It finds that the small economies have been marginalized as a result of the relative erosion of basic votes and that quotas are far from representative of the size of members' economies. As a result, developing economies are under-represented while certain industrial countries, notably those in Europe, are over-represented. It finds that the governance of the IMF does not meet the standards of transparency and accountability needed to ensure the legitimacy of its decisions and the proper use of the resources at its disposal.

Finally, the question is addressed of how the decision-making process can be reformed to attain political legitimacy without weakening the credibility in financial markets.

Introduction

Following the commitment of all participants in the Monterrey Consensus to increase the voice and participation of developing countries and transition economies in the Bretton Woods Institutions, the issue of governance has come to the fore of the IMF and World Bank. The Monterrey commitment was renewed in the IMFC and Development Committee communiqués of 12–13 April 2003, and has been reflected in recent administrative steps to strengthen the capacity of African constituencies.

In trying to find their way toward growth and economic and social development, policymakers in developing countries face multiple uncertainties. For most, the major sources of advice of external financial assistance are the Bretton Woods institutions. With large financial resources at their disposal, and their support conditional on the adoption of certain policy prescriptions, the influence of the International Monetary Fund (IMF) and the World Bank (WB) can hardly be exaggerated.

Their influence on economic policy has undoubtedly contributed to the strengthening of the macroeconomic framework of member countries, reducing public sector deficits and public debt accumulation, improving monetary control and reducing the distortions and misallocation of resources brought about by high rates of inflation. In addition, by fostering trade liberalization and privatization of state enterprises, the Bretton Woods Institutions (BWIs) have generally contributed to the growth of exports and the attraction of foreign direct investment. In the face of a number of recent challenges, however, these institutions’ neoliberal paradigm would seem insufficient, and needs to be complemented by other elements.

The first of these challenges is posed by the explosive growth of capital markets and their extraordinary volatility, with the consequent potential for the emergence of multiple equilibria in exchange markets – and also for devastating financial crises. While the BWIs recognize these risks, and are trying to improve their capabilities to predict crisis, efforts at crisis prevention have not been successful. As for crisis resolution, the IMF's approaches to in Asia, Russia and Argentina have been controversial. In fact, one of the more successful responses to the challenge posed by the volatility of capital flows has been the introduction in Chile and Colombia, for example, of market-based controls on capital movements, which had been resisted by the IMF for years. These responses illustrate the practical relevance of the ‘theory of the second best’ by which, when an economy suffers a distortion, welfare may be improved by the judicious introduction of another distortion through some form of government intervention.

A second, related, challenge, which is yet to be addressed, is posed by the massive reversals of previously large capital flows, from the developed to the developing countries.

In trying to find their way toward growth and economic and social development, policymakers in developing countries face multiple uncertainties. For most, the major sources of advice of external financial assistance are the Bretton Woods institutions. With large financial resources at their disposal, and their support conditional on the adoption of certain policy prescriptions, the influence of the International Monetary Fund (IMF) and the World Bank (WB) can hardly be exaggerated.

Their influence on economic policy has undoubtedly contributed to the strengthening of the macroeconomic framework of member countries, reducing public sector deficits and public debt accumulation, improving monetary control and reducing the distortions and misallocation of resources brought about by high rates of inflation. In addition, by fostering trade liberalization and privatization of state enterprises, the Bretton Woods Institutions (BWIs) have generally contributed to the growth of exports and the attraction of foreign direct investment. In the face of a number of recent challenges, however, these institutions' neoliberal paradigm would seem insufficient, and needs to be complemented by other elements.

The first of these challenges is posed by the explosive growth of capital markets and their extraordinary volatility, with the consequent potential for the emergence of multiple equilibria in exchange markets – and also for devastating financial crises. While the BWIs recognize these risks, and are trying to improve their capabilities to predict crisis, efforts at crisis prevention have not been successful.

Abstract

1. Introduction

Following the commitment of all participants in the Monterrey Consensus to increase the voice and participation of developing countries and transition economies in the Bretton Woods Institutions, the issue of governance has come to the fore of the IMF and World Bank. The Monterrey commitment was renewed in the IMFC and Development Committee communiqués of 12–13 April 2003, and has been reflected in recent administrative steps to strengthen the capacity of African constituencies.

Moreover, since 1997, following the Executive Board's approval of the Guidance Note on Governance, the IMF has increased its attention to governance issues among its member countries. The promotion of transparency and accountability are at the core of the IMF's efforts to ensure the efficient use of public resources, as well as the domestic ownership of IMF-supported reform programs. In recent years the IMF has developed instruments to help countries identify potential weaknesses in their institutional and regulatory frameworks that could give rise to poor governance, and to design and implement remedial measures well beyond the extent envisaged in 1997.

With resources of over $300 billion and an expanded mandate, the IMF is possibly the most powerful of all international institutions.