What's Wrong With the IMF and How to Fix It E-Book

Bessma Momani

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: PWWS - Polity Whats Wrong series
• Sprache: Englisch

Seitenzahl: 376

Veröffentlichungsjahr: 2017

Beschreibung

The IMF stands at a crossroad. Derided as increasingly irrelevant in the first decade of the new millennium, the Fund has had its power and prestige restored by the fallout from the 2008 global financial crisis. But will the resurgent IMF assert a more just and sustainable macroeconomic model and provide a voice for poor and marginalized people around the globe? Or will enduring weaknesses within the IMF mean it fails to address these issues? In this book, Bessma Momani and Mark R. Hibben dissect the variables and institutional dynamics at play in IMF governance, surveillance, lending, and capacity development to expose the fundamental barriers to change. Identifying four areas that could "fix" the IMF, they show how these genuine and workable solutions can give the IMF the effectiveness and legitimacy it needs to positively shape twenty-first-century global governance and push back against volatile and regressive forces in the international political economy.

Leseprobe

Contents

Cover

Title Page

Copyright

Preface

Acknowledgments

Abbreviations

Part I Diagnosing the Ills

1 What’s wrong with the IMF?

A constructivist-sociological organizational approach to analyzing the IMF

What is the IMF and how does it operate? Formal governance and organizational culture

How did we get here? A brief overview of the IMF and its beliefs

The dangers of resurgence without legitimacy

Organization and major findings

Conclusion

Notes

2 Governance and decision-making

Quota share and voting power

Executive Board and quotas

Consequences of powerful state intransigence

The elephant in the room: The US veto and its effects

The impact of MDs on IMF policy

The effectiveness of executive directors at the IMF

Informal mechanisms of control

Conclusion

3 Surveillance

Bilateral, regional, and multilateral surveillance

Surveillance: Trusted advisor or truth-teller?

The IMF’s repeated failures to predict crises

A model moving forward? The 2014 Triennial Surveillance Review

Working with others: The FSB and G20’s Mutual Assessment Process

Conclusion

4 Lending and conditionality

Tracing the “common sense” of IMF lending practices

The roots of macroeconomic conditionality

Liberalization, inflation, and the “absorption model”: 1945–1949

Macroeconomic conditional lending and the Polak model: 1950–1973

The Washington Consensus and structural conditionality

The post-Washington Consensus, ownership, and “pro-poor” participation

“Modernizing” conditionality

Current IMF lending operations and trends

Non-concessional lending facilities

Concessional lending facilities

Lending conditionality basics and current trends in structural conditionality

Assessment of IMF lending

Conclusion

5 Capacity development

CD: An overview

Internal assessments of IMF CD: 1999–2005

CD reforms: 2005–2015

Two visions of CD and the SDGs

Conclusion

Part II Finding a Cure

6 Democratize governance and decision-making

Recalibrating quota shares and voting power

Reforming the Executive Board

Non-resident Board

Council of Ministers

The MD

LIC representation

Eliminating the US veto

Conclusion

Notes

7 Diversify the IMF staff

The IMF’s organizational culture

IMF recruitment of its economists

Changes to Fund recruitment processes

Rethinking staff recruitment and responsibilities

Conclusion

Notes

8 Commit to inclusive growth

Economic trends and IMF policy formation and reform

Tracing the roots of inclusive growth: Fallout of the Asian and global financial crises

Inequality and redistribution enters IMF policy debates: 2008–2011

The Arab Spring and transition from “pro-poor growth” to “inclusive growth”: 2011–2016

Conclusion

Notes

9 Enhance multilateral partnerships

Collaborating with the World Bank

Challenges to IMF–World Bank collaboration

Collaborating with the AIIB

Collaborating with the FSB

Recommendations to improve collaboration with the FSB

Collaborating with NGOs

Recommendations to improve collaboration with NGOs

Conclusion

Notes

10 Closing the hypocrisy gap

What is wrong with the IMF? The hypocrisy gap between word and deed

How to fix the IMF: Recommendations to close the hypocrisy gap

Conclusion

References

Index

End User License Agreement

List of Tables

4.1 IMF lending facilities

5.1 IMF trust funds for capacity development

8.1 Six economic schools of thought and IMF influence

Guide

Cover

Table of Contents

Begin Reading

Pages

ii

iii

iv

vi

vii

viii

ix

x

xi

xiii

xiv

xv

xvi

1

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

115

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

What’s Wrong Series

Paul Harris, What’s Wrong with Climate Politics and How to Fix It

Simon Hix, What’s Wrong with the European Union and How to Fix It

Bill Jordan, What’s Wrong with Social Policy and How to Fix It Thomas G. Weiss, What’s Wrong with the United Nations and How to Fix It, 3rd edition

Rorden Wilkinson, What’s Wrong with the WTO and How to Fix It

What’s Wrong with the IMF and How to Fix It

BESSMA MOMANI MARK R. HIBBEN

polity

Copyright © Bessma Momani, Mark R. Hibben 2018

The right of Bessma Momani, Mark R. Hibben to be identified as Author of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.

First published in 2018 by Polity Press

Polity Press65 Bridge StreetCambridge CB2 1UR, UK

Polity Press101 Station Landing, Suite 300Medford, MA 02155, USA

All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

ISBN-13: 978-1-5095-0970-6

A catalogue record for this book is available from the British Library.

The publisher has used its best endeavours to ensure that the URLs for external websites referred to in this book are correct and active at the time of going to press. However, the publisher has no responsibility for the websites and can make no guarantee that a site will remain live or that the content is or will remain appropriate.

Every effort has been made to trace all copyright holders, but if any have been inadvertently overlooked the publisher will be pleased to include any necessary credits in any subsequent reprint or edition.

For further information on Polity, visit our website: politybooks.com

Preface

Debates over the failings of international organizations like the United Nations, the World Trade Organization, and of course the International Monetary Fund (IMF) are among the most pressing issues in global governance. Born out of the spirit of liberal multilateralism following World War II, these institutions and their beliefs are under direct attack by the new politics of reactionary nationalism across Europe and in the United States. In writing this book between 2015 and 2017, we thus find ourselves embedded in a critical historical moment in our analysis of the IMF. In the face of the rising tide of reactionary nationalism, the direction of the IMF’s future actions and degree of effectiveness will strengthen or help unravel the world’s commitment to liberal global governance.

While ultimately champions of the institution, we recognize the multiple areas of controversy tied to the IMF. For many in the developing world, the IMF has been appropriately criticized for its inaction, for its “one size fits all” policies which do not consider local context, and for the imbalance of power among its members, with the most powerful dominating it. The Fund’s current engagement in the troubled Eurozone also highlights the tension born out of deeply held norms that generally champion austerity. The IMF’s past response to the debt crisis of the 1980s and Asian crisis of the late 1990s also highlight pockets of institutional dysfunction that produced devastating effects on the lives of millions of people across the globe. However, the Fund has demonstrated it can learn from its mistakes. Particularly in the time period following the 2008 global financial crisis, the IMF has implemented effective policy reforms and has served as an important voice and advocate for many of the world’s poorest people. This is most salient currently in its commitment to “inclusive growth” and the United Nations’ Sustainable Development Goals.

This book looks ahead by diagnosing the failures and inconsistencies of the IMF and offering perspectives on the future role of the Fund. The book is part of a series of analyses of global institutions and issues, published by Polity Press. It draws on what we have previously written and presented through various publications and presentations; but also on the work of many other scholars looking at emerging mechanisms of financial governance at the global and regional levels. It seeks to push this literature forward by including in its analysis the democratization of decision-making within the IMF and the development of partnerships between the IMF and other regional and global financial institutions, but most of all by offering recommendations for closing the much-criticized “hypocrisy gap” of the IMF. In contrast to most literature on the IMF, we do not simply focus on the inefficiency of the institution but we consider how to “fix” it by highlighting informal processes of policy formation within the IMF, a critical issue that has not been sufficiently addressed in the literature. There is a possibility for substantial shift in the focus of the IMF through a more developed collaboration with international governance organizations and non-governmental organizations. This could lead to better performance by the IMF in its traditionally mandated areas and the inclusion of social outcomes in its policy formulation. This shift could create a synergy between the IMF and emerging countries. This is one of the possibilities following the institutional arrangements after the 2008 economic crisis. The other side of the coin would see an entrenchment of the influence of the most powerful states, and especially of the United States, the only member state enjoying single-handed veto power. Institutional memory would then participate in pushing the IMF further into what it has traditionally been: an insular community of macroeconomists far removed from local dynamics.

While writing this book, we have attempted through conferences and publications to increase the interest of scholars and students alike in global financial arrangements and the challenges ahead for the IMF. We have both published extensively on the IMF; on the drivers of change within the IMF, on its policies in specific countries, on emerging regional financial mechanisms, and on the possibility of reform of the Fund. This book is not our first collaboration but it is the most significant one. Bessma Momani’s interest in the IMF and global financial governance stemmed from her background in international political economy (IPE) and her analysis of IMF–Egyptian negotiations of the 1990s while a doctoral student at Western University. Bessma teaches courses on the IMF and on IPE at the University of Waterloo and the Balsillie School of International Affairs, and she has consulted for the IMF and its Independent Evaluation Office. She is also a non-resident senior fellow at Brookings Institution and the Centre for International Governance Innovation. Mark Hibben’s PhD thesis at Syracuse University addressed reform of the IMF in the “post-Washington Consensus.” His current research interests are in the politics of development in the “post-Washington Consensus,” with a consideration of the discourses on inequality and how Keynesianism shapes the policy choices of the IMF and the World Bank. The collaboration between the two Bretton Woods organizations and its impact on development outcomes is also one of his areas of interest. Mark teaches political science at St. Joseph’s College of Maine, Standish. Bessma was the external examiner at Mark’s PhD dissertation defense at Syracuse University and since then they have published and presented together on IMF reform.

What’s Wrong with the IMF and How to Fix It is the result of a close collaboration, with each author contributing to every chapter. Bessma Momani is the main author of chapters 2, 3, 6, 7, and 9 while Mark Hibben is the main author of chapters 1, 4, 5, 8, and 10. But this book, from its inception to publication, is the fruit of equal effort from both authors and teachers, interested in pushing forward the debate over IMF reform. It is targeted at students, scholars, IMF experts, and a general audience. With its two distinct parts, “Diagnosing the Ills” and “Finding a Cure,” What’s Wrong with the IMF is a must-have for all those interested in global financial regulation and the challenges ahead for the IMF.

Acknowledgments

As we reflect on the completion of this book, we are humbled by the “village” of colleagues, IMF staff and administration, institutional support, and family that ultimately made this project possible. Many thanks first to various colleagues who provided feedback on chapters in the book. Specifically, thanks to Anton Malkin, Skylar Brooks, Dustyn Lanz, and Eric Helleiner, who have previously co-authored work with Bessma Momani that has been featured in the book. Particularly invaluable to the project was the difficult editing and indexing work undertaken by doctoral candidate Ousmane Diallo.

IMF staff and administration also were extremely generous with time and access. Special thanks to IMF archivist Premela Isaac and staff in the IMF’s communication department, including Marjorie Henriquez and Jeremy Marks. Thank you also to staff from multiple departments who gave us time and were willing to provide frank assessment of the IMF’s strengths and weaknesses. Thanks to the Independent Evaluation Office’s Miguel de Las Casas for input on a number of chapters, although we may continue to have different takes on some issues. Financial and moral support also came from our home institutions, the University of Waterloo, Balsillie School of International Affairs, and Saint Joseph’s College of Maine. Bessma would like to acknowledge that research for this book was supported by the Social Science and Humanities Research Council of Canada. Finally, the patience of our families and partners was the final foundational piece that allowed us to focus our efforts and push through to completion.

Abbreviations

The full meaning of abbreviations is explained when they are first mentioned in the book. After that, acronyms are exclusively used except for very common terms such as “United States” or “United Kingdom.”

ADB

Asian Development Bank

AfDB

African Development Bank

AFRITAC

Africa Regional Technical Assistance Center

AIIB

Asian Infrastructure Investment Bank

AML/CFT

anti-money laundering and combating the financing of terrorism

ATI

Africa Training Institute

BIS

Bank for International Settlements

BRICS

Brazil, Russia, India, China, and South Africa

BTC

Joint Regional Training Center for Latin America in Brazil

CCB

Committee on Capacity Building

CD

capacity development

CSO

civil society organization

CTP

Joint China–IMF Training Program

ECB

European Central Bank

ECF

Extended Credit Facility

ED

executive director

EFF

Extended Fund Facility

e-GDDS

Enhanced General Data Dissemination System

EP

Economist Program

ESAF

Enhanced Structural Adjustment Facility

EU

European Union

EURODAD

European Network on Debt and Development

EWE

Early Warning Exercise

EWG

Early Warning Group

FCL

Flexible Credit Line

FDI

foreign direct investment

FfD

Financing for Development

FM

Fiscal Monitor

FSAP

Financial Sector Assessment Program

FSB

Financial Stability Board

FSF

Financial Stability Forum

FY

Fiscal Year

G7

Group of Seven

G10

Group of Ten

G20

Group of Twenty

GAB

General Agreements to Borrow

GATT

General Agreement on Tariffs and Trade

GDDS

General Data Dissemination System

GDP

gross domestic product

GFSR

Global Financial Stability Report

HIPC

Heavily Indebted Poor Countries

IBRD

International Bank for Reconstruction and Development

ICD

Institute for Capacity Development

ICU

International Clearing Union

IDA

International Development Association

IEO

Independent Evaluation Office

IET

Internal Economics Training

IFC

International Finance Corporation

IGN

Interim Guidance Note

IGO

intergovernmental organization

IMF

International Monetary Fund

IMFC

International Monetary and Financial Committee

IO

international organization

ISI

import substitution industrialization

JMAP

Joint Management Action Plan

JPA

Joint Partnership for Africa

JSAN

Joint Staff Advisory Note

JVI

Joint Vienna Institute

LIC

low-income country

LIDC

low-income developing country

LOI

letter of intent

MAP

Mutual Assessment Process

MD

managing director

MDG

Millennium Development Goal

MDRI

Multilateral Debt Relief Initiative

MEFP

Memoranda of Economic and Financial Policies

MOOC

massive open online course

NAB

New Arrangements to Borrow

NGO

non-governmental organization

OBOR

One Belt, One Road

OECD

Organization for Economic Co-operation and Development

PFP

policy framework paper

PLL

Precautionary and Liquidity Line

PRGF

Poverty Reduction and Growth Facility

PRS

Poverty Reduction Strategy

PRSP

Poverty Reduction Strategy Paper

PSI

Policy Support Instrument

QPC

quantitative performance criteria

RCF

Rapid Credit Facility

RFI

Rapid Financing Instrument

ROSCs

Reports on the Observance of Standards and Codes

RSN

Regional Strategy Note

RTAC

regional technical assistance center

RTC

regional training center

RTP

regional training program

SAF

Structural Adjustment Facility

SARTTAC

South Asia Regional Training and Technical Assistance Center

SBA

Stand-By Arrangement

SCAV

Standing Committee on the Assessment of Vulnerabilities

SCBR

Standing Committee on Budget and Resources

SCF

Standby Credit Facility

SCSI

Standing Committee on Standards Implementation

SCSRC

Standing Committee on Supervisory and Regulatory Cooperation

SDDS

Special Data Dissemination Standard

SDG

Sustainable Development Goal

SDR

Special Drawing Right

SIFI

Systemically Important Financial Institution

STI

IMF–Singapore Regional Training Institute

TA

technical assistance

TAIMS

Technical Assistance Information Management System

UK

United Kingdom

UKIP

United Kingdom Independence Party

UN

United Nations

UNSC

United Nations Security Council

US, USA

United States, United States of America

USSR

Union of Soviet Socialist Republics

WEO

World Economic Outlook

Part IDiagnosing the Ills

CHAPTER ONEWhat’s wrong with the IMF?

Born out of the ashes of World War II, the original mandate of the International Monetary Fund (IMF) highlighted five purposes designed to build and sustain a liberal and peaceful global economic order. These were: the promotion of international monetary cooperation; the expansion and balanced growth of international trade; the promotion of exchange stability; the establishment of a multilateral system of payments; and providing resources for member states experiencing balance of payment difficulties (IMF 2016b). Seven decades later, the IMF and the multilateral liberalism it champions are under direct threat. Protectionism and reactionary nationalism, once allocated to the “dustbins of history,” have returned in full force in the United States of America (USA) and Europe. For the likes of Donald Trump, the United Kingdom Independence Party (UKIP), and Marine Le Pen, the IMF has no useful purpose. We argue that a reformed and robust IMF is thus critically important to counteract the rising tide of reactionary politics manifested in this populist-nationalist surge. A reformed and robust IMF is also central to building and strengthening a twenty-first-century liberal global order committed to openness, cooperation, and mutual economic benefit.

It is in this spirit that we investigate “what’s wrong with the IMF” and “how to fix it.” In this introductory chapter, we first outline the conceptual framing of our study of the IMF, which is rooted in constructivism and sociological organizational theory. We then describe the formal operations of the IMF and discuss informal dynamics that shape its culture. The next sections provide an overview of the Fund’s seven-decade history, with special attention focused on how particular normative frameworks of “appropriate” policy response have evolved and how these norms are being challenged in the post-2008 era.

The chapter then provides an overview of the book and our major findings. In multiple areas, we find the institution is plagued by a pattern of inconsistency and disconnect between policy word and deed that undermines its legitimacy and effectiveness. We contend, however, that the gap between Fund rhetoric and policy outcomes is an outgrowth of dynamics that have provided openings for emerging voices to build coalitions that could ultimately “fix” the IMF.

A constructivist-sociological organizational approach to analyzing the IMF

Three primary questions drive our analysis of what is wrong with the IMF and how to fix it:

What caused the IMF to pursue a particular policy choice or position?

What caused the IMF to shift its past policy direction?

What is the most strategic way to “fix” the IMF?

Two predominant theoretical approaches focused on international organizations (IOs) and the IMF offer different analytical starting points to answer these questions. Rationalist-inspired frameworks conceptualize the IMF as an opportunistic entity (an “agent”) that pursues its interest relative to the demands and constraints placed by powerful states (“principals”), domestic political forces, private financial institutions, non-governmental organizations (NGOs), or other multilateral organizations (Copelovitch 2010; Gould 2006; Hawkins, Lake, Nielson, and Tierney 2006; Hodson 2015; Stone 2011). While this approach provides important insights into IMF behavior, we argue that it is conceptually unable to engage with crucial “micro-processes” at work within the institution, many of which we argue are tied to norms around what constitutes “appropriate” macroeconomic policy response, institutional and personal identity, and concerns around the legitimacy of a particular policy choice. As such, we maintain that an approach that merges aspects of constructivism and sociological organization theory is best suited to accurately assess the IMF and offer solutions (Best 2007, 2014; Momani and Hibben 2015; Moschella 2010, 2014; Nelson 2014; Park and Vetterlein 2010).

A constructivist-sociological organizational framework conceptualizes the IMF as an independent entity, with agency, rather than the extension of powerful state or economic interests. It also recognizes that variables standing outside the institution (e.g. powerful states, other IOs, NGOs) impact IMF policy choices. In these two positions, it is similar to rationalist-inspired approaches. However, a constructivist-sociological organizational approach argues that the most accurate analysis of IMF behavior identifies particular attributes of its organizational culture and then analyzes how this culture shapes how the institution reacts to, and acts on, external pressures and constraints (Barnett and Finnemore 2004; Chwieroth 2008a, 2008b). For our purposes, this translates into micro-analysis of the Fund, with specific attention paid to its organizational culture, norms, and notions of policy legitimacy.

One theme of note found in this book is that established organizational culture and subsequent policy direction do not change quickly or easily. As highlighted by Momani (2007), “organizational theorists contend that individuals resist change because they fear the unknown, have selective attention to and retention of new information, prefer habit and routine, need the security of the known, and feel threatened by change.” Resistance to change manifests at the organizational level “because there is a lack of trust, differing perceptions and goals, social disruption with change, a limitation of resources to devote to change, and most importantly change requires a change in the organizational culture” (2007: 147).

Yet, despite inertia meeting swift reform efforts, constructivists also highlight that IOs are never static entities. Vetterlein (2010: 98) highlights four IO features that, over time, subject them to change. These are: (1) shifting relationships with powerful state principals; (2) the fact that the institution’s original institutional mission evolves due to changing realities in the international system; (3) modifications in formal organizational structure; and (4) less observable alterations of informal organizational culture. Several variables that can change internal culture and policy choices are also identified. Foremost is the role of “norm entrepreneurs.” That is, individuals pushing a new idea will command the greatest influence if they occupy a position within the bureaucracy that: has access to management; can serve as a veto point for policy initiatives; and has access to resources. Staff and management also maneuver through the organizational bureaucracy, promoting new beliefs that can potentially alter the organization’s culture and practices (Chwieroth 2008a: 492–4). As summarized by Hibben (2016: 71–2), these individuals promote their agenda through three primary strategies.

First, they interpret historical experience through the assumptions and worldviews that will support their ideas, and they actively search for evidence that will reinforce their beliefs. Second, these actors may also engage in small-scale experiments to test their assumptions (Levy 1994: 293–4). Third, individuals that promote change will also engage in strategic ideological battles to win support for their ideas (Nielson, Tierney, and Weaver 2006: 114).

Park and Vetterlein (2010) also present a model for the study of IMF policy formation and change through the concept of a “norm cycle,” in which policy norms are reflexive and represent shifting collective understandings of how the world works by various actors, both within and outside the institution (2010: 3–26). Moreover, a norm gains traction and stabilizes only if it first is granted legitimacy: the degree of legitimacy granted to a new norm and the subsequent chances for policy reform are predicted by examining three constitutive components. The norm has (1) “formal validity” if it has been integrated into the IMF’s “Articles of Agreement, its operational strategy, and/or is included in Fund … loan contracts” (2010: 6). More informally, a norm has (2) “social recognition” when it is accepted by actors as the right thing to do. At the policy level, a norm has (3) “cultural validity” when expressed in programs at the local level. Once accepted as legitimate, patterns of behavior around the norm emerge, and are reinforced through new policies tied to the broad-based shift in thinking. Over time, the norm becomes institutionalized in the organizational culture.

Park and Vetterlein identify three variables that undermine legitimacy. First, space for debating new ideas occurs when there is a critical mass of elites who agree that an economic or policy program has failed. Second, an unexpected external shock can undermine taken-for-granted assumptions. Third, “mass condemnation” that occurs in conjunction with acknowledgment of past policy failure in addition to an external shock can facilitate the acceptance of new ideas and approaches. Thus, in this scenario, once a policy position norm or idea comes under question, actors (i.e. staff, management, NGOs, or states) use mechanisms of persuasion, arguing, shaming, and negotiation to push for reform. Best (2007, 2014) also contends that IMF post-Washington Consensus reform stems from multiple policy failures that have challenged the IMF’s “expert authority.”1

Best argues that a shift in IMF legitimacy is underway, where the narrowly defined “expert-based” form is being replaced by a “political” form. This has produced four broad governance strategies that impact policy choices: (1) fostering country ownership, (2) developing global standards, (3) managing risk and vulnerability, and (4) measuring results (Hibben 2016: 5). Moschella (2010) offers an additional model to predict Fund policy shifts on the basis of this theme of legitimacy. According to Moschella, we can expect change to occur when gaps open between “the institutionalization of specific economic ideas in the Fund’s policies” and “the acceptance of these policies by the actors of its social constituencies of legitimation” (2010: 27). Specific to the IMF, Moschella identifies three constituencies that legitimate norms and policy choices. The first is member states. While the Fund exhibits a high degree of autonomy in its daily operations, as an intergovernmental organization (IGO), it ultimately must have support from member states. Hence, a norm or economic idea that fundamentally challenges the position and interests of powerful states is not expected. The second constituency involves private market actors. As highlighted in chapter 8, the third constituency involves academic economists and the economics profession more broadly.

A final theme we apply is drawn more directly from sociological organizational theory. As summarized by Weaver (2008: 28–30), Nils Brunsson’s theory of “organized hypocrisy” captures the dynamic that occurs when external demands exerted on an organization conflict with internal norms:

two organizational structures evolve. One is the formal organization, which obeys the institutional norms and which can easily be adapted to new fashions or laws … A quite different organizational structure can be used in “reality,” i.e. in order to coordinate action. The second type is generally referred to as an “informal” organization … Organizations can also produce double standards or double talk; i.e. keep different ideologies for external and internal use. The way management presents the organization and its goals to the outside world need not agree with the signal conveyed to the workforce. (Brunnson as cited by Weaver 2008: 29)

Weaver, in her application of this framework to the study of the World Bank reform, warns that organized hypocrisy “may result in rhetorical shifts in stated goals, symbolic rules, and structures that may actually become further disconnected from the internal norms and standard operating procedures that inform the daily activities of staff. This will perpetuate behavioral hypocrisies and confound well-intentioned reformers” (2008: 178).

Drawing from Brunnson and Weaver, a 2016 study of IMF structural lending published in the Review of International Political Economy explains the current inconsistency of the institution as the by-product of what the authors describe as “institutional hypocrisy” (Kentikelenis, Stubbs, and King 2016). For Kentikelenis et al., the gap between IMF discourse focused on social issues (e.g. inclusive growth) and its actual practices is glaringly inconsistent. As such, the IMF is “invested in the maintenance of a myth about its actual practices. This occurred through the rebranding of existing practices and the addition of token gestures to placate critics, without altering the underlying premises of reform design. In short … the maintenance of business-as-usual practices became tenable only by adding ever-more layers of ceremonial reforms and rhetoric” (2016: 547). In our analysis of the Fund, this theme is central to understanding what’s wrong with the IMF. The disconnect between word and deed undermines trust in the IMF and potential positive reform efforts.

What is the IMF and how does it operate? Formal governance and organizational culture

The IMF came into force on December 27, 1945. Article I includes the following “purposes”:

(i) To promote international monetary cooperation … (ii) To facilitate the expansion and balanced growth of international trade … (iii) To promote exchange stability … and to avoid competitive exchange depreciation … (iv) To assist in the establishment of a multilateral system of payments in respect to current transactions … and … elimination of foreign exchange restrictions which hamper the growth of world trade. (v) To give confidence to members by making the general resources of the Fund temporarily available to them … to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity … (vi) … to shorten the duration and lessen the degree of balance-of-payment disequilibria. (IMF 2016b: 2)

Located in Washington, DC, the IMF currently is made up of 189 member states. Members are assigned a currency contribution, or quota, when they first join the Fund, determined by the relative size of the economy and engagement with international trade. Quota share determines how much the member state must contribute when initially joining the institution. Once the overall currency contribution is established, the initial 25 percent of the quota must be paid in hard currency. Referred to as the “reserve tranche” or “first tranche,” these resources can be accessed by a member state without any conditionality requirements. The remaining three quarters (“upper credit tranches”) are generally only granted with conditionality (Hibben 2016: 31).

Quotas also set the limit on how much a member can borrow from the Fund. For non-concessional loans, this currently stands at 145 percent of a member’s quota annually, and 435 percent cumulatively. In addition, the quota size determines the voting power of the member. As of 2017, the United States has the largest quota and percentage of votes (16.53 percent) at the Fund and holds veto power over significant policy reform. This is followed by Japan (6.16 percent), China (6.09 percent), Germany (5.32 percent), France and the United Kingdom (UK) (both 4.04 percent), Russia (2.59 percent), and Saudi Arabia (2.02 percent) (IMF 2016a).

Quotas were initially denoted in US dollar equivalents and were replaced with Special Drawing Rights (SDRs) in 1969. The value of the SDR is currently determined by a basket of four currencies (euro, yen, pound sterling, and US dollar). One unit currently hovers around the equivalent value of $1.40.2 Member states use SDRs to access hard currency through two mechanisms. They can voluntarily exchange SDRs for usable currency with another member, or the IMF can designate states with balance of payment surpluses to buy SDRs from those with payment deficits. Quota shares are reviewed approximately every five years and any change must be approved by 85 percent of the total voting power in the IMF (Hibben 2016: 31).

Along with quota subscriptions, two programs are implemented on an ad hoc basis to supplement Fund resources for lending purposes. The General Agreements to Borrow (GAB), established in 1962, allow the IMF to borrow up to $27 billion from eleven industrial countries on a short-term basis. The New Arrangements to Borrow (NAB) are available to supplement quota resources in times of financial crisis. Created after the 1997 Asian crisis, the NAB currently involve thirty-eight member states that have committed $225 billion in resources to the arrangement. Since the 2008 crisis, the NAB have been activated six times (IMF 2016c).

Decision-making via voting takes place at two levels in the IMF. The Board of Governors is comprised of finance ministers or central bank heads of each of the 189 member states. The Board of Governors retains the right to vote on policies including quota increases, SDR allocations, member admittance and withdrawal, and amendments to Fund Articles of Agreements and By-Laws. This body meets twice a year, at the fall Annual Meeting and the Spring Meeting. The majority of its business is allocated to the International Monetary and Financial Committee (IMFC), which “monitors developments in global liquidity and the transfer of resources to developing countries; considers proposals by the Executive Board to amend the Articles of Agreement; and deals with events that may disrupt the global monetary and financial system” (IMF 2016d). Finally, the Development Committee, made up of Fund and World Bank members, is tasked with advising both institutions’ Board of Governors on economic development issues in emerging and low-income developing states (Hibben 2016: 32).

Day-to-day operations are delegated to a twenty-four-member Executive Board whose executive directors (EDs) are elected or appointed to two-year terms. Eight appointed EDs currently represent individual countries with the largest quotas (the US, Germany, France, United Kingdom, Japan, China, Russia, and Saudi Arabia). The remaining 16 EDs represent 181 members. The managing director (MD) is appointed by the Executive Board, serves a five-year term, and by convention is European. Christine Lagarde serves as the current MD, and was re-elected for a second term to run from 2017 to 2022. The MD is assisted by the first deputy MD (by convention an American) and three deputy managing directors. The most senior member of the IMF staff, the economic counsellor (currently Maurice Obstfeld), serves as the head of the Research Department. Finally, the Independent Evaluation Office (IEO), founded in 2001, sits outside the IMF and conducts reviews of Fund policies and programs (Hibben 2016: 32).

The Fund staff (approximately 2,400 individuals) is distributed across eight functional and five area departments. Functional departments are: Finance; Fiscal Affairs; Institute for Capacity Development (ICD); Legal; Monetary and Capital Markets; Strategy, Policy, and Review; Research; and Statistics. Area departments are: African; Asia and Pacific; European; Middle East and Central Asia; and Western Hemisphere. Staff members are formally involved in three primary activities for member states: monitoring economies, short-term crisis lending, and capacity development (CD). With regard to the first of these, and explored further in chapter 3, members agree to collaborate with the IMF and one another to promote international economic stability. The Fund is charged with monitoring individual member economies (“bilateral surveillance”) and reporting on global and regional economic trends (“multilateral surveillance”). Bilateral surveillance is accomplished through Article IV Consultations. IMF staff travel to member states to evaluate monetary, fiscal, financial, and exchange rate policies and to meet with stakeholders to discuss future policy direction. Upon the staff’s return to the IMF, an Article IV is filed with the Executive Board, including comments from country officials. Multilateral surveillance efforts include publication of the World Economic Outlook (WEO), the Global Financial Stability Report (GFSR), the Fiscal Monitor (FM), and a series of regional economic reports (Hibben 2016: 32–3).

IMF lending, the focus of chapter 4, is divided into concessional and non-concessional categories. Concessional loans are designed for low-income countries (LICs) and reflect policy commitments developed through a Poverty Reduction Strategy (PRS). Non-concessional lending arrangements with member states are facilitated through a letter of intent (LOI). Through the LOI process, Fund staff meet with country authorities and draft what the government plans to pursue in return for financial support. Although the Executive Board formally approves or rejects lending arrangements, staff are granted considerable autonomy in setting and monitoring agreements with members (Hibben 2016: 34).

Capacity development, the focus of chapter 5, consists of technical assistance (TA) and training. Capacity development examples include effective monetary and fiscal policy design and implementation, banking systems, taxation reform, financial systems, fiscal management, and foreign exchange policy. Funding for TA makes up approximately one fifth of the Fund’s operating budget, with two-thirds of these resources provided by external sources.

How did we get here? A brief overview of the IMF and its beliefs

The origins of the IMF stem from four primary tendencies that dominated international political economy in the interwar period (1918–39) and during World War II (1939–45): widescale interstate conflict; global depression and economic volatility; “beggar thy neighbor” protectionism and currency devaluation following the abandonment of the gold standard; and the rise of center-left Keynesianism in democratic capitalist states.

The United States and Britain led negotiations with allied states at the end of World War II and created the Bretton Woods system. To encourage trade liberalization, states committed to reducing protectionist barriers through the multilateral framework of the General Agreement on Tariffs and Trade (GATT).3 Currency stability would be re-established through a flexible gold standard arrangement built around IMF monitoring and support. States pegged their currencies to the US dollar, convertible at $35/ounce, and agreed to hold exchange rates within 1 percent of this level. With IMF consultation, member states could correct a “fundamental disequilibrium” by a currency devaluation of up to 10 percent. Rather than be reliant on private creditors, states contributed to an IMF-monitored stabilization fund designed for countries to finance temporary balance of payment deficits. These policies would substitute for harsh domestic austerity adjustments, as seen under the classic gold standard. Finally, states could control short-term capital flows as deemed necessary, facilitating individual state autonomy in instituting monetary and fiscal policy that would support full employment policies and the subsequent stability needed for long-term liberalization (Hibben 2016: 44).

The evolution of several normative frameworks and formal policy positions during the Bretton Woods era (1945–73) set the stage for more contentious policy positions during the Washington Consensus era (1982–99), and even today. First, the IMF adopted the notion that lending to states suffering from balance of payment crises required some form of conditionality, a position explicitly rejected by several prominent IMF founders, including John Maynard Keynes.

Second, by the early 1950s a norm developed that control of inflation, rather than a focus on employment, was the key variable that IMF policy should address in its dealings with member states in economic difficulty. Related to this norm was the development and application of the Polak model, starting in the late 1950s. This model focused attention on the level of domestic consumption relative to economic output and advocated for deflationary policies to correct balance of payment deficits. As the IMF expanded short-term lending to developing countries in the 1950s and 1960s, the Polak model was integrated into conditionality (Polak 1997).

Third, the IMF moved away from traditional Keynesianism and adopted positions tied to “neoclassical synthesis.” Often described as “technocratic” Keynesianism, or what Jacqueline Best (2004) describes as a “hollowed out” form of Keynesianism, the neoclassical synthesis argued that while markets were prone to short-term market failure, they were generally self-correcting in the long term. Within the Fund, this translated into increased skepticism toward regulatory schemes (e.g. capital controls) and an emphasis on limited monetary and fiscal policy intervention to manage economic downturns (Hibben 2016: 77).

The Bretton Woods system ended in 1973 when the US abandoned the modified gold standard and ushered in a new era in which advanced economies adopted floating exchange rates (Frieden 2006). Several key trends are of note from the demise of the Bretton Woods system until the Mexican debt crisis of 1982. First, an institutional focus on chronic balance of payment issues moved to the center of the IMF policy agenda. By the mid-1970s, the IMF’s main policy interventions were in the world’s poorest states, deemed too risky for private investment. The consolidation of structural conditionality as a policy norm also emerged in the 1970s. Structural conditionality focused on reforms of national economies and their legal systems. This broadened IMF influence beyond macroeconomic policy.

By the late 1970s, two economic schools tied to a rightward ideological shift gained traction in the IMF. Monetarism, tied to the works of the Chicago School of economics, advocated for a conservative monetary and fiscal policy position.4 However, new classical economics, according to IMF historian James Boughton, proved more influential at the IMF (Boughton 2004). New classical theory rejected the notion that markets and prices only clear over medium and long time horizons. Rather, rational, utility-maximizing individuals and firms constantly adjust to changing market conditions to maximize profit or utility. The aggregate effect of individuals and firms acting rationally and in “real time” quickly balances supply and demand and guarantees that prices accurately reflect underlying fundamentals (Muth 1961).

During the 1980s, themes pulled from new classical economics and monetarism were strongly integrated into IMF policy positions concerning monetary and fiscal policy. Relative to structural reform, IMF conditional lending focused primarily on dismantling the state-heavy development strategy of import substitution industrialization (ISI) popular in non-communist developing states between the 1930s and early 1980s. The impetus for replacing ISI with a liberal development model can be traced in part to the influential work of Anne Krueger. Krueger’s “The Political Economy of the Rent-Seeking Society,” published in 1974 in American Economics Review, modeled the adverse effects on growth when actors compete for import licenses. Krueger argued that non-tariff trade restrictions create substantial economic rents since they legally grant monopolistic control of market share to favored or politically connected actors. She highlighted that we should expect hard-fought competition for these rents (“competitive rent seeking”) that misallocates resources in the formal economy and incurs a subsequent welfare cost additional to that caused by tariff restrictions (Hibben 2016: 119–20).

Krueger, who went on to serve as the World Bank’s chief economist (1982–6), first managing deputy director of the IMF (2001–3; 2005–6), and interim MD of the IMF in 2004, helped catalyze a series of additional works focused on dismantling ISI (Hibben 2016: 120–1). IMF skepticism toward protectionism and state intervention was also reinforced by the contributions of Robert Bates. Bates, in Markets and States in Tropical Africa