Reforming the International Monetary Fund
| Date | 01 February 2012 |
| Published date | 01 February 2012 |
| DOI | http://doi.org/10.1111/j.1758-5899.2011.00105.x |
| Author | Ross P. Buckley |
Reforming the International
Monetary Fund
Ross P. Buckley
The University of New South Wales
Abstract
This article explores the International Monetary Fund’s performance through crises ranging from the debt crisis of
1982 to the global financial crisis of 2008. The rise of market fundamentalism in the Fund’s policy prescriptions is
analysed and contrasted with its abrogation of market principles in crafting resolutions of crises. Potential reforms to
voting rights, culture and perspectives within the Fund are considered, along with what may be required to achieve
such vitally needed changes.
The principal criticisms of the International Monetary
Fund (IMF) centre on its addiction to neoliberalism and
insistence on smaller government and an increased allo-
cative role for markets (Meltzer, 2000; Vines and Gilbert,
2004). It is therefore reasonable to assume that markets
have figured prominently in the IMF’s policies and prac-
tices and that the global financial crisis (GFC) has poten-
tially shaken the belief of the IMF in the efficiency of
markets. It is a reasonable assumption but wrong on
both counts.
One of the principal challenges in reforming the IMF is
to embed important market principles and practices;
specifically, to let the market allocate losses among
borrowers and lenders when loans go sour. This market
discipline has been notably absent from our system of
global financial governance since 1982. In allocating
losses in times of crisis, the IMF has never allowed
market principles to govern.
1. How the IMF has consistently abrogated
market principles
The multilateral system of international financial gover-
nance, with the IMF at its centre, works to reward the
international commercial banks and elites in developing
countries, at the expense of the common people in debtor
countries. It does this by only applying market principles
and disciplines selectively. The market is allowed to oper-
ate unimpeded when it is delivering profits to the interna-
tional banks and elites in developing countries, and its
operation is interfered with grossly when market forces
would impose massive losses on the banks.
A few examples will suffice to demonstrate this
dynamic. After the 1982 debt crisis struck, a mechanism
was needed to allow hundreds of creditors to negotiate
with multiple debtors in each nation. The commercial
banks appointed steering committees of six to eight
banks to represent all creditors, and persuaded the
sovereign to represent all debtors within its jurisdiction
(including state governments, state-owned industries
and private corporations). This was sensible. The banks,
however, went further and persuaded debtor nations to
bring all debt incurred by all entities within their jurisdic-
tion under their sovereign guarantee (Buckley, 1999).
This was unnecessary and, from the perspective of the
people of the debtor nations, appalling. The inevitable,
massive shortfall between what the sovereign now owed
the bank creditors and what it could recover from the
original debtors was added to the nation’s debt. The
people paid in reduced services or higher taxes so that
the foreign banks could receive a free credit upgrade on
most of their assets (Marichal, 1989).
Likewise after the Asian economic crisis, the IMF and
foreign commercial banks insisted that Indonesia assume
the obligations of the local banks to foreign lenders, and
then recover the funds from the local banks. Recovery of
such sums from insolvent Indonesian banks was always
going to be extremely difficult, and eventually only about
28 per cent of the total liabilities assumed were recov-
ered (Asian Development Bank, 2009). Accordingly,
almost three-quarters of the costs of repaying these
foreign loans were borne by the Indonesian people, and
for no good reason. The market mechanism, if left to
work, would have seen many Indonesian banks made
bankrupt by their western creditors who would have
recovered portions of their claims in the bankruptcy.
Instead, the creditors were repaid in full, insolvent local
banks were bankrupted by Indonesia, and the Indonesian
Global Policy Volume 3 . Issue 1 . February 2012
ª2011 London School of Economics and Political Science and John Wiley & Sons Ltd. Global Policy (2012) 3:1 doi: 10.1111/j.1758-5899.2011.00105.x
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