杜哲浩:国际货币基金组织——大国操纵的工具? @大外交智库·第11期

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大外交·青年智库

让壹亿中国大外交青年智慧被全球看见

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Glory Diplomacy

Ny.2021/ No.72

Structural and functional problems of the IMF and a way to reform

Zhehao DU（杜哲浩）

Youth Think-tank Of The Glory Diplomacy

As the centre of the international monetary system, the International Monetary Fund has suffered much criticism for its malfunction and used as a political tool of the U.S. (Vreeland, 2006) To offer a constructive way of reform, this essay will trace back to the nature of the Fund, what roles and functions it was designed to perform, its organizational structure and what problems it currently has.

Functions and structure of the IMF

When the world economy enters into the situation of the Great Depression, countries will try to devalue their currencies to boost their competitive advantage against their trading partners. This competitive devaluation is an example of the beggar-thy-neighbour policy that when a country lowers its currency value relative to other countries, making its products cheaper and increase its exports to receive more money. However, the trading partners would respond by devaluing their currencies, creating a vicious cycle(Gutner, 2016), which is an extreme situation. The more common one is that a country could be buying more from the world than selling, and since it pays the imports in hard currencies, this trade deficit means that the central bank of this county is low on hard currencies, which is the balance of payments problem(Blustein, 2003). In order to prevent the country from devaluating its currency keeping the exchange rates stable, the IMF was designed to give the country short-term loans to deal with the payment imbalance problem, at the meantime, attaching conditionality to the loans that the recipient country should apply specific policy changes that the Fund deems necessary for its economic health(Gutner, 2016). Besides provides emergency loans for a country in economic crisis, the Fund also has a role of surveillance, to foresee the global economic crisis and prevent it from happening, it monitors the global economy and member state's policies for economy and finance by issuing a report annually to address the economic situation and assess the domestic macroeconomic policies for each member state(Moschella, 2012).

When a country joins the Fund, it would be assigned a quota, based on its GDP, openness, variability and reserves, determining how much money the member can get from the Fund and its voting power. The Fund is formally accountable to the member states that every member state is represented on the Board of Governors, which oversees the Fund's functioning(Woods and Narlikar, 2001). The Board of Governors delegates most of the decision-making authority to the Executive Board that consists of 24 directors who are appointed or elected by the BOG(Vreeland, 2006). The voting system consists of basic votes that every member has the same vote, and a more significant part that each member's vote is weighted based on its quota and major decisions, like the change of quota, require 85% votes(Woods, 2014). In daily functioning, the EB seldom makes decisions from the formal voting but practice the formation of consensus to minimize the confrontation and promote agreement on the decisions(Driscoll, 1992).

The Fund's structural problems

The widespread criticisms are originated from the deviation of the Fund's practice from the design purposes. To better understand the reasons for this deviation, it is needed to analyze the Fund's structural problems behind its practice. This section will address the member states' power distribution problems, the bureaucratic agency itself, private financial institutions' influence and the ideational belief. The Fund is often criticized for being a tool of the U.S. foreign policy, and evidence suggests that countries that receive U.S. aid tend to be 39% more likely to receive IMF programs with fewer categories of conditions(Stone, 2008). Apart from the U.S. having a 17.44% quota share today, which gives it veto power over major decisions, the U.S. dominant influence could be explained by principal-agent and informal governance theories.

International organizations operate on the formal rules embodied in the procedures and the informal rules that would allow influential countries to have exceptional power. The danger of the delegation is the system been captured by the most powerful state. In ordinary situations, the organization itself produces predictable policies that reflect the most potent member's consensus with a degree of discretion. When the organization's long-term strategic objectives override the interests of the U.S., it may intervene and even temporarily take control because the informal governance practices would grant it decisive influence and does not require the exercise of formal power leverage. Other leading states would choose to tolerate these behaviours as long as they are not frequently exploited, as this tolerance would make the institution more valuable to the U.S. so that it may not choose the outside options and knowing that their interests would not conflict with the U.S in most cases(Stone, 2008).

Principal-agent theory suggests that the agents are subject to their principals' constraints but will pursue their interests. (Kiewiet and McCubbins, 1991). The principals will try to control their agents while inevitably leaving some degree of agency slack(Hawkins et al., 2006), which is more severe in a common agency. The common agency acts on behalf of the collective principles, comprised of the largest shareholders. Therefore, the largest shareholders of the Fund de facto control the Executive Board acting as its political principal. Their preference heterogeneity is a crucial determinant for the loans and conditionality. The variations of the lending are based on the relative influence of the principals. When the recipient country is vital to the principals, the heterogeneity among them would determine the variation. If their interests are less intense, the staff's influence and autonomy would be more significant, and the agent could exploit this situation to pursue their interests. The Fund may seek more significant resources for itself. The agency slack can be decreased in the situation that the principal has a significant interest in a decision, creating a strong incentive of monitoring the behaviour of the agent (Copelovitch, 2010). The sufficient autonomy would create a problem of the democratic deficit that the Fund and other international organizations may pursue a type of "undemocratic liberalism." (Barnett and Finnemore, 2004)

Therefore, apart from the powerful member states' influence, the staff within the bureaucracy and its culture also play a vital role. The chain of command for each program is long, and it is the technocrats who guide the lending discretion since the letter of intent send from the borrower country are prepared by the staff in negotiation with the local official, and they also engage in the routine surveillance. As the chain of command stretched long, some degree of control would be lost at each link of the chain(Vreeland, 2006). The staff face pressures to design programs that can be approved so that they are inclined to maximize the amount of the loan by reporting growth projections and the effect to make a larger loan possible(Woods, 2014).

The Fund officials have seldom been held accountable for their mistakes(Weisbrot et al., 2009). The accountability of the Fund is held according to the percentage of the votes that smaller percentage of the votes a member control means less influence it has(Vreeland, 2006), resulting in less motivated this member would be to monitor the officials and staffs' activities. The governments that can control the Fund also lack the incentive to hold it accountable for the mistakes that only impact other less developed countries. Furthermore, due to the lack of transparency for the policy formulation process, it is unclear who is responsible for their policies' negative outcome(Weisbrot et al., 2009). Besides the actors who constitute the Fund, private financial institutions can exercise direct influence on the Fund. A country's balance of payment problem may be so severe that a loan from the Fund alone would not be enough, so that the Fund may need help from private financial institutions putting them in a position that could shape the Fund's program to put them as the priority of the payment order(Vreeland, 2006).

Furthermore, the Fund's ideational structure is embedded in the neoliberal ideology to the degree of abiding faith that its conditionalities prescribed to the recipient states are dominated by the pro-market policies regardless of the actual outcomes(Peet, 2009). When an institution faces new challenges, it will dash in using the tools it has, which would narrow the consensus within the institution. This narrowed consensus could become a dangerous trap that would lead them to fixate on a particular interpretation of events and filter the alternative scenarios(Woods, 2014). The Fund's expertise would prevent it from developing a comprehensive understanding of the relation between the financial sector's weakness and global economic stability. Therefore, the Fund is dominated by the principles from the frameworks of the U.S. and the U.K. (Moschella, 2011)

The Fund's functioning problems

The core functions of the Fund are the loans, conditionalities and surveillance. This section will analyze how and why the loans and conditionalities may hurt the recipient countries and the surveillance's failure not to foresee the 2008 Crisis. Providing loans for a country with the balance of payment problem is the Fund's primary role, which creates a moral hazard problem. The existence of an international lender of the last resort would generate a kind of confidence in the international capital market, encouraging countries of implementing over-expansionary policies. Therefore, lowering a government's incentive to avoid the problematic economic policies that caused the crisis in the first place(Commission, 2000). Furthermore, the Fund is also been criticized that its loan lendings are not to maintain global stability but to pursue the financial community's interest. When the Fund extends the loan in a crisis country, its currency exchange rate will maintain relatively stable, which buys time for the foreign financiers and domestic elites to exchange their money for hard currency and get out of this country through the liberalized market imposed by the conditionality. After this, the currency will be devalued, leaving the debt of repaying the loan with the devalued currency to labour and the poor(Stiglitz, 2002).

The most controversial part of the Fund is the conditionality, which mainly consists of two types macro-conditionality and structural conditionality. The former is about cutting government spending and raising taxes to reduce the budget deficit, raise central bank interest rates, and place ceilings on credit creation to reduce the money supply and devaluate the national currency. Moreover, the latter is any condition that is not a quantitative target(Office, 2008), such as good governance, the rule of law and corruption. The outcomes of the Fund's programs are creating more long-term dependency and failing to improve the recipient countries' economic conditions, even doing more harm to them(Peet, 2009).

Empirical evidence suggests that the governments under loan conditions make wage bill cuts in the public sector, but when the conditionality is lifted, the public spending will increase, appeasing the domestic constituents(Rickard and Caraway, 2019). Therefore, the conditions fail to produce long-term reform in the public sector, but the effects are important, reducing essential public services like healthcare and education(Forni and Novta, 2014). For instance, in West Africa, the most exposed area in Africa to the Fund's programs, the conditionality reduced the government health expenditures(Stubbs et al., 2017). A more severe consequence of the structural adjustment programs is that they would systematically create winners and losers, giving the latter incentive to engage in civil conflict. The programs create a rate of generating new losers within a country with weakening powers and incapable of contending, leading to reduced opportunity costs of the conflict initiation and the rise of the risk for civil war(Hartzell et al., 2010). To be more precise, a state leader's decision of receiving a Fund's loan would provide information for the public that the leader's ability to redistribute wealth in the future is weakened by redistributing income away from the poor, and information to the elites that their expected value of rents would be reduced, giving elites the incentives of launching a coup(Casper, 2017). Therefore, the programs would foster dissent among broad sectors of society within a country and endangering stability.

The conditionalities' design is under the belief of the best-practice model that a unique set of institutional arrangements as the best practices is possible to be ex-ante settled(Abbott et al., 2010). Furthermore, the current policy thinking adopts a "shotgun" approach to reform, believing that any reform is good, reform the more areas and deeper the better(Hausmann et al., 2005), the policy's content is dominated by the neoliberal belief of the market. The policies adopt little role for the non-market solutions, which assumes the market itself will correct all problems in the long term, but the Fund itself is a non-market solution for a market failure(Stiglitz, 2002). Furthermore, the fact is that many growth "miracles", especially in Aisa, have demonstrated heterodox institutional arrangements(Hausmann et al., 2005). Moreover, most of the growth acceleration is not the result of reforms but small-scale changes, which means that some country-specific constraints may be the factors blocking the economic growth(Abbott et al., 2010). According to the second-best theory, a small number of focused policy intervention will significantly impact the growth than the traditional believed long list of reforms. It is pervasive in a market to have imperfections and distortions. Changing an arbitrarily chosen distortion may reduce welfare. And the only way to ensure the effectiveness of reform is performing a wholesale reform, which is not viable as it requires comprehensive information of all the distortions within the economy. Therefore, a marginal reduction in one distortion can directly affect welfare depending on the extent of the constraint linked with this distortion. The distortion binds the more constraints, the larger the direct effect would be(Hausmann et al., 2008).

The Fund also failed to deliver another minor function, to anticipate the 2008 crisis. The reason for this malfunction is that the Fund neglected the effect of a sharp downward turn of housing prices to banks and other financial institutions(Joyce, 2012). It failed to draw the link of the risk across different sectors and underestimated the macroeconomic consequence of the financial sector spillover. Moreover, the surveillance to detect the domestic policy problems may have the risk of undermining the state's stability(Moschella, 2011).

The difficulties and aspects to reform

As demonstrated above, the problems for the Fund lies within both the structure and function. This section will address some difficulties to reform and how to reform some aspects of the Fund. The Fund's problems are easy to identity, but the real problem is the difficulty to produce a feasible alternative architect for the Fund. This is because of the lack of a secure theoretical or empirical basis on which the reform could be based. The ideational structure of the Fund constructed by the faithful belief for the neoliberal ideology and the current lack of compelling ideological alternative, and as it is a novel invention in human history, it is challenging to find a clear path for the reform. Therefore, the "learning by doing" approach means that it is inevitable to make mistakes, which should be acknowledged by the Fund when they happen. Furthermore, the reform process can be promoted when there is a strong institutional commitment, which is difficult to achieve because of the complexity of the issues and legitimate grounds for debate(Bird and Rowlands, 2010).

As for the political structure of the Fund, the core problems come from the voting distribution and the bureaucracy. As the surrender of the decision-making power to the Fund is, in effect, the surrender of a level of economic sovereignty, the distribution of quota shares should reflect the extent of this sacrifice(Virmani, 2012). The vote distribution should not mainly be based on the GDP as it tends to undervalue the non-tradable services from the developing countries(Vreeland, 2006). This better representation for the developing world could be a double-edged sword. There is the risk of diluting the incentives to monitor the Fund should the controlling power be decentralized(Vaubel, 2006). It could simply replace the previous governments' political interests with other large countries(Copelovitch, 2010). As the voting power get more evenly spread, the agency slack might increase due to the enhanced preference heterogeneity within the EB. The voting reform could promote the bureaucratic politics in the Fund's lending decisions. It should be coupled with implementing a more powerful Independent Evaluation Office to assess the effectiveness within the bureaucracy and hold the staff who make mistakes accountable.

Therefore, the gradual moving away from using quotas as a foundation for the organizational structure might improve the Fund's efficiency(Bird and Rowlands, 2006). The quota system is one of the core resistance to fundamental reform and serves mutually inconsistent purposes. The system is designed to function as a credit union, the Fund's initial purpose, but since its nature has been changed, there exists a clear bifurcation between the countries that provide resources and the countries that draw from it(Bird and Rowlands, 2010). Moreover, we are not at the stage that simply changes the voting shares could make a difference as the developing countries tend to go along with the U.S. decisions, even against their interests(Weisbrot and Johnston, 2016). Therefore, the quota system cannot reflect the changed reality so that different formulas to determine the rights of voting, drawing, and subscription should be formulated. One way to lay the foundation of this change is by reforming the financing model of the Fund as the old one is reliant on both the income from the borrowers and lenders. It is currently dependent on the borrower payment and the funding from powerful nonborrowing members, making the crisis countries beholden to the Fund and empowering more influence to the powerful members. Therefore, the alternative should reduce this dependence on them by endowing and broadening the investment authority of the Fund to secure more autonomy over the control of its resources without depending on the member states' decisions. The key is a capital increase to enable the Fund to deal with the crisis without the loans from powerful countries and the financial community(Woods, 2010).

Furthermore, the Executive Board should be expanded, allowing more representatives from the recipient countries. The Managing Director should solely be selected based on merit instead of using European background as a prerequisite. It is vital to increase the transparency of the Fund, which could promote the accountability of the Fund, help to deal with the problems of the conditionality and noncompliance by oping the debate to transform the policy prescriptions(Stiglitz, 2002). It is better to scale back the conditionality and narrow the focus towards data collection and surveillance, and the lending should temporarily address the severe crisis. The Fund should withdraw from the development finance since the data suggests the programs have a negative impact of delaying reforms(Meltzer, 2000). Furthermore, surveillance should be promoted as it plays an insurance role exhibiting a significant political economy influence, which could help to improve the financing conditions for countries in financial distress(Fratzscher and Reynaud, 2011).

The problems of the Fund are the powerful-countries-controlled structure and the policies that reflect their interests. Therefore to reform the Fund, it is vital to promote transparency, representativeness and also the autonomy of the Fund to lay the condition for changing the Fund back to its original role as a place to deposit surpluses that can be withdrawn as emergency loans(Peet, 2009) and surveillance, but not as a political tool to reflect both the interest and ideological dominance of the powerful states.（作者杜哲浩系大外交青年智库研究员、山东政法学院新加坡研究中心研究员；观点不代表平台，转载请务必联系作者及平台授权）

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大外交智库即大外交青年智库（Youth Think-tank Of The Glory Diplomacy，简称Glory Diplomacy 或GD）是一家创办于2017年的以外交为主的综合性战略研究机构，创始人是王盖盖。2020年，大外交智库又在中国深圳成立专门咨询公司，目前已成研究青年外交与青年发展、国际关系与国际组织、跨国企业与全球治理等事务的综合性全球思想库。

此前，大外交智库聚焦在二十一世纪中国与全球大外交领域的青年原创方案、青年发展计划和青年外交延伸的助力与服务，推动大外交青年智库在对照全球外交发展、对接世界高端智库、对比新型平台建设的三原则下为中国大外交的发展贡献青年力量和方案，也特别提倡、鼓励并支持大外交领域内青年大胆原创小心求证来实现价值增值，以期实现全球青年价值最优，从而聚集了全球各地区有志青年一起在当今时代为实现个人、社会和国家发展目标而奋斗。

因此，大外交智库自创办以来一直致力于让壹亿中国大外交青年的智慧与方案被全球看见，效果非常明显，被海内外青年誉为现代智囊的“青年精英大脑集中营”，是中国大外交新型青年智库的开创者和代言人！

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