In this new paradigm, as in the neoliberal model at the national level, the market takes the predominant role. This means that commercial capital flows1 (described in Table 1) are, as far as possible, allowed to operate freely, while the role of public sector institutions (including the IMF and the World Bank) is to help the market to operate effectively and to intervene directly only where it fails to operate.
For countries with ready access to commercial flows this implies a relatively limited role for the Bank and Fund. Such countries have recently included the major economies of Latin America and East and South East Asia (at least until the 1997-8 East Asian financial crisis). In these countries, the role of the Bank is likely to be limited to project support for purposes for which commercial finance is unavailable (eg., health, education and environmental protection). In normal times, the IMF has no role beyond its regular monitoring function. When a crisis arises, however, these roles change, and the IMF and the World Bank are at the centre of financial support packages.
In some other countries, the IMF and World Bank help to encourage commercial flows. IMF programmes provide a "seal of approval", which is intended to act as a signal to private investors that the country is following good economic policies; and the World Bank provides partial guarantees for commercial finance to reduce the risks for investors and loans for projects in the private sector. The aim is primarily to mobilise commercial flows to these countries rather than to provide finance directly.
In many countries, especially low-income countries, there is as yet little sign of commercial flows rising to levels where they can provide adequate support for development. Here, the Fund and Bank can be expected to play a much greater and more direct financial role, somewhat closer to that of the 1980s.
For those countries identified as highly-indebted poor countries (HIPCS), the Bank and Fund are to provide debt reduction, as part of a coordinated package with other creditors, intended to reduce debts to sustainable levels - that is, to levels which can be repaid by governments without them rescheduling or accumulating arrears. For most of these countries, debt reduction is to be phased over a six-year period, with increased adjustment lending in the interim. It is hoped that debt reduction, together with further adjustment, will encourage commercial flows in the future.
Beyond the promotion of financial flows at the national level through adjustment programmes, the IMF is seeking an amendment to its Articles of Agreement to widen its mandate to include capital account liberalisation - that is, the removal of restrictions on financial flows in and out of a country. Economic theory dictates that “free capital movements facilitate a more efficient global allocation of savings, and help channel resources into their most productive uses, thus increasing economic growth and welfare. From the individual country’s perspective, the benefits take the form of increases in both the potential pool of investable funds, and the access of domestic residents to foreign capital markets.” (Fischer, 1997, p3)
If the IMF’s Articles of Agreement are changed, this would introduce a mechanism to seal in the liberalisation of financial flows, in much the same way that liberalisation of current account transactions are promoted at present. It is likely that countries could remove restrictions gradually, but once removed restrictions could not be reimposed except in response to a crisis, and only then with IMF approval2.