Organizational Reform and the Expansion of the South’s Voice at the Fund

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Organizational Reform and

the Expansion of the South’s Voice at the Fund

Peter Evans

Department of Sociology

University of California at Berkeley
Martha Finnemore

Department of Political Science

George Washington University

We would like to thank all of the Executive Directors and members of the IMF staff without whose generosity in offering their time and insights this paper could not have been written. We also are grateful to the Berkeley Institute of International Studies for sponsoring the Workshop at which a preliminary version of this paper was discussed, and to the participants in workshop for helpful comments: Barry Eichengreen, Vijay Kelkar, Aziz Ali Mohammed, Maury Obstfeld, Beth Simmons, and Steve Weber. Suggestions from Tom Callaghy, Jo Marie Griesgraber, Devesh Kapur, and Robert Wade were also invaluable. All errors of judgement or fact are, of course, the responsibility of the authors.

What organizational reforms might increase the influence of developing member countries within the Fund? In this paper we argue that a variety of organizational changes are both feasible and could substantially increase the ability of developing countries to articulate policy alternatives and advance change. We focus particularly on changes in the recruitment, training, career paths, and deployment of the Fund’s staff. Our recommendations speak to two general issues. First, we explore ways to diversify the “intellectual portfolio” of the staff by drawing more effectively on hands-on knowledge of the concrete circumstances that shape policy outcomes in the South. More mid-career hiring of staff with practical experience inside developing country institutions could increase the degree to which the distinctive institutional circumstances of developing members are taken into account in formulating Fund policies and implementing them. Allocating a larger share of the Fund’s resources to research consulting contracts to researchers and institutions based in developing countries could also expand input of ideas that reflect the experience of member countries from the South. Second, large asymmetries in workload currently make it difficult for those working on the needs of developing members to formulate and advocate alternative policies. We suggest a number of ways in which even modest reallocation and addition of staff resources might create breathing space that would allow developing country EDs to play a larger role in shaping Fund policies.

Organizational Reform and the Expansion of the South’s Voice at the Fund

Peter Evans and Martha Finnemore

With over a thousand competitively selected professional economists, the staff and management of the International Monetary Fund (IMF) constitute a globally unique accumulation of human capital. The Fund should be one of the world’s premier public service organizations. For developing countries, where specialized human capital is a scarce commodity, the potential value of such an asset is especially great. Yet, in the South the Fund’s expertise is often seen less as an asset than as a source of intrusive, external control used to further the interests of private financial institutions and rich countries. Dealing with the Fund’s economists becomes the price to be paid for continued access to the financial flows that the Fund controls rather than a means of access to a major intangible public good.

For the IMF to be perceived as an institution owned and controlled by northern governments, operating as “the creditor community’s enforcer” (Lissakers 1991:201), is obviously a problem for the Fund itself as well as for member countries from the South. Everyone recognizes that when member countries “take ownership” of Fund programs, chances of success increase. Even the quality of the information the Fund uses for surveillance and design of programs depends on the level of member country participation.

There are two ways in which the South’s “ownership” of the Fund might be increased. First and simplest would be to expand the degree of the South’s formal control over the Fund’s decision-making apparatus by re-aligning votes to reflect the reality that developing countries are both the Fund’s primary clients and a major source of its operational income. This route is conceptually simple but politically difficult, perhaps impossible, without fundamental changes in the underlying reality of the disproportionate political and economic power of the North. A second, more subtle, and more politically feasible, way would be to increase the voice of the South in the Fund--to increase the extent to which perspectives derived from the experience and interests of the member countries of the South are incorporated into research, policy formulation, and decision-making within the Fund.

Expanding voice is less dramatic than changing votes, but no less important.1 Effective voice, for our purposes, has two components. It involves having the opportunity to formulate clear, informed views as well as having the opportunity to advance them. Having more votes is an empty victory without a well-developed set of policy proposals that can in turn be effectively harnessed to the machinery of policy implementation. The power of votes is undeniable and in the case of clearly clashing interests, votes will trump voice. Nonetheless, the course of policy and programs at the IMF depends as often on the sway of presumptions and ideas which make proposals persuasive as it does on the unambiguous imposition of interest. Voice is important and, while in no way denying the importance of votes, we will focus here on voice.

Two features of the Fund’s structure seem particularly important to the South’s ability to voice its views. One hallmark of the Fund’s policy making is the value placed on consensus, both among staff of the bureaucracy and within the Executive Board. The extent to which policy is validated by consensus, particularly consensus among Executive Directors (EDs), increases the importance of effective voice since significant opposition undermines consensus claims. Other voice opportunities arise through the staff. We know that in any large bureaucratic organization the incentives, orientations, and goals of the staff account for a substantial part of the variance in organizational direction and performance. This is especially true when staff activities depend on highly specialized expertise and when the organization’s goals and outputs are complex and difficult to measure. Acknowledging the lessons of organizational theory leads firmly to the conclusion that the way in which the Fund’s staff is recruited, trained, organized, and rewarded must be a central determinant of how the Fund defines and executes its mandate. Therefore, the foundations of effective voice must be built on the recruitment, experiences, and career trajectories of the staff.

In sum, the question posed by this paper is “What kinds of organizational reforms might increase the voice of developing member countries within the Fund?” We will answer this question at the end of the paper by proposing several specific organizational reforms. Before suggesting specific reforms, however, we will make two initial arguments. First, the changing nature of the Fund’s role in the current global political context makes increased responsiveness to the interests and perspectives of developing countries almost a logical necessity. Second, important organizational reforms are feasible despite the realpolitik of Fund governance and the technical constraints within which Fund policies and programs must operate.

The Political Context of Globalization and the Fund’s Evolving Role

As the magnitude, velocity, and volatility of global financial flows grows and the capacity of national public authorities to manage these flows declines, the role of the IMF has become more crucial. Even though private financial institutions and the other private agents who collectively constitute “the markets” dominate the international financial system, the Fund is an essential catalyst for the collective action necessary to keep the system running.

As the global political economy has evolved over the course of the last 50 years, the Fund’s role has also evolved. The initial tasks of increasing openness to the movement of global trade and capital have largely been accomplished. Current challenges are different and more difficult. On the one hand, the task of devising reliable institutional insurance against the threat of volatility and crisis has become ever more challenging as the volume and velocity of flows increases. Even more intractable is that fact that openness has proven insufficient to effect the kinds of North-South transfers of real resources on which market-driven solutions to poverty in the South depend. The difficulty of responding effectively to these new challenges makes the Fund’s legitimacy more fragile.

The Fund’s problems flow in the first instance from the failure of market-driven globalization to deliver sustained growth, diminished inequality, and enhanced well-being to the majority of the world’s citizens that live in the South. Growth has been uneven. Inequality has increased. Even where increases in monetary incomes have been achieved, they are too often accompanied by the loss of well-being due to the erosion of collective social and cultural goods. Discontent with the results of globalization is rife, but the private actors who bear primary responsibility for shaping the process of globalization are hard to hold accountable. “The markets” are not accountable to either citizens or congressional commissions. Consequently, resentment generated by globalization is focused on the public institutions charged with trying to diminish its negative effects, and the Fund is a prime target.

Ironically, while angry citizens storming the Fund’s meetings are the more visible threat, critics with a very different point of view are more likely to undermine the Fund’s ability to carry on. For those convinced that the solution to the problems of globalization is simply a more thorough hegemony of market forces, the Fund appears superfluous, if not an impediment. The Meltzer Commission, with its fixation on the Fund as a source of moral hazard is a good example. From the point of view of the Fund, the question is how it might generate a political constituency sufficient to prevent itself from being crippled from the twin cries of “De-Fund the Fund” and “Let the Markets Work.” Providing more effective service to developing country members must be a central element in building a broader constituency.

At the same time that the current global context makes the Fund more politically vulnerable, it also increases the importance of ideas and expertise in the Fund’s role. The Fund’s ability to act as a catalyst for collective action and its ability to both disseminate and legitimate ideas and information about the global economy as well as individual national economies becomes more important as the magnitude of its financial leverage relative to private markets declines.2

A central feature of the Fund’s ideas about how to help members respond to global change has been a deepening of the Fund’s involvement in local institutions in the member countries of the South. In the 1980s and 1990s, convinced that resolving balance of payments problems and achieving macro-economic stability was impossible unless borrowers could be persuaded to restructure their domestic economies, and forced by the increasing magnitude of world trade and capital flows to undertake greater risks by lending increasing proportions of country quotas, the Fund began to focus its attention on constructing sets of “conditionalities” which member countries were required to accept in order be deemed credit worthy. Conditionalities were also seen as a service to private sector creditors, since their acceptance gave governments a way “to signal the predictability of their policies to private creditors” (Kapur 2000:5). In the nineties, governance-related conditionalities became the vogue and conditionalities came to focus increasingly on institutional issues rather than variables measurable in terms of traditional economic parameters.

The expansion of conditionalities is, in many ways, a logic result of the uneven success of Fund programs (see Killick 1995). The assumption underlying policies prior to the 1980s, that macro-economic performance can be separated from the seamless web of institutional relations that determine economic performance, was only a convenient fiction to begin with. As it became more obvious how hard it was to change a specific, restricted set of parameters without modifying the surrounding parts of the seamless web, the temptation to broaden the scope of conditionalities was irresistible. It is a hard trajectory to reverse. While the Fund’s new Managing Director would like to shift the momentum in the direction of “streamlining conditionalities” (IMF 200b:322), too many aspects of the domestic economy and its governance are critical to the Fund’s core goal of macro-economic stability to allow the Fund to recapture the simpler world of its early lending practices.3

Along with the move toward an expanded set of conditionalities the Fund has intensified its focus on issues of poverty and inequality through the HIPC (“Heavily Indebted Poor Countries”) and PRGF (“Poverty Reduction and Growth Facility”) initiatives. Like conditionalities, this has forced deeper involvement in the institutional life of borrowing countries. The Chair of the Fund’s 2000 annual meetings opened the meeting by highlighting these twin issues: “The great economic tragedy of our time is poverty. . . . Growing inequality poses the greatest risk for the future of the global economy.” The new Managing Director underlined the point by declaring that “The membership wants the IMF to stay strongly engaged with its poorest member countries.” The Fund Management’s position on the importance of continued Fund engagement with poverty issues is completely consistent with the position of the G-7 as expressed at the July 2000 G-7 summit in Japan (where it was agreed that IMF responsibility for macroeconomic stability is a “key tool for the achievement of poverty reduction and growth”) and in the G-7 finance ministers report to the summit (which states that the IMF has a critical role to play in supporting macroeconomic stability in the poorest countries, through the Poverty Reduction and Growth Facility).4

Both conditionalities and responsibility for poverty reduction increase the importance of “on the ground” knowledge of and experience with the institutions of the member countries in which the Fund has programs. Indeed, even conventional macro-economic analyses concerned with financial stability require such institutional knowledge. Concern with the capacity to make “credible commitments” as central to building sound relationships with the international financial community illustrates the point. Only robust institutions can make credible commitments. The commitments of one central bank that is formally independent but organizational weak may be less credible in practice than those of another central bank that is not formally independent but organizationally robust. Superficial examination of the two cases is not likely to suffice to evaluate the difference between the two.

For programs and policies that focus on poverty reduction the case for drawing upon local knowledge is equally strong. Making sure that macro-economic policies are consistent with poverty reduction is a task that depends substantially on an intimate knowledge of the functioning of local institutions. Enabling the Fund’s staff to play the same kind of innovative role in the implementation of conditionalities and poverty reduction that they have played in the diagnosis of macroeconomic flows requires diversification of the Fund’s human and epistemological capital.

Attempts to change the Fund’s role and the contents of its policies and programs must recognize the Fund’s diverse relationships with different sets of member countries. The constituency of the contemporary Fund with its 182 members, the vast majority of which are poor nations of the South is vastly different from the constituency of its 29 original members, mostly industrialized countries from the North. The task of protecting the Bretton Woods system of exchange rates among the industrialized countries of the North has disappeared and lending programs in the North ended a quarter of a century ago.

North and South now confront the Fund from substantially different perspectives. From the point of view of the “structural creditors” of the North, the terms of the Fund’s loan program are rules that will be imposed on others (Kapur 2000). While the North would obviously benefit from the diminished global tension that would result from improved economic performance in the South, the interests that impress themselves most immediately on Northern policy makers are those of the private financial institutions and transnational corporations that call the industrial nations home. These private actors have three kinds of interests. First, they want to make sure that they are not excluded from any potentially profitable opportunities in the South. Second, they are anxious to minimize the risks that might arise from clumsy economic management in fragile Southern economies. Finally, they would like to have economic institutions in the South mirror the ones with which they are familiar in the North to the greatest extent feasible.

The South is, of course, interested in attracting capital from the North and can hardly afford to ignore the interests of Northern investors, but the Fund’s activities appear in a different light. Just as debtors and creditors will never see bankruptcy laws in the same light, developing and industrial countries cannot be expected to see the Fund’s role in the same light. The South’s vision of the Fund’s ideal role would emphasize provision of technical advice and information in a way that allows local policy makers substantial autonomy in deciding how it should be used to reshape local practices and institutions. Likewise, the Fund’s “service” role would be focused on service to member countries rather than private lenders: providing finance when the private sector is no longer willing to lend, buffering poor nations from speculative attacks on the value of their currency and destructive “asset grabs” by creditors during liquidity crises.

Specific Fund policies are also likely to evoke different responses among Southern borrowers than they do from Northern structural creditors. For example, in the early 90s policy makers in the South were not necessarily averse to opening their capital markets, but were more likely to see the Fund’s efforts to impose “corner solutions” (i.e. either totally pegged or fully flexible currencies) as intrusive and limiting their policy flexibility. Issues of macro-economic coordination among the industrial economies offer another kind of illustration. The countries of the South strongly suspect that the absence of macro-economic coordination among the major industrial economies is an important element in the origin of financial crises in the system as a whole and should, therefore, be a matter of considerable interest to the Fund. From the point of view of the North, greater attention to this issue, even if it remained at the level of theoretical pronouncements, would constitute an unwanted intrusion into their policy process.

As political constituencies, North and South, especially the South, are, of course, hardly homogeneous. No matter how narrowly the boundaries of the North are drawn – G-10, G-7, or G-3 – there are still substantial differences in ideology and interests with respect to specific policies of the Fund within the North. These differences are important to any analysis of possibilities for innovation in the Fund’s policies, but, from the point of view of the Fund’s response to the challenges of globalization, differences within the South are even more important.

In thinking about the South and the Fund it makes sense to divide the South into “emerging market countries,” HIPC countries, and “the rest.” Most prominent in the calculations of the Fund (as well as those of private financial actors) are the emerging market countries. The basic qualification for being considered an “emerging market” is having sufficient access to international capital markets so that private capital flows constitute a credible potential solution to local development problems. Depending on where the line is drawn, about a dozen developing countries and a smaller number of European transitional countries would qualify. At the other end of the spectrum are the 35 HIPC countries (IMF 2000a:50), whose poverty and institutional problems leave them without the prospect of access to private capital, beyond a scattering of traditional extractive investments which are unlikely to trigger transformative growth. This leaves the largest single group of the Fund’s member countries, perhaps 60-80 in all, who may be treated either as potential emerging market countries or potential HIPC countries, depending on the optimism of the observer. Before thinking further about the relationship of the South as a broad constituency to the Fund, it is worth briefly considering the situation of each of these three groups in turn.

Emerging market countries of the South include the major middle income countries of Latin America, like Argentina, Brazil, Mexico, Chile, and Venezuela along with the East Asian “Tigers” and the major countries of Southeast Asia (Korea, Singapore, Malaysia, Philippines and Thailand) and perhaps South Africa.

While poverty and inequality are still central issues in these countries, inflows of private capital are seen as central to growth and poverty reduction. At the same time, since this small set of emerging markets absorb the vast bulk of Northern investment going to the South, these countries are vulnerable to the volatile behavior of international investors and therefore highly concerned with Fund policies aimed at maintaining investor confidence (e.g., the Fund’s new Contingent Credit Line) and policies aimed at limiting the damage from the almost inevitable exchange and liquidity crises (e.g., lending into arrears, standstills, collective action clauses etc.). The emerging market countries are paramount both in defining the Fund’s strategy toward the South and as a source of tension over Fund policies. At the same time, since emerging market countries are the main sources of opportunity and risk for Northern capital in the South, these countries also define North-South issues from the point of view of “the markets.”

Those who would like the Fund to focus on global financial concerns argue that inclusion in international capital markets is the best answer to underdevelopment and all countries of the South, even the poorest, are emerging markets waiting to happen. The empirical basis of this projection is shaky. Despite the vast increase in net private capital flows to the South during the 1990s (prior to the Asian crisis), flows to PRGF countries were tiny and unreliable. In 1998, Chile (an emerging market country with only 15 million people) absorbed more net private capital flows than all of the PRGF countries combined. To be sure, total flows to PRGF countries increased, but individual PRGF countries bounced back and forth between positive and negative net flows with little expectation that such flows would solve their poverty problems in the foreseeable future.

The 35 HIPC countries and the 45 PRGF-eligible members who are not included in the HIPC initiative are intimately involved with the Fund but in a different way quite different from the emerging market countries. With the exception of China and India, whose huge size more than compensate for their low incomes, dealings with private lenders are an aspiration rather than a problem for PRGF countries. Securing debt relief and further concessional financing for basic health, education, and infrastructure projects is the goal, and separating projects aimed at “macro-economic stability” from those whose goal is “poverty reduction” is more a theoretical exercise than a practical distinction. The rest of the South is more like the PRGF countries in terms of the likelihood of private capital flows solving its problems than it is like the emerging market countries. While a few countries in this category (e.g. Columbia and Indonesia) have attracted capital flows on a scale like that enjoyed by emerging market countries, a change in political fortunes could easily thrust them back into the regular ranks.

Not surprisingly, analyzing the Fund’s changing relationship to different constituencies produces conclusions that parallel those reached by analyzing changes in the Fund’s role. Both sets of changes argue for an increased voice for the South and a diversification of the Fund’s intellectual portfolio in ways that would draw more effectively on the development experience of the South. Without more substantive input from the South, Fund programs will be handicapped by a weak sense of ownership and suboptimal design and implementation. This still leaves the question of whether organizational reforms that would accomplish this are possible given the political realities of governance at the Fund and the heavy weight placed on legitimating Fund’s policies in terms of macro-economic theory. We will look first at governance issues, then at the role of theory and methods, and finally at the intersection of the two. We argue that, even in combination, these issues do not preclude important organizational reforms.

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