The International Monetary Fund: Future Directions

Publication Date: June 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

The IMF was created in a world of fixed-parity exchange rates, where most currencies were defined in terms of the U.S. dollar and the dollar was defined in terms of gold. Countries could devalue their currencies only if they were faced with -- in the original language of Article IV -- "fundamental disequilibrium" in their economy and only if the IMF approved. International capital movements were restricted and cumbersome. That world has now largely disappeared. Since the 1970s, the relative value of most major currencies is determined by world currency markets, and the daily volume of international currency movements far surpasses the volume of currency circulating in most major countries. Article IV was amended in 1976 to replace the fixed-parity exchange rate system with new procedures for enhanced surveillance in the new world of flexible exchange rates.

This has led over time to the IMF having basically the same customer base as the multilateral development banks (MDBs). While the IMF's core concerns are macroeconomic and exchange rate stability, many of the factors the IMF now takes into account in its surveillance and loan programs are similar to those the MDBs consider in their development programs. The IMF is a monetary institution, not a development agency. Nevertheless, growth and development are among the purposes specified in its Articles of Agreement and its activities can have a significant impact on the economic prospects of its borrower countries.

Many ideas have been put forward in recent years suggesting ways the IMF, World Bank and other international financial institutions (IFIs) might be restructured or reformed. This report looks at proposals which have been made to alter the structure of the IMF -- to change its format, add or eliminate programs, restrict the scope of its lending programs, and limit the scope of its loan conditionality.

This report discusses seven proposed ways that different authors believe the IMF should be changed: (1) Abolish the IMF, (2) Shrink the IMF, (3) Focus on Macroeconomics, (4) Streamline IMF Loan Operations, (5) Reassign Functions among the IFIs, (6) Better Coordination between the IMF and World Bank, and (7) Expand the IMF. Each is discussed and analyzed. In this way, the report hopes to give readers a better understanding of the basic issues and choices which affect the future direction of the IMF.

There are many avenues by which Congress can influence this debate. Congress must approve any increase in IMF or World Bank funding. It also frequently enacts legislation or includes directives in reports specifying goals the United States should pursue in the IFIs. The United States needs the support of other countries, however, if it wishes to effect change in the policies, procedures or structure of the IMF and the MDBs. Many of the alternatives listed above require changes in the international agencies' Articles of Agreement. This requires an 85% majority vote. Other changes may be effected by simple majority. However, this requires a broad consensus of support among the advanced industrial countries. Their views on these issues are often quite different from those expressed by policy makers from the United States. This report will be updated only if major developments require changes to be made.