The international monetary system as it was originally designed at the Bretton Woods Conference and subsequently amended stands in marked contrast to today's global economy in terms of the size. complexity and speed of capital markets. This paper presents an evaluation of some of the key elements of the main proposals for reforming the IMF. The analysis reveals that. with the exception of a regime of complete flexibility, all other proposals relegate the IMF to a minor and ineffectual role or assign it an impossible task of co-ordination. One direct consequence of the globalization of financial markets is the need for non-inflationary monetary policies. Consequently. under the best proposals. the IMF reconfigures itself as a public rating service and an agency for rescheduling debt. and withdraws from foreign exchange rate stabilization.
Key Words: International Monetary Fund. IMF. Bretton Woods. globalization, international finance, monetary policy, exchange rates.
An animated debate over the future of the International Monetary Fund has begun. The institution's present unpopularity appears to be on the increase while a wide variety of fixes have been proposed; including outright abolition. It has become obvious, fifty years after Bretton Woods, that the global economy is characterized by a slow growth, third world debt crisis, and currencies crisis, with no sign of reversing. Even during periods of deflation of the 1990, inflationary expectations remain so deeply ingrained that the slightest sign of economic recovery is sufficient to trigger another round of price hikes. These changes in the global economy suggest that the international monetary fund is in need of a major overhaul. Historically, the IMF has shown some ability to adapt to changing times. After several rounds of negotiations, the General Arrangements to borrow (GAB), was agreed in December 1961 and by the end of sixties, when confronted with the Triffin dilemma, it created special drawing rights (SDRs).1 The 1970s witnessed the implementation of flexible exchange-rate regimes. As of the second half of the eighties, the IMF adopted the approach of surveillance over the economic policies of its member nations. At the same time, the literature on possible reforms of the Fund expanded. The objective of this study is to present a critical analysis of the various proposals pertaining both to the exchange mechanism and to other essential aspects of the smooth functioning of the IMF, and to identify viable alternatives. As to the current policy of surveillance, a cross-examination of both its feasibility and its real impact will be provided. To lay the groundwork for this study, a brief discussion of some of the main aspects of the difficulties currently facing the IMF, is first outlined.
The IMF and the Global Economy, or David and Goliath
A Mixed Record
If GATT's success in liberalizing trade among its member countries is uncontested, the same cannot be said for the IMF's record in achieving its goals as laid out at the Bretton Woods conference. Recall the first article of its Articles of Agreement:
...To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustment in their balance of payments without resorting to measures destructive of national or international prosperity.
In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
Article 4 invites each member to co-operate with the Fund in order to promote exchange rate stability and to avoid competitive devaluations. Thus, as a financial institution, the IMF was assigned the task of helping its members defend their currencies on financial markets and of preserving equilibrium in the balance of payments. Has the IMF performed these functions well? …