Given that the increasing dominance of private financial flows relative to official flows has shifted power and influence toward private sector capital, the role of the IMF has come into question in the last several years. This identity dilemma has been fomented by the continued stagnation of the poorest countries, despite many years of structural adjustment. Now, since the IMF will have a new managing director for the first time in thirteen years, is a propitious time to examine the fund's role in the global economy of the twenty-first century.
Reform of the IMF must be a key component of U.S. foreign policy priorities. The reform agenda includes downsizing the fund's role and determining exactly how it carries out its more restricted mission. The IMF was created to monitor economic developments in the global economy and to address short-term external imbalance when necessary. Treasury Secretary Summers' recent call for a refocused IMF is welcome, and this should be the starting point for a new U.S. policy. The IMF should return to it original mandate and lend to countries (rich or poor) facing short-term balance-of-payments problems. Conditions would be few, dealing strictly with core macroeconomic problems and with repayment to the IMF. Longer-term development lending for the poorest countries is better left to agencies with the appropriate mandate and staff expertise, such as the World Bank and certain UN agencies.
A surveillance function should remain part of the IMF's mission, with one important change needed to ensure improved global economic governance: the monitoring of private capital flows, which played a major role in the crises of 1998. But though the IMF should track these flows, imbalance created by such flows may not warrant IMF assistance, nor can the IMF realistically expect to match the volume of private capital. In today's world of massive, volatile capital flows, the IMF should not step in and bail out banks and private lenders who knowingly took risks investing overseas.
Good global governance means that speculators and bankers should not get special treatment. An independent, rules-based system that equally balances the importance of meeting human needs and public services with meeting obligations to creditors is necessary to ensure effective global governance. Because it is dominated by the finance ministries of the wealthy countries (particularly the U.S.), the IMF is incapable of achieving this important balance. With respect to the problem of mounting third world debt, the creation of an independent debt adjudication board (similar to U.S. bankruptcy courts) outside IMF control would be one way to establish such a rules-based system. The U.S. should give such an alternative proposal due consideration.
But while the IMF reins in its activities, it must itself adhere to principles of global economic governance, and the U.S. should take a strong role in ensuring that this happens. One step would entail freer access to information. The IMF's annual economic surveys--the Article IV consultations--should be public documents, although certain sensitive information could be withheld. …