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8/13/2019 Aula 10_Allegret, J. P.; Dulbecco, P. (2003). the Governance of International Institutions - The IMF and the Evolutio…
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The Governance of International Institutions- The IMF and the Evolution of the New International Financial Architecture -
J.P. Allegret Associate Professor of Economics
at the University Lumière Lyon 2GATE - 93 chemin des Mouilles, 69130 Ecully, France
P. DulbeccoProfessor of Economics
at the University of MetzCERDI – 65 boulevard François Mitterrand, 63000 Clermont Ferrand, France
Economics for the future - CELEBRATING 100 YEARS OF CAMBRIDGE ECONOMICS Cambridge (UK) 17-19 September 2003
Preliminary Draft – Please do not quote without authors’ permission
1 Introduction
Governance refers to “the process and institutions, both formal and informal, that guide and
restrain the collective activities of a group” (Keohane and Nye, 2000: 12). The main aspects of
governance are the production of information, control and coordination mechanisms. The
financial globalisation process has been accompanied by a wave of financial crises which has
led to a renewal of the debate on so-called “global governance”. Indeed, globalisation
implies the emergence of public goods, which modifies the traditional international
cooperation system and the question of governance in international affairs. In this new
context, international financial stability is not only based on “external” monetary
considerations, but also on domestic issues (Kaul, Grunberg, Stern, 1999). This increases the
contradiction between the economic system, which becomes more and more integrated, and
the political systems, which remain segmented.
Global governance means that interactions between domestic and international institutions
are now particularly strong. International institutions are seen to exert a decisive influence
on domestic governance. Nevertheless international institutions have recently been severely
criticised for their lack of both transparency and democracy (Metzler, 2000). They are also
often viewed as costly and over-centralised. In other words, international institutions
themselves seem to exhibit a rather poor governance which questions both their political and
economic legitimacy (Rodrik, 1997).
This paper focuses on the case of the IMF which appears to exhibit most of such criticisms.
More precisely, the aim is to propose an analytical framework to evaluate the IMFgovernance issue It is not only the design of the new international financial architecture
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which is addressed by our analysis, but also the question of both the emergence and the
evolution of an international institution. Our analysis thus raises the question of the
consistency between domestic objectives and global objectives for international institutions
such as the IMF.
The remainder of the paper is structured as follows. Section 2 reviews the nature of
international institutions. Section 3 highlights the governance issue of any international
institution. Section 4 makes use of our analytical framework in order to evaluate several
critical issues related to the IMF governance. Section 5 focuses on the efficiency of the IMF,
joining the debate on the evolution of the IMF. Section 6 concludes.
2 The Nature of International Institutions
Following the seminal book by North (1990), it is now largely recognized that institutions
play a crucial role in explaining the economic performances of different countries. Both
domestic and international institutions exert an influence of the speed and form of economic
growth. The question of the specificity of international institutions is, however, still open.
Institution, Markets, and Economic Performance: a Renewed Debate
Institution may be defined as “a regularity in social behaviour that is agreed to by all
members of society, specifies behaviour in specific recurrent situations and is either self-
policed or policed by some external authority” (Schotter, 1981: 11). This definition requires
consideration not only of the legal framework, but also of behavioural regularities associated
to a set of rules, norms and routines (Nelson, Winter, 1982). These two elements may
determine both the emergence and evolution of institutions.
As institutions are based on the idea of behavioural rules (Langlois, 1993: 166) they represent
a means by which agents, who ignore each other's actions and expectations, obtain the
information that enables them to co-ordinate. In other words they allow economies to be
made with respect to knowledge and information (Lachmann, 1970). They represent“orientation points”, which have the authority to render both actions and individual
expectations compatible (ibid.).
The point is that institutions consequently represent an essential element, a necessary
condition, for the harmonious functioning of the markets. This idea has been largely
developed by the Austrian theory of market processes. Time and uncertainty, which in an
Austrian perspective characterize all market processes, encourage agents to follow common
rules. The latter lead to the emergence and development of institutions, which then reduce
the uncertainty prevailing in markets by supplying stable models of interaction (O'Driscoll,
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Rizzo, 1996). This argumentation naturally rests on the idea that the knowledge
disseminated by institutions is of a stabilizing nature – in that it reaffirms the stability of the
social structure at regular intervals – unlike that disseminated by the price system, which is
of a dynamic nature –in that it leads individuals to revise their plans continuously (Hayek,
1945)1.
Although international institutions fulfil these different functions - for example, by
producing information in the direction of private markets, the IMF facilitates the functioning
of the market - they nevertheless have specific characteristics.
Specificity of International Institutions
• Definition and Roles
An international institution is defined as “a set of rules that stipulate the ways in which
states should cooperate and compete with one another. [International institutions] prescribe
acceptable forms of state behaviour, and proscribe unacceptable kinds of behaviour”2. One
recognizes here the behavioural rule function of institution previously underlined. But why
do international institutions exist? Considering a demand-side perspective, functionalist
theory explains that international institutions result from the fact that in the international
economy, transaction costs are high and property rights not perfectly defined. In this
perspective, states – as rational and homogenous agents - turn to international institutions in
order to minimize the negative consequences of these market failures. More precisely,
international institutions become the main instrument which allows states to cooperate with
each other. It is the so-called collaboration problem: how to incite states to cooperate in order
to achieve the Pareto efficient frontier? Institutions perform this function by providing
information about others states’ preferences, intentions and motivations, and by limiting the
potential behaviour of governments.
Functionalist theory assumes that states remain the key actors in world politics. International
institutions do not modify states’ interests and motivations. They simply allow them tochoose the most efficient solution in a non-cooperative game. In fact, by providing
information and defining certain standards of behaviour, international institutions matter.
More precisely, they change two basic features of the non-cooperative game between
governments: their strategies and beliefs. States’ strategies are affected by the rules of the
game determined by institutions. Some actions are prohibited or very costly and others
costless or promoted by institutions. States’ beliefs change because the production of
information by institutions modify the informational environment of states. This first feature
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of the international institution is essential in order to understand the necessity of a
governance action.
Although institutions play an essential role in facilitating international cooperation,
problems of collaboration are not the only difficulties which impede such cooperation.
Indeed, it is necessary to take into account conflicts over where on the Pareto frontier states
will be situated. This is the so-called distributional problem. For numerous international
problems necessitating collective action, there are many possible sustainable agreements or
multiple equilibria. For example, states may agree on the reduction of current account
imbalances, but disagree on what current account balance is and on the adjustment sharing 3.
The traditional answer to this problem rests on the realist approach of international relations:
it is the exercise of state power (Krasner, 1991). The most powerful states have the most
bargaining power and so can impose a particular solution on the Pareto frontier.
International institutions do not play a significant role in the realist approach. Martin (1997)
identifies two other solutions to the distributional problems in which international
institutions matter. On the one hand, international institutions can act as “constructed” focal
points4. In this situation, they solve distributional problems by constructing regularities in
players’ behaviour. On the other hand, by promoting intense interactions between players in
a context of international cooperation, institutions favour the constitution of a common
culture which facilitates the choice of a particular outcome along the Pareto frontier.
• Autonomy of International Institutions
The governance of international institutions is a relevant question only if institutions can
gain autonomy relative to states. Autonomy has two inter-related meanings. On the one
hand, it refers to the ability of institutions to evolve independently from the wishes of states.
As we will see in section 3, IMF conditionality is such an example. On the other hand, an
institution has a degree of autonomy if it can impose new rules and/or norms on states and
other international players. In general, autonomy is a situation in which internationalinstitutions exert a specific influence on international affairs, influence which does not only
result from the states’ power.
The realist approach denies any autonomy to international institutions. In fact, the evolution
of international institutions demonstrates that they can obtain a degree of autonomy relative
to domestic government. They reflect more than states’ preferences in international affairs.
This point is particularly clear in the study by Barnett and Finnemore (1999). Using a socio-
economic approach, the authors identify two sources of institutions’ power. First, “the
legitimacy of the rational-legal authority they embody” (p.707). This source is intrinsically
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linked to the nature of any institution. Indeed, institutions produce norms and rules which
create regular behaviour among participants in international affairs. Such regularities are a
strong source of “technical” legitimacy5. Second, institutions are autonomous players
because they exert a “control over technical expertise and information” (p.707). Again, IMF
conditionality is a good example of such autonomy.
• Legitimacy, Accountability and Democracy
The globalisation process has led to the end of what Keohane and Nye (2002) call “the club
model”. It designates a system of governance founded on a high degree of specialisation of
institutions responsible for international affairs. Opacity and lack of transparency are the
main characteristics of this system. More precisely, international governance is structured in
specific-issue areas which are without explicit links to the rest of the international system.
For example, the IMF is responsible for exchange rate arrangements and macroeconomic
policies while the Basle Committee is responsible for banking and financial areas. Until the
creation of the Financial Stability Forum in 1999, no explicit coordination between the two
institutions had existed. This specific-issue area implies that interactions with domestic
political systems are weak. The process of negotiations is conducted in secret, only the
outcomes being reported to publics and domestic legislatures6.
Globalisation modifies the structure of the world economy. First, new major participants
appear: developing countries as a whole, but more particularly new regional powers such as
China, India or Brazil which are marginal in the club model. These countries ask for greater
participation in the policy-making and decision-making processes. Second, one of the main
lessons of financial crises in 90’s is the strong links between monetary and financial factors.
Manifold empirical studies for emerging economies have demonstrated that banking crises
lead to balance-of-payments crises. The club model is not adapted to this new situation.
Third, increasing integration – both real and financial - makes the public more sensitive to
international concerns, such as the destabilising role of pension funds and hedge funds,company delocalisation and environmental problems. Finally, globalisation has led to the
proliferation of non-governmental organisations which represent the civil society. The
strategy of these NGOs is to contribute to, not to exit from, the new international syste m.
The end of the club model raises new questions for international governance. More precisely,
three main challenges concerning the governance of international institutions need to be
analysed in new terms: legitimacy, accountability and democracy. Each of these results from
the deep difference between domestic and international institutions. The former are
embedded in a coherent political sphere where citizens belong to the same political identity.
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The latter are embedded in international relations based on unequal partners. As a result, the
game rules are asymmetric, not only in terms of construction, but also in terms of
implementation and modification. The most powerful states exert a decisive influence in this
area. The IMF is particularly concerned by this observation: there are no rules for surplus
countries and, to a lesser extent, very few for deficit countries, in the industrialized world
while developing countries have to apply strict rules when they borrow from multilateral
financial institutions. The main point is that the IMF is evolving in a paradoxical manner. On
the one hand, since the collapse of socialist bloc, it has become a universal institution. On the
other hand, as a consequence of the expansion of international capital markets, the IMF has
now a marginal influence on industrialized countries. This asymmetry in the evolution of the
IMF is one of the main problems justifying the debates on its legitimacy.
It is important to stress that the inequality between states which characterizes international
relations implies that a strict application of democratic rules – largely founded on the
principle of “one citizen, one voice”- is inapplicable. Indeed, it should be contrary to a
democratic principle to consider that a large country – Brazil for example - could have the
same voting power as smaller countries such as Panama. Again, this remark shows the
striking difference between the domestic and international spheres.
The three dimensions of global governance are inter-connected.
There is a close link between accountability and democracy. Indeed, accountability refers to
the ability of people to exercise control on governments or institutions. The latter is given a
mandate to fulfil missions in the interest of the former. In a democratic system, a government
is accountable to the majority of the citizens in a specific jurisdiction. For example, the
government presents its program to the Parliament which is the democratic representation of
citizens. The main pillar of this electoral accountability is the existence of a political
community whose citizens are members. In the international sphere, there is no comparable
political identity because there is no world government and no world identity. Even in theEuropean Union, where the integration process is particularly advanced, many observers
consider that European institutions display a democratic deficit. For instance, the ability of
the European Parliament to control the European Central Bank is limited. As a result,
electoral accountability at a global level cannot become a realist system for controlling
international institutions. Is the absence of a political community an absolute barrier for
accountable and democratic international institutions? On the one hand, electoral
accountability in international relations can be strengthened by various mechanisms
(Keohane and Nye, 2002). First, in order to reinforce state control and people’s judgement,
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the transparency of the missions carried out by international institutions must be improved.
Targets must be clear and easily observable by both governments and the people. In
addition, a strict correspondence must exist between the mandates of international
institutions and their goals and actions. As we will see below, this question is essential for
the evolution of the IMF. Second, mechanisms of domestic accountability can be used.
Procedures could be implemented to encourage governments to inform parliamentarians
about their international strategy7. Finally, it is possible to increase legislative control over
international institutions at the supranational level. Such a mechanism exists in the European
Union. In the rest of the world, the lower degree of political integration undermines such a
possibility. Despite this barrier, a possible answer is to strengthen the political dimension of
international institutions (see below section 5).
On the other hand, non-electoral dimensions of democracy at the global level can be
identified. The public can exert an influence on the conduct of international affairs through
the NGOs. “A public space is an identifiable set of issues within a communicative
environment in which people can speak to one another in comprehensible ways. The public
is the group of people who communicate and agitate over their shared externalities in that
space […]. In this sense of shared externalities, and a degree of shared understanding, there
may be some global publics even if there is no global community” (Keohane and Nye, 2002:
15-16).
Democracy and legitimacy are closely linked. If the IMF is now challenged, it is in part
because its decision-making procedure has a low democratic level. Since 1945, world
economic and political structures have changed considerably. Industrialized countries
nevertheless remain the main shareholders and hence the main initiators of reforms in the
Bretton Woods institution. The problem of legitimacy is as follows: minor shareholders, the
developing countries, have become the main “clients” of the IMF. When they borrow from
the IMF, they must apply corrective macroeconomic measures – and now more and moregovernance measures - which exert a decisive influence on the domestic structures of these
countries. For most developing countries, this influence appears to be non-legitimate because
they do not significantly participate in the decision-making procedure of the IMF. They
consider that corrective measures are imposed by the most powerful industrialized
countries. The increasing influence of the IMF in domestic affairs is clear if we consider the
distinction made by Gould (2001) between targets conditionality and procedures
conditionality. Targets refer to measures – like a fiscal deficit limit - that can be met by
borrowing countries whatever methods they choose. Procedures specify both ends and
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means by requiring countries to implement a single one-time action – for example a change
in exchange rate regime and the adoption of new corporate governance principles. As a
result, “procedures more directly dictate borrowing country policies, constrain domestic
politicians and violate sovereignty” (Gould, 2001: 8). After 1982, we observe a steady
increase in procedures conditionality.
Legitimacy, accountability and democracy are at the centre of the debate on the governance
of international institutions, and more particularly of the IMF.
3 The Evolution of International Institutions: a Global Governance Issue
The issue of global governance results from the two basic functions of institutions in the
world economy: coordination and collective action.
Coordination
Numerous studies have demonstrated the interaction between international and domestic
institutions. Studying the question of institutional effects, Martin (1997) identifies two “ideal-
types” of such effects. First, institutions can act as substitutes for domestic mechanisms and
institutions. Then, institutional effects must lead to a convergence of outcomes among the
members of the international institutions. The European monetary union or human right
institutions belong to this ideal-type. Second, institutions can complement the effects of
domestic institutions. In this case, international institutions “exaggerate domestically
generated practices” (Martin, 1997:8). When international institutions act as substitutes
governments turn to them when they cannot achieve a desired outcome with only domestic
measures. In his study on IMF agreement, Vreeland (2002) shows that governments use IMF
leverage to favour unpopular policies. As a result, domestic institutions matter in explaining
the behaviour of international institutions. In a similar perspective, Edwards (2001)
demonstrated that the ability of governments to satisfy IMF conditionality depends on the
political system. More precisely, fractionalised legislative political organisation exhibitspoorer performances in satisfying IMF programmes.
But from the perspective adopted in this paper, it seems to us that the coordination function
is particularly important in achieving a complementarity between domestic and global
governances. Such a complementarity becomes more and more determinant in the context of
financial globalisation (Allegret, Dulbecco, 2002). As noticed by Kapur and Webb (2000),
both the IMF and the World Bank are introducing more and more governance-related
conditionalities in their programs. This new form of conditionality implies institutional
changes in countries under IMF programs or World Bank loans. Institutional changes
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accompanying financial liberalization may thus lead to a deterioration compared to the
initial situation because “various institutions and social expectations change at different
speeds, particularly when there is a mix of exogenous and endogenous forces, as when
global markets interact with domestic policies [...].The central problem to be addressed […] is
variable institutional adaptation” (Jacobs, 1999: 8). It is thus necessary to render the idea of
institutional change – implied by the financial liberalization - compatible with that of the
institution, understood as a permanent orientation point. There is, indeed, an asymmetry
between abandoning - rapidly destroying - previous institutions, and adopting - slowly
constructing - new ones.
Furthermore, one must take into account the fact that the adoption - the transfer -, just like
the creation of new institutions, is subject to delays: delays of implementation in the first
case, and delays of construction in the second. Yet, the amount of economic change possible
per unit of time is always limited, because agents have limited training capacities.
Lachman (1970) distinguishes between legal norms or designed institutions, which are “the
products of legislation and other manifestations of the ‘social will’” (Lachman, 1970: 69) and
spontaneous or “non-designed institutions”, understood as “recurrent patterns of conduct”
(ibid: p.75). Thus, if it is always possible, both in theory and in practice, to imagine a
situation in which an economic or political authority decides to implement new institutions -
for example a new system of property rights - the benefits expected from this type of
measure are a controversial issue. Indeed, insofar as such a policy is, by definition, limited to
designed institutions, its success depends on the capacity of these new elements to meet the
demand for change in institutions not yet designed. The difficulty lies in the fact that,
although the transformation of designed institutions is, in general, both radical and fast, that
of non-designed institutions is of an incremental nature, and is necessarily subject to path
dependence constraints.
Finally, the question of institutional order, and of its unity, arises: if institutional order is theproduct of the complementarity of institutions, what are the integrating forces of institutions,
and under which circumstances do these forces cease to work? The analysis of the process of
financial globalisation requires us to specify the conditions for the coherence of institutional
order, because the system's components evolve at different speeds.
This is one way to highlight the governance issue of international institutions: international
institutions need governance control in order to articulate both the evolution of international
and domestic institutions (Allegret, Dulbecco, 2002).
Collective Action
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Collective action problems result from the fact that each country can improve its welfare
when it can free-ride on the other countries which bear the costs of intervention. These
problems are particularly relevant in contemporary financial crises in which contagion
process is strong. With contagion, the question of burden sharing of financial interventions is
very important. In the case of the Asian crisis, using a game theoretical perspective, Hausken
and Plümper (2002) conclude that “intervention by the international organization as a first-
mover was a necessary and crucial condition of collective action in containing [the crisis]”
(p.228). Indeed, their intervention incites players (the United States, Japan and European
countries) to participate in resolving the crisis because their respective payoffs are
maximized. More precisely, Japan and the United States – the two players most involved in
Asia - are in a defection game if no other players intervene. From a collective point of view, it
is clearly a sub-optimal strategy when we take into account interdependences between
countries.
The Asian crisis shows that international institutions can influence the decisions of states.
Similarly, states can influence the actions of institutions. If stronger states exert an influence
on international institutions, to what extent do they take politics into account when making
decisions? In principle, political factors do not influence IMF or World Bank decisions. In
order to explain why countries receive financial assistance from the IMF, (Barro and Lee
2002) find that political connections to the IMF are a significant explanatory variable of the
probability and size of IMF loans. The determinants of the political connections are the
following: country quota, national participation in the IMF staff, and member country’s
political and economic proximity to the IMF’s major shareholding countries. Each of these
determinants exerts a positive influence on IMF loans. Thacker (1999) studies the underlying
causes of the IMF’s behaviour concerning lending decisions and sanctions if borrower
compliance with IMF conditionality is weak. Decisions to lend are analysed over the period
1985-1994 for 87 developing countries. The main result is that politics matter in the IMF. Thegovernance of international institutions becomes a major preoccupation once we take into
account the influence of political factors. Indeed, it appears necessary to control that the
decisions of international institutions result from general interest and not from the strategy
of powerful states in the world economy.
Another factor justifying the critical role of governance is the ability of international
institutions to become autonomous and powerful actors in global politics. International
institutions develop specific knowledge about the functioning of the global economy. This
expertise – both technical and informational - gives autonomy to international institutions.
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Over time, international institutions can exert an unexpected influence, not intentionally
planned by their creators. An illustration of this process is the evolution of conditionality
within the IMF. As noticed by Martin (2002), “the development of the principle of
conditionality went hand-in-hand with a shift in responsibility from the executive board to
the staff” (p.20).
Conditionality specifies policies, performance criteria and standards which borrowing
countries must meet to receive resources from the Fund. Although conditionality was
initially a vague notion in the Bretton Woods Agreements, it developed during the 50’s with
the expansion of IMF lending activities. Conditionality is a source of autonomy for the IMF
staff for two main reasons. First, during the 80s and 90s, the IMF was confronted by more
and more complex problems such as debt crisis of developing countries and the transition of
socialist countries to a market economy. As a consequence, binding conditions attached to
IMF agreements become more and more sophisticated and numerous. “The mean value of
the average number of binding conditions for arrangements initiated between 1952 and 1973
was 4.23; between 1974 and 1982 was 7.13; between 1983 and 1990 was 12.07 and between
1991 and 1995/2000 was 12.42” (Gould, 2001: 6). The mission of the staff is to prepare
agreements between the Fund and the borrowing countries. Thus the staff directly negotiates
the binding conditions with them. In a principal-agent relationship, when we take into
account the increasing complexity of these conditions, it appears more and more difficult for
the Executive Directors (the principal) to exercise strong control over the staff (the agent).
This technical advantage allows the staff to influence the content of programs. The staff also
has a significant agenda-setting power based on the extension of IMF lending activities8.
Second, because of the political nature of the Executive Directors, domestic authorities are
reluctant to communicate strategic information to the IMF when they negotiate a loan.
Indeed, they are afraid that this information be used for political motivations. Information is
an essential element of conditionality. In order to incite domestic authorities from borrowingcountries to provide such information to the staff, the Executive Directors have guaranteed
their confidentiality. It is a classical situation of asymmetric information between the
principal and the agent. The staff knows information on the countries’ economic situation
not transmitted to the Executive Directors. It is a powerful source of autonomy for the staff.
International institutions need governance because of the issue of collective action: as
international institutions are implemented in order to serve the collective interest, it is
important to control the way the decision-making process evolves through time.
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4 The Governance of the IMF: Controversial Issues
One of the main lessons of past financial crises is that institutions matter. From the point of
view of international financial institutions (IFIs), this means that it is necessary to go beyond
the Washington Consensus. Indeed, since the Mexican and Asian crises, IFIs have modified
their approach to financial liberalization in order to integrate the role played by institutional
factors. The Bretton Woods institutions nowadays promote the so-called sequential approach
to financial liberalization: financial liberalization must be part of a program of
macroeconomic and microeconomic structural reforms. The so-called “second generation
reforms” are another way to insist on the role played by institutional factors. The idea is that,
since macroeconomic reforms are not sufficient to promote high-quality growth,
“ownership” reforms by domestic authorities and the civil society become central to
successful liberalization. The architecture of the new international financial system reflects
these challenges.
With this new international financial architecture, the IMF becomes a market institution,
although this raises some controversial issues about its governance.
The IMF as a Market Institution
Negative externalities engendered by private markets might be internalised by public
institutions when they produce information about states’ situations and the evolutions of
private markets. This role nowadays played by international institutions implies that they
have become market institutions. In this last case, their intervention represents a pre-
condition in order to obtain mature markets where asymmetric information is limited. This
aim is moreover clearly confirmed by the IMF: production of information and international
standards hold “the promise of better informed lending and investment decisions, increased
accountability of policy makers and better policy making…” (IMF, 1999: 2).
Production of information, transparency and accountability constitute the main elements of
the new architecture. Although their function is to promote market discipline, IFIs alwaysrely on market operators to elaborate the guidelines for information production. A double
interaction between institutions and the market seems to exist: the first, in which institutions
promote market discipline; and the second, in which market operators own the standards
and guidelines. By managing the production information process, the IFIs contributed
decisively to the reduction of uncertainty and consequently provided solutions to the
formation and revision of individual plans.
However, despite this progress, IFIs have to cope with two connected impediments to
establish the preceding pillars.
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A first limit is related to the credibility of IMF surveillance of countries’ policies. This
surveillance is exerted in accordance with article IV by means of annual consultations
between the Fund staff and representatives of each member country. However, the content
of the article IV discussions is not systematically made public. One argument is to consider
that systematic publication of reports would corrupt the quality and the frankness of the
discussion. In addition, publication could have adverse consequences, possibly causing
foreign investors to lose confidence. Although it may be based on relevant arguments, this
solution reduces the effectiveness of the surveillance. The power of the Fund to put pressure
on member countries and the efficiency of its surveillance activity are thus curtailed when
the markets are not informed about the difficulties experienced by each individual economy.
Second, we have some doubts concerning the incentives to divulge information by states or
private institutions. In both cases, IFIs and supervisors use market discipline to incite states
and private institutions to respect minimum standards and guidelines. For instance, in the
SDDS design, the IMF can eject a participating member if that member does not meet its
obligations. This sanction should discipline the domestic authorities because, when the
market observes its exclusion, its spread on international capital markets should rise.
However, such a threat does not seem credible since the IMF’s member countries are also its
shareholders. The incentive to participate is consequently undermined and the signals sent to
markets are not very easy to interpret.
IMF Governance
A major topic initiated by the debate on the new international financial architecture is IMF
governance. On the one hand, the Asian crisis has demonstrated the limited efficacy of the
IMF to restrain international contagion. On the contrary, IMF remedies in Asia – based on
restrictive monetary and fiscal policies – have seemed to worsen the situation. In fact, the
IMF has been the victim of “bureaucratic universalism”: applying universal remedies
without taking into account local specificities9
. On the other hand, the severity of the crisishas raised important doubts about the economic rationality of financial liberalisation. It
appears less and less evident that capital accounts convertibility on a worldwide scale leads
to a greater level of growth and development. How can the IMF’s behaviour before, during
and after the Asian crisis be explained? How can its unquestionable support of international
financial liberalisation be justified?
We interpret it in terms of governance. From this perspective, Stiglitz (2002) stresses that the
IMF “has pursued the collective interests of a subset of the international community, rather
than serving the broader collective interests for which it was originally created” (p.243).
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More precisely, the main interlocutors of the IMF are financial ministries and central banks.
The latter have close connections to the financial community. Consequently, it seems natural
that IMF remedies tend to reflect the interests of that community. These close connections
between the IMF and the finance ministry exert a decisive influence on the conduct of IMF
programme negotiations.
In his critical analysis of international financial liberalisation, Helleiner (2002) considers that
this agenda resulted from the disproportionate influence of stronger countries and private
interests. “The drive towards the universal liberalisation of capital accounts […] suited the
interests of the Northern banks and other financial institutions, and the governments that
represent them” (p.318).
It seems to us that these previous remarks refer to three critical issues concerning IMF
governance: (i) the IMF decision-making process; (ii) the weight of developing countries in a
changing world economy; and (iii) the ownership of reforms.
• The IMF decision-making process
Manifold reports dedicated to the new international financial architecture stress the lack of
transparency of the IMF decision-making process. The main obstacle to greater IMF
transparency relies on the Chairman’s Summing-up practice and to decision made by
consensus.
The Chairman’s Summing-up, also called “Chairman’s Concluding Remarks” fulfils three
roles related to the conduct of IMF Article IV surveillance (Van Houtven, 2000):
(i) to capture the progress of negotiations concerning a country’s IMF program;
(ii) to capture the main topics of the Board debate and to reflect the main differences
between the Board’s views and the opinions of the staff;
(iii) to indicate agreements and differences among Executive Directors.
The advantage of this procedure is to lead to the elaboration of common ground within the
Executive Board. However, it also leads to less transparency by underestimatingdisagreements within the Board. From an outsider’s perspective, the ongoing debate within
the Board and the manner in which final decisions are adopted appear largely non-
transparent, even secret.
Lack of transparency is reinforced by consensus decision-making within the Board. More
precisely, no formal vote within the Board concludes the adoption of a decision. Protection of
minor shareholders and minimisation of strong conflicts are the positive side of consensus.
The negative side is nevertheless important. On the one hand, the position of the staff is
strengthened. Indeed, consensus leads Executive Directors to adopt a “take it or leave it”
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behaviour because any amendment to staff proposals could be very controversial and
contrary to the consensus spirit. On the other hand, the accountability of the Board seems
low. With decision making by consensus, it becomes impossible to identify who is effectively
responsible for a decision. Contrary to the main central banks, neither formal up-or-down
votes nor the release of results exist for the IMF.
From the institutional perspective adopted in this paper, it seems to us that the lack of
transparency of the IMF decision-making process is a significant drawback for its legitimacy.
By choosing not to render public disagreements within the Fund, the Bretton Woods
institution is unable to explain its decisions to the civil society.
• Weight of developing countries in the IMF structure of governance
Another point which decreases IMF legitimacy is the asymmetry between industrialized
countries and developing countries. In the IMF, as in numerous international institutions,
voting power is determined by taking into account economic strength and not repartition of
the world’s population. As a result, the majority of the world’s population is weakly
represented within the Fund. “Whereas developed countries […] accounted for only 17 per
cent of voting strength in the United Nations […], 24 per cent in the WTO, and 34 per cent in
the International Fund for Agricultural Development, they account for 61-62 per cent in the
World Bank and IMF” (Helleiner, 2002: 312). Such under representation of developing
countries – which are the Fund’s main clientele - has led more and more observers to
consider that the IMF is dominated by the richest countries and that its action is illegitimate.
A more democratic IMF implies an increase in the influence of developing countries in its
structure of governance. At the same time, it is essential to keep in mind the logic of
collective action: the higher the number of participants in a decision, the less effective the
decision will be. There is thus a trade-off between democracy and effectiveness. The Board is
composed of 24 members. In the report by the Group of Independent Experts (1999),
manifold Executive Directors stressed that its size “makes a free-flowing of well-focuseddiscussion very difficult” (p.33).
The IMF could become more democratic by using two non-mutually-exclusive mechanisms:
to review quota formula and to modify voting rules.
Developing countries claim a new quota formula which could lead them to obtain a better
situation within the IMF. More precisely, IMF quotas have four functions. First, it is equal to
the member country’s capital subscription to the Fund. Second, quotas determine the
maximum amount of credit that a member can obtain from the IMF. Third, the distribution
of quotas determines members’ voting power. From a governance perspective, this is the
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most significant function. Each country has a voting power which is composed of two parts:
on the one hand, the basic votes equivalent to 250 votes; on the other hand, one additional
vote for each part of its quota equal to SDR 100,000. This latter part represents the main
determinant of each country’s voting power. The voting power is thus related to the size of
their quotas. Fourth, the country’s share in total quotas determines its relative share of SDRs
following a general allocation. General quota reviews occur on a five-yearly basis. It is
important to distinguish here between “equiproportional” increase and selective increase:
- equiproportional increase means that rises are such that pre-existing quota
distribution is unchanged. The increase is expressed as a uniform percentage of the
pre-existing quotas;
- selective increase occurs when quota increases vary across countries expressed in
terms of existing quotas or when the increases benefit only a subgroup of members.
The choice between this two modalities of quota increases is a matter of judgement by the
Executive Board. On average, equiproportional increases have represented 70% of total
increases while selective increases have represented 30%10. As a consequence, members’
quota shares evolve very slowly over time. This slow adjustment is in contradiction with the
rapid transformation of the world economy. There is now a large gap between the structure
of the world economy and the distribution of quotas between member countries.
In terms of governance, but also in terms of new financing needs for IMF members, quota
formula review is a major stake for the Bretton Woods institution. In 1999, the Managing
Director requested that a group of external experts publish a report (Cooper, 2000). The
Board’s mandate was clear: reviewing the quota formula with respect to “their adequacy to
help determine members’ calculated quotas […] in a manner that reasonably reflects
members’ relative position in the world economy as well as their relative need for and
contributions to the IMF’s financial resources, taking into account changes in the functioning
of the world economy and the international financial system and in light of the increaseglobalisation of markets” (Cooper, 2000: 3). The review group has proposed a simplification
of the current system based on one formula containing two variables, one representing a
country’s ability to contribute to the IMF’s resources11 and the other its external
vulnerability12. Such a formula is not applicable because it would exacerbate the decline of
developing countries quota share. A quota formula respecting economic criteria – such as the
capacity of contribution to IMF’s resources - thus seems contradictory to a political formula
implying a new distribution of quota shares in favour of developing countries. It is
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important to stress the fact that this new distribution does not respond exclusively to
economic reasons, but to political factors linked to IMF governance.
A second way to improve the position of developing countries in the IMF structure is to
modify voting majorities. Decisions within the Fund are adopted on the basis of weighted
voting power of the members. Ordinarily, a simple majority rule is required. However, for
sensitive decisions – as a new SDR allocation - special majorities are needed. Currently, there
are two special majority rules: 70% and 85%. It is important to stress that the second rule
allows the United States to exert a decisive influence on major IMF decisions. Indeed, it can
exert its veto power with its 17.5% voting share. In addition, industrialized countries –
through the Group of Eight- have a powerful position within the Fund. It is more difficult for
developing countries to exercise veto power because of their limited capacity to coordinate
among themselves. The evolution of decisions requiring special majorities exhibits a striking
trend. Originally, the Articles of Agreement included only 9 categories of decisions. At
present more than 50 categories of decisions require special majority rules. There is thus a
strong relationship between the increasing role of special majority votes and the expanded
responsibilities of the IMF. Not only has this latter trend led the staff to become more
autonomous relative to the Executive Board, it has also created inequalities within the Board
and more widely within the IMF governance structure. An increasing part of major IMF
decisions – those relating to the IMF governance structure - are under the control of major
countries. Such a development undermines the legitimacy of the IMF. As suggested by the
Overseas Development Council (2000), a solution to strengthen the IMF’s legitimacy is to set
special majorities below the voting share of its Board’s main shareholder.
• Ownership of reforms
In his study on adjustment programs, Killick (1995) identifies two major trends. On the one
hand, programs exhibit high mortality or interruption rates. From 1991 to 1993, 61% of IMF
programs were stopped before the end of their intended life. On the other hand, theconnection between structural adjustment programs and the implementation of policy
reforms is weak, more particularly for institutional reforms. These weak results can be
explained by the lack of ownership of reforms initiated by the IMF. Following a study by the
World Bank (1992), we define ownership as a multidimensional concept. First, ownership
refers to the extent to which the initiative for reforms planned in programs is local or
external. Second, intellectual conviction in the appropriateness of measures matters. Finally,
the degree of support from the top political leadership is a determinant of ownership. Lack
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of ownership rests on two main factors: the circumstances under which countries use IMF
resources and IMF conditionality.
Traditionally, member countries borrow from the IMF in crisis circumstances. The
negotiating mission ordinarily lasts two or three weeks. Under these circumstances,
structural adjustment programs raise two major problems. First, in a context of imperfect
knowledge about local particularities, the IMF cannot render compatible what we called
domestic and global governance. The IMF does not take the time to invest in institutional
knowledge. Second, the adoption of IMF programs does not result from consensus building.
Not only does the IMF staff not devote enough time to ensuring that the government is fully
involved in reforms, but also the government rarely consults the civil society. The letter of
intent – in which the borrowing country formally presents the policies it will undertake to
meet program objectives and conditions - is drafted in Washington. From this point of view,
IMF conditionality appears coercive and thus undermines ownership.
In general, lack of ownership, like the decision-making process and the low weight of
developing countries in the IMF governance structure, undermine the legitimacy of the
Bretton Woods institution.
5 What Institutional Change for the IMF?
Broadly speaking, institutional change has two main characteristics (North, 1990b). First,
high transactions costs resulting from the re-design of institutions imply that changes are
gradual, incremental. Second, there is a significant path dependency associated to
institutional change: history matters. A corollary question of institutional change is the
efficiency of such process. We refer here to both a problem of institutional efficiency and a
problem of political markets efficiency.
In the second section of this paper, we stressed that institutions are a main pillar of the
market process in a context of decentralized individual decisions and uncertainty. At thesame time, problems encountered by agents change over time implying institutional
adaptations. When institutions evolve in such a manner to allow agents to solve these new
problems, there is adaptive efficiency. It is a dynamic perspective of institutional changes.
For the IMF, adaptive efficiency is its capacity to respond to new concerns encountered by
the globalisation of markets, mainly the compatibility between domestic and global
governance. When institutions have a strong political signification, like the IMF, institutional
change also raises the problem of political markets efficiency. Agents evolve in a context of
uncertainty. They therefore only have an imperfect knowledge and understanding of the
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consequences of their political choices. More precisely, agents use subjective models to
choose between different political organisations (North, 1990b). The IMF suffers from both a
problem of adaptive efficiency – in that the dramatic increase in its missions undermines its
capacity to improve the market process - and a problem of political efficiency – based on its
lack of legitimacy in the absence of significant amendments which would take into account
changes in its missions. We focus our analysis of IMF institutional change by considering
two basic properties owned by any institution: legalization and political legitimacy.
Financial instability partly arises from the fact that the private sector seizes the opportunity
of the limited power of national and international authorities to implement new worldwide
rules of the game. Thus, globalisation raises the need for global governance. This latest
problem requires two kinds of responses linked to legalization and political legitimacy. The
first is related to the adequate kinds of rules to devise. The second is related to the
underlying institutional arrangements which might make these rules effective.
• What rules in a global governance perspective?
As it reinforces the interdependences at a worldwide scale, financial globalisation places
international institutions and governments in a dilemma. On the one hand, the increasing
world integration calls for the establishment of certain substantive rules, which precisely
define the standards of behaviour of each state as it interacts with other states. On the other
hand, the increase in capital mobility reduces the power of the authorities. It also limits the
ability of the countries to apply these rules and the capacity of international organizations to
enforce them. As repeated crises of exchange rate regimes demonstrate, substantive rules are
excessively rigid and difficult to apply. That is why any attempt to return to the Bretton
Woods order or a similar one, based only on a set of such rules, would be unworkable. That
is also the reason why substantive rules tend to be replaced by procedural rules 13 which -
unlike the former - do not define a priori behavioural standards, but continuously develop a
process of negotiation between states.Whereas most of the Bretton Woods substantive rules collapsed in the early 70’s, the
historical evolution of the 80’s and 90’s highlights the difficulty encountered by the
international institutions in creating new ones. For example, the negotiations aimed at
establishing a single set of world accounting standards come up against national specificities,
while capital moves freely throughout the world. So, the efforts to define new principles of
monetary organization seem to evolve necessarily to the implementation of procedural rules
designed to bring governments and the private sector together and to strengthen the
compatibility of their behaviours. At the same time, it seems to us that global governance
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needs a higher degree of legalization than today. Legalization is “a particular form of
institutionalisation characterised by three components: obligation, precision, and delegation”
(Abbott and others, 2000: 401). Obligation means that the behaviour of the states and other
international players is bound by rules and commitments. With behaviours becoming more
foreseeable, obligation is thus an essential element to support collective action. Precision
means that behaviours in international affairs are unambiguously defined by rules which
define what is required, authorised and proscribed. Finally, delegation refers to the extent of
the implementation, the interpretation and the application of rules which is under the
responsibility of a third party, such as the IMF.
From this point of view, orderly globalisation requires a higher degree of legalization with
the definition of an internationally accepted framework concerning the pace and sequencing
for opening domestic financial systems to world markets. Two main factors justify such a
higher degree of legalization.
First, international financial integration engenders centripetal forces which can destabilize
the international financial system. Indeed, if emerging economies believe that the benefits of
integration are greater than the costs - without distinguishing between short- and long-term
horizons - then they will prefer a rapid integration in order to attract a share of world
savings. This strategy could imply negative externalities on the international financial system
if their financial infrastructure is insufficiently developed.
Second, capital controls a priori contradict the so-called “Wall Street paradigm” according to
which the globalisation of financial markets induces only benefits via the optimal allocation
of resources. As a result, the imposition of capital controls could consequently be interpreted
by the markets as a negative signal and the cost of international loans (credit as well as
bonds) can increase. So, centripetal forces and negative signal do not incite the authorities of
emerging economies to adopt a prudential strategy of liberalization.
In this context, the IMF should develop a precise and mandatory code of good practicesconcerning capital movements, in order to avoid such heavy and sudden destabilizing
inflows and outflows. The opening of the capital account must be carried out under the
surveillance of the international institutions which provide a common framework to the
international community and, at the same time, respect the variable institution adaptation in
each country. At the Hong Kong annual meeting in September 1997, a first step in this
direction was proposed by the IMF.
The Board of Governors published a communiqué entitled “Statement of the Interim
Committee on the liberalization of capital movements under an amendment of the articles”.
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In this statement, the Board affirmed the necessity “to add a new chapter to the Bretton
Woods agreement” and, in order to promote an orderly financial liberalization, to adapt the
capital account liberalization to “the circumstances of individual countries, thereby
maximizing the chances of success, not only for each country but also for the international
monetary system”.
In order to reduce the negative effects coming from these controls, the IMF should propose a
broad set of principles and guidelines concerning their uses. Principles and guidelines
should be negotiated multilaterally, but each member-country should be free to use them
after consultation with the IMF. The negative signal linked to the imposition of capital
controls should be minimized if the IMF integrates them in a liberalization strategy. The
intervention of the IMF would serve as a guarantor of the credibility of the strategy adopted
by domestic authorities. Capital controls would become a positive signal for markets, i.e. the
illustration of the prudent strategy adopted by authorities in emerging economies, but under
the surveillance of the IMF.
The main implication of this proposition is that capital controls – and more broadly capital
account convertibility - must be under the jurisdiction on the IMF. More precisely, in the
same way that article VIII of the Bretton Woods agreement establishes current account
convertibility and article XIV specifies the transitional measures towards a total
convertibility, a new article to be written relating to capital account convertibility, would
institutionalise the appropriate sequencing of the financial opening of the member countries
and the game rules concerning capital controls, thus favouring a sustainable integration in
the world economy. This new article should specify to what extent the IMF has the
responsibility of monitoring progress towards capital account convertibility.
This new responsibility may be interpreted as an implicit way of forcing national authorities
to liberalize their economy. We propose here another interpretation. Instituting a code of
good practices indeed offers the advantage of stabilizing the relationship between thevarious agents in the financial markets, since internationally recognized standards model
their behaviour. As a result, far from promoting a global capital market that escapes any
control, enhanced surveillance and careful Fund management of capital account
convertibility would help ensure a gradual and successful integration of each country in the
global financial community. That also means that the IMF must develop its analysis of the
use of different types of capital controls by member countries.
• Strengthening IMF political legitimacy
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The credibility of this strategy, however, requires institutional changes aimed at
strengthening the effective power of the Bretton Woods institutions.
From this point of view, it seems necessary to enhance the legitimacy of the IMF so as to take
up the challenge of financial globalisation. Actually, the mastery of global interdependence
calls for the creation of international institutions endowed with a real capacity to promote an
evolution of government behaviour as well as the functioning of financial markets towards a
greater stability of the world economy. The monetary crises, which have been on the increase
since 1997, have re-launched the discussions about strengthening the IMF’s role and power.
There is a need for more effective political oversight on the part of the IMF. At present, the
IMF as a political body is weak both in terms of legitimacy and effectiveness. Legitimacy is
undermined by frequent political pressure from the governments of the major industrial
countries within the Executive Board. IMF lending to Russia is a striking illustration of such
pressures. Effectiveness is undermined by a fragile balance within the Fund between its
shareholders and its management. On the one hand, governors of the IMF – who are already
ministers in their country with full agendas – do not devote enough time to controlling IMF
activities effectively. They tend to delegate their functions to lower level staff in their
ministries or to the Executive Board. On the other hand, Executive Directors rarely spend
more than three years in the Board. Unlike the staff, they cannot develop their expertise
while there is a growing complexity and diversity of the IMF’s agenda. In general, contrary
to the principle of good IMF governance, there is neither effective political leadership nor a
strong Executive Board.
To reach these two objectives, it seems necessary to us to promote both a more political body
within the IMF and at the same time a less political decision-making process in the Board.
One way is to transform the International Monetary and Financial Committee (IMFC) (the
former Interim Committee) into a body possessing real decision-making power. At present,
this committee, which stems from the Committee of the Twenty of the early 70’s, iscomposed of 24 members: IMF governors, ministers or officials of similar rank. The IMFC
meets only twice a year. Notwithstanding its ministerial level and thus its political character,
the IMFC has no formal decision-making power, being merely consultative. In addition, the
frequency of its meetings is too low to permit it to exert a real impact on the managing of the
world economy. The former Managing Director of the IMF, Michel Camdessus, proposed to
transform the IMCF into a decision-making council. In order to strengthen the effective
support of member countries at a political level, he also proposed that the IMCF meet
periodically at the level of heads of state or government. There is strong opposition among
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IMF shareholders. Developing countries are afraid that such measures might destroy the
consensus building and lead major countries to decide by up-or-down votes. Many members
do not want to be invested with more political responsibility when emerging markets crises
put the IMF under stress.
An additional method could be to constitute the IMF’s Executive Board at ministerial level 14.
The Executive Board is the IMF’s true, permanent, decision-making authority. However, as
presently constituted, the Executive Board does not have the political power that would
enable it to discuss with member states at the same level of political competence and
responsibility. Such a transformation of the Executive Board into a ministerial decision-
making body, called “Council”, was provided for in the second amendment of the Bretton
Woods Agreement (in 1978). In order to avoid a problem of excessive politicisation of the
Board, it is important to strengthen its legitimacy by two measures (De Gregorio,
Eichengreen, Ito and Wyplosz, 1999). First, with respect to central banks, the independence
of the Executive Board should allow it to take decisions without political influence from its
main shareholders. Taking into account the strong influence of the Board on the agendas of
national governments, this is a crucial measure. So, its decisions should be better accepted by
members. Second, the Executive Board must be accountable for its actions to a political body
which represents the international community. Under the condition that the IMFC becomes
the effective political body of the IMF, the Executive Board could regularly present its results
and projections to the IMFC.
6 Conclusion
This paper has studied the role of international institutions from the point of view of global
governance. Our approach focused on the two basic functions of an international institution -
coordination and collective action - which raise the question of governance. In a dynamic
perspective, coordination underlines the necessary complementarity between domestic and
global governances. Collective action stresses the fact that not only the most powerful states
can influence strategies and decisions of institution, but also that international institutions
can obtain autonomy from governments.
Our analysis of institutional changes leads us to propose an intermediate approach between
an independent and specialized IMF on the one hand, and the constitution of a political IMF
with a large but imprecise mandate on the other. Legitimacy and a high degree of
legalisation are the cornerstone of IMF governance in a global perspective.
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