International Monetary Fund

by Professor Jan van der Veen

In July, 1944, at the Mount Washington Hotel in Bretton Woods, New Hampshire, representatives from 44 nations created the International Monetary Fund (IMF, also called "the Fund"). By December, 1945, 29 countries had signed the Articles of Agreement that formally established the IMF. Five months later, in Washington, DC, the Fund began operations. Today, in mid-1999, 182 countries are members of the IMF. These members have provided almost US$300 billion in quota subscriptions to the Fund. This US$300 billion asset base far exceeds the annual gross domestic product of most of the countries in the world. The Fund's financial clout is immense. It has become arguably the most important institution mediating financial relationships among nations in the second half of the 20th century.  

The IMF also is a highly controversial institution. In 1998, having made very large loans to Thailand, Indonesia, South Korea and Russia, the Fund's Board of Governors determined that member countries needed to augment the Fund's financial resources. The share attributed to the United States was US$18 billion. The US administration duly requested the funds and the US Congress opened debate on the proposed legislation. Although the request eventually passed and was signed into law by the President, it was not an easy exercise. The administration was attacked by Democrats as well as Republicans. The controversies swirling around the IMF were freely aired on the floor of both the US Senate and, especially, the US House of Representatives. Thus the House majority leader, Republican Dick Armey, argued that the IMF actually makes matters worse in afflicted countries and encourages inappropriate behavior, "…behavior that leads directly to financial and economic collapse." David Bonior, the second-ranking Democrat in the House, wanted the administration to get tough with Indonesia's President Suharto, especially on issues involving human rights abuses and on official corruption.

Many voices condemned the IMF. Some extreme economic liberals, viewing the Fund as a quasi-governmental body that interferes with private, market-based solutions to international financial crises, urged the abolition of the IMF. So did some advocates of the mercantilist perspective; they argued that, since the Fund reflects a multinational agenda that is not identical with that of the US, Congress should bypass the IMF, take advantage of the turmoil in Asia, and promote the sovereign national interests of the United States. Finally, some advocates of the structuralist perspective also urged the abolition of the IMF which they view as a tool of hegemonic power; they argued that the programs imposed by the Fund actually frustrate economic development and impoverish people in low income countries who have only recently escaped from poverty. Advocates of all three perspectives urged thorough reforms not only of the IMF but also of the entire structure of international finance.

The controversies nearly blocked the US administration's effort to provide additional funds to the IMF. They highlighted three key issues. The first involves the reduction in sovereign power that is the price of admission a country must pay to join the IMF "club." The second is based on the economists' concept of "moral hazard." The third involves the extent to which the actions of the IMF serve the interests of the global hegemon, the United States of America.

The Functions of the IMF
In broad terms, each member of the IMF agrees to let other member countries know precisely how it will determine the value of its currency's exchange rate (via a peg, a float or a managed float), not to unduly restrict the exchange of its currency for that of other countries (low-income countries are treated far more leniently than are wealthy, industrialized countries), and to pursue "orderly and constructive" economic policies. With these commitments, IMF member countries agree to give up some of their sovereign authority. They agree to do so in the interests of creating and maintaining a smooth and orderly flow of funds among nations.
But economic activities among nations frequently are neither smooth nor orderly. Balance of payments crises occur with disquieting frequency. A nation, perhaps one that is unknowingly living beyond its means, or perhaps one that confronts an unexpected collapse of its export markets, may suddenly need help with its balance of payments. It may need a temporary infusion of foreign exchange. It may have exhausted its ability to borrow in the international financial markets. Under these circumstances the IMF, as a lender of last resort, may provide foreign exchange through a short term loan. Despite the Fund's willingness to make such a short term loan, a prospective borrower may be reluctant to ask for help. A loan from the IMF comes with a hefty price tag. The IMF typically requires the adoption of austere economic policy reforms.

The IMF claims that it does not coerce its member countries into accepting its policy reform recommendations. However, even the Fund's staunchest supporters agree that it is highly persuasive. Much of its clout comes from its highly trained staff of around 1,000 professionals that includes many internationally recognized experts in trade, finance, taxation, money and banking and other technical and sophisticated branches of economics. While some countries have access to this kind of expertise domestically, most do not. But effective policy advice is based upon far more than just technical expertise.

To assure that its experts are heeded, the IMF empowers its technical experts both indirectly and directly. Indirectly, international bankers, investment brokers, currency speculators and other actors in private financial markets have loudly, and frequently, supported the policy recommendations of the IMF: to a large degree, private capital (foreign direct investment, portfolio investment and loans) tends to flow into countries that have been blessed with the IMF's seal of approval. More to the point, very little private capital flows into countries that do not adopt the IMF's policy recommendations. Countries that want access to international financial markets flaunt IMF policy recommendations at their peril.

The IMF also empowers its technical experts directly. The foreign exchange loans provided by the IMF are made available in "tranches." The loans are parceled out, each parcel contingent on the implementation of a specific set of policy reforms. The Fund's technical experts devise these reforms, which are intended to provide an urgently needed and solid foundation for long-term sustainable economic growth. But there are side effects: the policy reforms also typically reduce the living standards of many people in the borrowing country. Despite the sometimes devastating effects on their people, countries wanting access to IMF loans must accept the "conditionalities" designed by the Fund's technical experts or they will not receive the funds.

Relinquishing Sovereignty: Changes in the IMF's Standard Austerity Program
The responsibilities of the IMF have changed a lot since 1945. Under the Bretton Woods foreign exchange system, the IMF was largely a deliberative body that discussed proposed changes in a given currency's par value (in terms of gold or, what at the time amounted to the same thing, dollars) before that currency was formally devalued or revalued. With the collapse of the Bretton Woods system in the early 1970s, and the emergence of today's mixed or managed exchange rate system, the IMF became far more deeply involved in the broad range of monetary, fiscal and other macroeconomic policies of each of its member nations. After all, the value of a country's currency is no longer a relatively simply matter of declaring that value in terms of gold. In a managed exchange rate system, virtually all elements of macroeconomic policy effect the foreign exchange value of a nation's currency. As a result, for well over two decades, the IMF has been increasingly involved in assessing, and in influencing, virtually all vital macroeconomic policies of its member states. This has become its traditional "surveillance" function.

Through its involvement in the Asian crisis, the IMF expanded its traditional surveillance function once again. It no longer confines its interests largely to the macroeconomic policies of its member countries. The Fund increasingly is involved in microeconomic policies operating at the level of the firm. The Fund's expanded interests are reflected in its standard austerity package of policy reform conditionalities.

IMF loans typically have been used to help low income countries resolve their short-term balance of payments problems. The policy reforms attached as conditions to these loans correct fundamental balance of payments problems. In general, these conditions require policy reforms that encourage merchandise exports and other sources of earned foreign exchange and discourage imports and other sources of spending foreign exchange. After all, the IMF needs adequate safeguards that will assure, to the extent possible, that its loans will be repaid. It would make no sense for the IMF to help countries climb out of debt only to watch them collapse all over again.

A low income country that turns to the IMF for assistance normally suffers from a typical set of policy problems. In the past that country may have pegged its currency either to a strong international currency such as the US dollar, or to a "basket" of currencies; that peg may have outlived its usefulness. The country may have run sustained fiscal deficits in which government spending exceeded government tax receipts for years. In most cases, because its citizens found it difficult to save, its national saving rate also may have been low for many years. And, most importantly, the value of its exports may have exceeded the value of its imports for years, a gap which may be growing. For all these interrelated reasons, it may have borrowed too much foreign exchange on the international markets. Now it faces the inevitable result of spending more than it has been earning. It has exhausted its ability to borrow additional foreign exchange. Its creditors begin to clamor for payment. It is on the verge of bankruptcy.

This is when the IMF steps in. An IMF loan will help the country weather the storm and buy it some time with its creditors. The conditionalities attached to the loan will assure that the borrowing country's current account deficit is reduced as its exports rise and its imports fall. To accomplish this reduction, the IMF typically insists that the borrowing country introduce three sets of policy changes simultaneously. The borrowing country must:

  • Depreciate its domestic currency to make exports cheaper and imports more expensive. Exports will therefore rise and imports fall. But it will take some time before exports and imports respond to the depreciation. Other policy measures having more immediate effect are required as well.
  • Reduce government spending and increase taxes (a contractionary fiscal policy) so that both government purchasing agents and ordinary consumers spend less; expenditures on imported goods and services will fall as a result.
  • Raise interest rates (a contractionary monetary policy) by tightening credit to reduce prospective investment. Local businesses will find it more expensive to borrow money and therefore will finance fewer new business ventures, expansion plans and working capital requirements. Raising interests rates normally has another salutary effect: domestic money managers will be more likely to keep their currency in the domestic market, and foreign money managers will find the higher interest rates to be an incentive to transfer foreign exchange into the domestic economy because the returns to doing so will have risen.

Before the onset of the Asian crisis, this was the nature of the fund's typical macroeconomic austerity reform program. The essential economic components are variations on a theme: depreciate the currency and adopt contractionary fiscal and monetary policies. Such an austerity reform program can have severe effects on many ordinary citizens. Some people may descend into abject poverty, unable to find food or buy medicine or keep their children in school. To soften the blow, the Fund usually builds into its policy reform programs specific assistance projects designed to help those most severely harmed by those reforms.

The Fund modifies its program to take specific circumstances into account. Special cultural, economic, historical, political and social factors combine to make each intervention by the Fund unique. Of these, economic factors usually are most emphasized by the Fund, especially those that distinguish between illiquidity and insolvency. At the macroeconomic level, if governments as "… sovereign borrowers were simply illiquid…, policy should center on rescheduling debt and lending additional funds. If they were insolvent, it should center on permanent reduction of debt obligations."

The distinction between illiquidity and insolvency holds with equal force at the microeconomic level of the firm. If banks or other financial institutions, manufacturing companies, construction firms, or any other businesses are insolvent, most observers would agree that they should close their doors. If those firms are not deemed insolvent, but merely need access to funds to get them through a period of temporary difficulties, then most observers would agree that they should be provided loans. The distinction is important. A bankrupt firm that closes its doors tosses its former work force onto the street. A struggling firm that is merely illiquid and is provided a loan will continue to employ most, if not all, of its workers and will continue to contribute to the economy.

Problems at the microeconomic level of the firm normally are worsened by the Fund's macroeconomic austerity program. For example, higher interest rates and tighter credit may push some firms over the brink into bankruptcy. If a large number of business firms normally carry a lot of debt, their increased debt service payments may easily carry them from illiquidity into bankruptcy. In short, some aspects of the IMF's macroeconomic reform program may sharply worsen the crisis by shutting down otherwise viable business and generating additional, and possibly unnecessary, unemployment.

The distinction between illiquidity and insolvency is important because it affects the policy program designed by the Fund's technical experts. If the IMF believes that it is being asked to resolve a relatively simple illiquidity crisis, then it will prescribe policy reforms that intrude only minimally upon the macroeconomic policy making prerogatives of the state. The Fund will have no reason to become immersed in policy decisions at the microeconomic level of the firm. It will not insist that specific businesses be shut down.

If, however, the IMF believes that it is being asked to resolve a deeper insolvency crisis (or an illiquidity crisis so severe that, when addressed, individual firms will become insolvent), then it will intrude deeply upon the macroeconomic policy making prerogatives of the state. Furthermore, it may believe that it is justified in intruding on the state's microeconomic policy making prerogatives as well. So it was in the Asian crisis. In Indonesia, for example, "…the IMF has insisted on a long list of reforms, specifying in minute detail such things as the price of gasoline and the manner of selling plywood. The government has also been told to … curtail the special business privileges used to enrich [former] President Suharto's family and the political allies that maintain his regime."

The Fund's policy prescriptions also were replete with similar highly specific microeconomic interventions in Thailand and South Korea. The IMF intruded far more extensively into the microeconomic policies of the Asian crisis countries than it has in its earlier, more traditional crisis interventions of the past.

There is a flip side to the Fund's growing involvement in the microeconomic policy prerogatives of the policy makers of borrowing countries. As the Fund's involvement grows, the authorities of local political leaders diminishes. The Asian crisis exacerbated a trend: for the member countries of the IMF, especially the low income countries in crisis, economic sovereignty is more negotiable now than ever before.

Moral Hazard
In 1994 Mexico faced a severe balance of payments crisis that was correctly diagnosed as primarily a crisis of illiquidity. The IMF and the US Treasury extended a substantial (around US$40 billion) line of credit to Mexico; less than two years later, Mexico had repaid all the money it had borrowed and the crisis was fully resolved.

The Mexican crisis of 1994-95, called the "tequila crisis," forcefully illustrated the dangers of an excessively long commitment to an overvalued, pegged, domestic currency. The Government of Mexico should have devalued the peso, or allowed the peso to depreciate well before its economy began to falter. It did neither. International investors, losing confidence in the ability of the government to manage the Mexican economy effectively, began to pull their investments out of the country. Doing so forced them to sell pesos and buy foreign exchange, typically US dollars. This put additional downward pressure on the peso, making a devaluation inevitable. The flow of foreign resources leaving Mexico quickly turned from a trickle to a flood. The economy was in crisis.

Many factors contributed to the tequila crisis. One of the most controversial was the government's decision to issue and sell "tesobonos." Tesobonos were bonds, or debt instruments, issued by the Government of Mexico and denominated in dollars.

Normally bonds issued by the Government of Mexico are issued in pesos. Foreigners who buy peso bonds must first convert their money, such as US dollars, into pesos to buy the bonds. Later, when they redeem the bonds, they are paid in pesos and then reconvert the pesos into dollars. If the value of the peso falls between the time of purchase and the time of redemption of the bonds, the investor will be repaid with pesos that are worth fewer dollars; the investor absorbs the loss caused by the devaluation of the peso. The risk of this kind or loss, called foreign exchange risk, is borne by the foreign investor. Thus, if international investors have no confidence in the ability of the Government of Mexico to maintain the dollar value of the peso, they will be unwilling to buy Mexican bonds because they will be unwilling to accept the foreign exchange risk. The government, as a result, will be unable to raise the foreign exchange it needs to manage the economy.

The situation is substantially different, however, if the government's bonds are issued in dollars. Foreigners who buy tesobonos do so with foreign exchange such as US dollars. Later, when they redeem their tesobonos they are paid in US dollars. They are indifferent to whatever changes may occur to the dollar value of the peso between the time of purchase and the time of redemption. The foreign exchange risk is borne not by the foreign investors but by the Government of Mexico. If the government were to devalue the peso, then it, and ultimately Mexican taxpayers, would bear the financial loss. In effect, by issuing tesobono bonds denominated in US dollars, the Government of Mexico tried to assure international financial markets that it would not devalue the peso. But the pressures were too great. Eventually the government was forced to devalue the peso. Having done so, it knew that it would have to borrow US dollars or buy them with pesos of substantially lower value to pay back foreign investors when they redeemed their tesobonos. The Government of Mexico borrowed some money from the IMF and then redeemed the tesobono bondholders, as promised, in US dollars.

The celebrated story of the repayment of the tesobono debt led to exceptionally sharp criticism of the IMF. The tesobono story highlighted a phenomenon economists refer to as "moral hazard."

In its pure form, the term moral hazard refers to a situation in which an insured person profits by causing the insured event to occur. More generally, it refers to a situation in which a person's behavior may change because an outside party provides insurance against that person's risky behavior. The insurance induces unduly risky behavior, or behavior based on an unduly optimistic assessment of risk. For example, if the IMF guaranteed that a loan made to a Mexican bank or other firm would be fully repaid no matter what, then the lender might not bother to go through the normal process of evaluating the risk of lending money to that firm, saving money in the process. Absent the Fund's guarantee, the lender would go through that more expensive evaluation process and would charge a higher rate of interest to cover its additional costs.

In the wake of the 1994-95 Mexican crisis, most international investors suffered severe losses. The value of the assets they owned in Mexico, expressed in terms of pesos, had not changed much. But the devaluation of the peso meant that the value of those assets, expressed in terms of US dollars, had fallen sharply. Some lenders also took substantial losses: loans they had made in pesos before the devaluation were being repaid in much cheaper pesos. There were, of course exceptions. Some players in the international financial markets, having seen the handwriting on the wall, successfully transferred their assets to dollars before the devaluation of the peso. And then there were those investors who had purchased tesobonos. The Government of Mexico could have defaulted on its redemption of the bonds. It could have negotiated partial, rather than full, payment to the bond holders. But it did not do so. The holders of tesobonos suffered no loss whatsoever, thanks in part to the IMF's "bailout" package; some of the money borrowed from the IMF was used to repay the holders of tesobono bonds. The IMF effectively bailed out highly influential investment bankers in several large financial houses in the United States who had purchased Mexican tesobonos before the tequila crisis broke.

The moral hazard question, in the context of the tequila crisis, is exceptionally clear: would the investment bankers who purchased Mexico's tesobonos have done so without knowing in advance that the IMF would spring to their rescue in the event the Mexican economy were to collapse? While the question is clear, the answer is less so. What is clear is that the Mexican economy did collapse, and IMF funds were used to pay tesobono bond holders, thus saving them from the kinds of substantial losses suffered by almost all other foreigners who invested in Mexico.

As a result of the criticism heaped upon the IMF for effectively protecting foreign investors in tesobonos, IMF technical staff became more sensitive to issues of moral hazard. Analysts now have clearly identified three distinct kinds of moral hazard that are relevant to the actions of the IMF.

The first kind of moral hazard is illustrated by the tesobono example. Lenders fail to exercise due diligence when making loans (for instance, ignoring early warning signs that a crisis is approaching) because they believe that the IMF has guaranteed that their loans will be repaid. This is a case of moral hazard before the fact, one that takes place before the onset of the crisis.

The second kind of moral hazard takes place after the fact, that is, after the onset of the crisis. According to some critics of the IMF, international bankers lent enormous sums to bankrupt Korean banks after the financial crisis hit South Korea not "…because they were ignorant of Korean bank insolvency. They did so because they rightly believed that the Korean Government and the IMF would protect them." And they did so without exercising due diligence (for instance, assessing the extent of the bank's insolvency) because the cost of doing so would have been wasteful. After all, due to Fund involvement, their loans were guaranteed.

Clearly this after the fact example of moral hazard is significantly different from a before the fact example. In the tesobono example, the lenders were not certain that the Fund would protect them. In the Korean case, the lenders were certain. One of the primary functions of the IMF is to encourage international financiers to continue to lend to a country that is already in a crisis. If after the fact loan guarantees are necessary as a temporary measure to assure access to international finance, than the Fund should issue these guarantees.

The third kind of moral hazard refers not to lenders or to borrowers but to the policy makers who run national governments. Policy makers often postpone making politically difficult decisions that clearly serve their country's national interests. The cumulative effect of postponing these decisions can be financially disastrous for the economy as a whole. But the very existence of the IMF, willing and able to lighten the country's financial burden after the onset of an economic crisis, may cause those policy makers to delay making those difficult decisions further than otherwise would be the case. Perhaps, for example, Indonesia's Suharto was willing to tolerate the official corruption and human rights abuses that characterized his presidency because he believed that, in the event of an economic crisis, the IMF would provide assistance.

One can only speculate on the existence of this third kind of moral hazard. To be sure, it seems implausible that policy makers in low income countries would deliberately invite the kinds of severe austerity packages that the IMF routinely imposes as conditions of its assistance. Indeed, several countries have built massive amounts of foreign exchange reserves to forestall speculative attacks on their domestic currencies as an alternative to calling on the IMF. But it is quite possible that some actions of a few governmental leaders are conditioned by this third kind of moral hazard.

The Fund as Stalking Horse
The International Monetary Fund is led by a Board of Governors consisting of ministers of finance (for the United States, the Secretary of the Treasury) or the heads of central banks. They represent their individual governments and meet only occasionally. The daily work of the Fund is managed by a 24-member Executive Board. Eight executive directors, including the US Executive Director, represent individual countries; the other 16 represent different groupings of countries. The decisions of the Executive Board are based on votes taken at frequent board meetings. Each member's voting power is proportional to its quota subscription. Thus the United States, which contributes about 18 percent of the total subscriptions of the Fund (larger than that of any other country), has a weighted vote of 18 percent. Formal votes, however, are seldom taken. Of the several hundred decisions made annually by the board, all but a tiny handful are consensus decisions.

Those consensus decisions almost always are consonant with US policy. Many analysts, from widely divergent political perspectives, have commented on this remarkable degree of agreement; some have gone further and suggested that the IMF effectively serves the national interests of the US. For example, Walden Bello, a staunch advocate of grass-roots non-governmental organizations, testified before the US House of Representatives that "…the Fund is being brazenly used by the Clinton administration as an instrument to promote the bilateral trade and investment objectives of the US…." Bello also has observed that, in South Korea, the IMF "…is viewed as a surrogate for the USA … [and that] US officials have, in fact, done little to hide the fact that they see the Fund … as doing their bidding." From a very different political perspective, Gerald O'Driscoll, Jr., writing for the Heritage Foundation on the widely held perception "…that the IMF is a mere instrumentality of U.S. policy," comments that, for foreigners, "there is no doubt that the script for the IMF is written in the U.S. Department of the Treasury…."

The evidence that the US is using the IMF as a cover to pursue its bilateral policy interests is particularly striking in South Korea. During the Cold War, US bilateral relations with South Korea were dominated by issues of global politics and military security. Economic issues routinely took a back seat. "In the halcyon days of the Cold War, the deviant nature of the Korean financial system (deviant from the standpoint of laissez-faire) was ignored or soft-pedalled [sic]. The United States always stood ready to help out in the event of trouble, slapping the Korean wrist now and then for maintaining market barriers and not liberalizing enough."

Despite the fact that the US still has some 37,000 troops stationed on the Korean peninsula, the situation has changed substantially since 1989. Mild slaps on the wrist have been replaced with tough negotiations on trade related issues. Long afraid that a chaebol-driven and rapidly growing South Korea would, like Japan, generate massive and seemingly permanent US merchandise trade deficits, in the late 1980s the United States began to favor policies that inhibited South Korean imports into the US and stimulated US exports to South Korea. According to Bello, the results were quite striking: "…[South] Korea saw its 1987 trade surplus of $9.6 billion with the USA turn into a deficit of $159 million in 1992. By 1996, the deficit with the USA had grown to over $4 billion…."

Yet, from the US perspective, these results still were not enough. The Government of South Korea continued to follow its "deviant" ways. The chaebol continued to dominate the South Korean economy, which continued growing rapidly. The Asian economic model had a newly emerging champion in "Korea Inc."

But then, in the mid-1990s, "Korea Inc." began to unravel. First, South Korea was rocked by scandal flowing from the close relationship between business and the state: two former presidents were jailed for corruption, having accepted bribes of about $900 million and $600 million respectively. Then, during the ensuing state of political paralysis, the government was unable to take the strong actions needed to avert a financial collapse as the Asian crisis smashed into South Korea in late 1997. The IMF arrived shortly thereafter.

Negotiations on a policy reform package between the Fund and a vulnerable South Korea quickly moved past discussions of how best to rectify the growing balance of payments crisis to discussions of how best to restructure the South Korean economy. The IMF pressed the Government of South Korea to adopt reforms that were strikingly similar to those that the United States and Japan had been advocating, unsuccessfully, for years. The Koreans agreed to policy reforms that "…included accelerating the previously agreed upon reductions of trade barriers to specific Japanese products and opening capital markets so that foreign investors can have majority ownership of Korean firms, engage in hostile takeovers opposed by local management, and expand direct participation in banking and other financial services…. Koreans and others saw this aspect of the plan as an abuse of IMF power to force Korea at a time of weakness to accept trade and investment policies it had previously rejected." Thus the IMF accomplished what the US and Japan, acting bilaterally, could not.
The United States not only exerts considerable influence over the IMF, it also jealously guards against any efforts to dilute the authority of the Fund. Japan's proposal to create an Asian Monetary Fund provides a case in point.

In September, 1997, shortly after the start of the Asian crisis, officials from the Japanese Ministry of Finance formally proposed the creation of an independent Asian Monetary Fund. In the eyes of the US, the creation of this institution would have threatened "… the primacy of the International Monetary Fund's role in coordinating world responses to financial crises." As proposed, the Asian Monetary Fund, supported with pledges of $100 billion primarily from Japan, China, Hong Kong, Taiwan, and Singapore, would have been uniquely Asian. This Asian fund would have been independent from the IMF. Its disbursements were intended primarily to help the countries in crisis stabilize their macroeconomic conditions and overcome problems of illiquidity; they were not intended to induce reforms of the structural foundations of those countries. Conditionalities would have been less stringent than those associated with IMF loans. The Asian Monetary Fund would have made "…quick-disbursing loans available to members in difficulty, with conditionalities limited to stabilisation (sic) rather than to IMF-type structural reforms. It would operate to reinforce the demonstrated strengths of Asian-type financial systems, and not to disavow them."

Not surprisingly, the US moved forcefully to quash this challenge to the prerogatives of the IMF. In November, 1997, less than two month after Japan formally proposed the creation of the Asian Monetary Fund, finance ministry and central bank deputies from 14 Asia-Pacific countries met for the first time in Manila, the Philippines. Participants in this "Manila Group" discussed their nation's responses to the Asian crisis. Under heavy pressure from the United States, the Manila Group adopted the so-called "Manila Framework." Each participating Asian-Pacific country agreed that any funds it might provide to help any Asian country in financial distress would be predicated on a successfully negotiated IMF economic reform program. By endorsing the notion that the IMF would continue to take the lead role in resolving the crisis, the Asian-Pacific countries essentially eviscerated the Japanese proposal.

Later that same month, at the 1997 meetings of the Asia Pacific Economic Forum in Vancouver, British Colombia, the Japanese delegation conceded that the idea of an independent Asian Development Fund was going nowhere. The US Treasury subsequently expressed satisfaction with the failure of what it considered an effort to weaken tough and necessary IMF conditionalities in Asia.

Reforming the International Monetary Fund
Japan's proposal to create an Asian Monetary Fund was spawned, in part, by widespread criticism of the IMF's reform programs in Asia. The failure to create a competitor to the IMF did not quiet the voices calling for reform of the IMF. If anything, those voices grew louder and more numerous. By early 1998, advocates of reform included senior members of both the US Government and the IMF itself. Finally, the international community got the message: not only was reform desirable, it was inevitable.

As discussions on specific proposals to reform the IMF began, they were quickly subsumed under a far broader title: "Reforming the Architecture of the Global Financial System." Notwithstanding this lofty label, the reforms being considered do not rise to the level of creating a fundamentally new finance structure. Unlike the proposals considered at Bretton Woods in 1944, the current reform proposals are on a very small scale. While they are many in number, each involves only a relatively minor adjustment.

While many aspects of the final shape and content of these reforms remain cloudy, two things are very clear. First, the kinds of changes that have been or are being adopted reflect the reigning Anglo-American liberal perspective of international political economy. Basically, the US is reforming the IMF in its own image. In the words of the US Secretary of the Treasury (then Robert Rubin), the approach adopted by the US "…to reforming the global financial architecture is based on the fundamental belief that market-based systems create the best prospects for job creation, economic growth and rising living standards both in the U.S. and around the world. We also believe that governments play a necessary role in creating the conditions for markets to product the best results…."

Second, the effort to reform the architecture of the global financial system will continue to proceed in a piecemeal and incremental manner. Very few analysts anticipate a Bretton Woods-type conference and no participating country has called one. The United States has made its position clear: "Going forward will not require the kind of far-reaching institutional change that we saw in 1945, but the international architecture does need to adapt substantially for the very different circumstances that have developed over the past decade, and to fully prepare for the challenges of tomorrow." The International Monetary Fund's position as arguably the most important institution mediating financial relationships among nations will remain secure well into the 21st century.