TWN Info Service on WTO and Trade Issues (Feb06/10)

19 February 2006

Dear friends and colleagues

An important and path-breaking paper on the need to reform the IMF, and in particular to have it not deal with trade and development policies, has been authored by Yilmaz Akyuz (formerly Chief Economist of UNCTAD and the main author and coordinator of its annual Trade and Development Report).

Below is an announcement of this paper, as well as a report summarising its main points.

Please send any comments that you may have on the paper and ideas for follow-up activity.

With best wishes
Martin Khor (Director, TWN)




A comprehensive critique of the role of the International Monetary Fund and a call for fundamental reforms is avaliable in the paper "Reforming the IMF: Back to the Drawing Board."

It is authored by Dr. Yilmaz Akyuz, former Chief Economist of UNCTAD. Akyuz was formerly Director of UNCTAD's Division on Globalisation and Development Strategies and the chief author and coordinator of its annual Trade and Development Reports.

The paper is published by the Third World Network and can be found at

It was originally presented at the 21st technical group meeting of the G24 held at the IMF headquarters in Washington on 15-16 September 2005. The G24 is the main grouping of developing countries operating in the IMF and World Bank.

The paper comprehensively reviews the IMF's various activities and performance, and provides reform proposals that include removing several issues from its activities, changing the content of the remaining functions, and overhauling the governance system.

The paper makes the following main points:

-- A genuine reform of the IMF would require as much a redirection of its activities as improvements in its policies and operational modalities.

-- There is no sound rationale for the Fund to be involved in development and trade policy, or in bail-out operations in emerging market crises.

-- It should focus on short-term counter-cyclical current account financing and policy surveillance.

-- To be effective in crisis prevention it should help emerging markets to manage unsustainable capital inflows by promoting appropriate measures, including direct and indirect controls.

-- It should also pay greater attention to destabilizing impulses originating from macroeconomic and financial policies in major industrial countries.

-- Any reform designed to bring greater legitimacy would need to address shortcomings in its governance structure, but the Fund is unlikely to become a genuinely multilateral institution with equal rights and obligations for all its members, de facto as well as de jure, unless it ceases to depend on a few countries for resources and there is a clear separation between multilateral and bilateral arrangements in debt and finance.

To view the full paper, click on the webpage below:

We are also attaching the paper as a Word File for your convenience.

For a summary report of the paper, please see below.



Report on some Highlights of the Paper by Yilmaz Akyuz on "Reforming the IMF: Back to the Drawing Board"

The International Monetary Fund should give up its lending and policy activities relating to development and trade, and instead return to its original mandate of safeguarding international financial stability.

This is one of the key messages in a paper "Reforming the IMF: Back to the Drawing Board" by Dr. Yilmaz Akyuz, former Chief Economist of UNCTAD.

The paper is published by the Third World Network and can currently be found at this webpage:

It was originally presented at a meeting of the G24 held at the IMF headquarters in Washington on 15-16 September 2005.

The paper comprehensively reviews the IMF's various activities and performance, and provides reform proposals that include removing several issues from its activities, changing the content of the remaining functions, and overhauling the governance system.

The paper by Akyuz makes the following major points:


The original rationale of the Fund, namely to safeguard international monetary and financial stability, is now even stronger than in the immediate postwar era given the size and speed of international capital flows and their capacity to inflict damage on the real economy.

Thus, the Fund needs to go back to its core objectives and focus on preventing market and policy failures in order to attain greater international economic stability and facilitate expansion of employment, trade and income."


To realise this objective, there should be reforms of the IMF on many fronts, including:

(a) The IMF to have a greater focus and stay out of development finance and policy.

(b) There should be strict limits to its crisis lending and instead the Fund should develop orderly debt workout mechanisms.

(c) The Fund should also focus on lending to finance temporary current account imbalances, with greater automaticity in meeting imbalances and less emphasis on policy adjustment.

(d) Conditionality should not be extended to structural issues but confined to macroeconomic and exchange rate policies.

(e) The IMF's surveillance activity has increased the vulnerability and fragility of emerging markets by promoting premature capital account liberalization and failing to alert countries to looming dangers. There should thus be fundamental change in the IMF's approach to capital market issues.

(f) The reforms must also address shortcomings in the Fund's governance.


The paper says that the Fund is no longer performing its original functions - securing multilateral discipline in exchange rate policies and providing liquidity for current account financing. Rather, it has been focussing on development finance and policy and poverty alleviation in poor countries, and the management and resolution of capital account crises in emerging markets.

The paper argues that there is no sound rationale for the Fund to be involved in development matters, including long-term lending. This is also true for trade policy which is a matter for multilateral negotiations elsewhere in the global system. There is also little rationale for financial bail-out operations that have so far been the main instrument of the Fund's interventions in crises.


By contrast the Fund should pay much greater attention to two areas in which its existence carries a stronger rationale: namely, short-term, counter-cyclical current account financing, and effective surveillance over national macroeconomic and financial policies, particularly of countries which have disproportionately large impact on international monetary and financial stability.

The IMF was originally designed to ensure an orderly system of international payments at stable but adjustable exchange rates under conditions of strictly limited international capital flows. A key task was to provide international liquidity to avoid deflationary and destabilizing adjustments and trade and exchange restrictions in countries facing temporary balance of payments deficits.


A major divergence from the Bretton Woods objectives has been in conditionality. Through conditionality the Fund has imposed exactly the kind of policies that the postwar planners tried to avoid in countries facing payments difficulties - austerity and destabilizing currency adjustments.

Austerity has been promoted not only when balance of payments difficulties were due to excessive domestic spending or distortions in the price structure, but also when they resulted from external disturbances such as adverse terms of trade movements, hikes in international interest rates or trade measures introduced by another country.

Furthermore, the distinction between temporary and structural dis-equilibria has become blurred, often implying that a developing country should interpret every positive shock as temporary and thus refrain from using it as an opportunity for expansion, and every negative shock as permanent, thus adjusting to it by cutting growth and/or altering the domestic price structure.


The paper analyses the IMF's "mission creep" into development finance and policy. The Fund has been criticised for three things: its promotion of rapid deregulation and liberalization, with adverse effects on growth and poverty; the interference with sovereignty caused by Fund conditions; and the inadequacy of financing for such programs.

Akyuz, however, pointed to the issue of whether the Fund should really be involved in development finance and policy, and poverty alleviation. He said there are indeed no compelling reasons why the IMF should deal with structural problems in developing countries. As noted, the Fund moved towards developing countries in large part because it was no longer needed by industrial countries as a source of liquidity and it lost leverage over exchange rate and macroeconomic polices of these countries.

The Fund introduced long-term facilities and concessional lending. In doing so, however, it has gone into the domain of development, with its programs and structural conditionality having addressed almost all areas of development policy, which are issues dealt with by multilateral development banks.

This is problematic for several reasons. First, it is not clear that the Fund has the necessary competence and experience in such complex issues. Furthermore, there are serious risks in entrusting development matters to an organization preoccupied with short-term financial outcomes and susceptible to strong influences from sudden shifts in market sentiments about the economies of its borrowers.

Difference of perspective is a latent source of conflict and competition between the Bank and the Fund, creating confusion in countries relying on policy advice from these institutions.

In reality much of what is being done in development by the Fund could easily be transferred to the Bank, said Akyuz. It is important that they have distinct mandates and objectives. He suggested that the Fund should cease development-related activities and transfer them to the Bank.


The paper criticises the Fund's intrusion into trade policy matters. It says that the Fund, as a monetary institution, was not to be involved in trade issues. In the event, however, it has gone in the opposite direction, putting pressure on deficit developing countries to undertake payments adjustment despite mounting protectionism in industrial countries against their exports, forcing them to resort to import compression and sacrifice growth.

More importantly, it has increasingly seen trade liberalization as an important component of structural adjustment to trade imbalances.

Low-income countries and LDCs working under Fund programs have been encouraged and even compelled to undertake unilateral trade liberalization, putting them at a disadvantage in multilateral trade negotiations. Trade liberalization has also been promoted in certain emerging market economies.

An implication of unilateral liberalization is that the industrial countries would not need to lower their tariffs in areas of export interest to developing countries in order to secure better access to the markets of these countries in the WTO where trade concessions are based on some form of reciprocity.

Liberalization without improved market access in the North creates the risk of deterioration in their trade balances, hence leading either to a tighter external constraint and income losses, or to increased external debt.

Developing countries find it difficult to raise their tariffs once they are lowered. Also, applied tariffs are now a benchmark in binding and reducing tariffs in the current negotiations on industrial tariffs in the WTO.

The paper notes that Fund staff have been advancing arguments in favour of unilateral liberalization in developing countries that go even beyond the positions advocated by major developed countries in the current negotiations on industrial tariffs.

It is advisable for the Fund to focus on its core responsibility of ensuring greater stability and better alignment of exchange rates, rather than narrowing the policy space for developing countries in matters related to trade and pushing trade liberalization as if a consistent international monetary order had existed.

"As the Fund transfers its work on development to the Bank, it should also stop being involved in trade policy issues or undertake activities that interfere with multilateral trade negotiations."


On the IMF's handling of recent financial crises, the paper criticises the Fund's ad hoc management of crises and instead proposes that it assists in orderly debt workouts. It says the IMF rescue packages tend to aggravate market failures and financial instability by creating moral hazard. The bailouts encourage imprudent lending since private creditors are not made to bear the consequences of the risks they take.

The paper adds that there has been growing agreement that orderly debt workout procedures drawing on certain principles of national bankruptcy laws provide a viable alternative to official bailout operations.

These should meet two goals: prevent financial meltdown in developing countries facing debt servicing difficulties and facilitate an equitable restructuring of debt. This requires a few key principles: a temporary debt standstill; provision of debtor-in-possession financing; and debt restructuring including rollovers and write-offs, based on negotiations between the debtor and creditors.

These principles could serve as the basis for a coherent approach to crisis intervention. The Fund appeared to be moving in this direction at the end of the previous decade, with the Board at first recognizing that a unilateral standstill may be necessary in extreme circumstances, and the Fund secretariat moving towards a sovereign debt restructuring mechanism (SDRM).

The secretariat's SDRM proposal had many shortcomings. But even a watered down version could not elicit adequate political support, and has been put on the backburner. Indeed, the impetus for reform has generally been lost.

NOTE: This is a shorter version of a report on the paper that was published in the South North Development Monitor (SUNS)