Global financial governance: whose ownership?

Business Economics, April, 2004 by Hossein Askari

The Need for Strengthening the Role of Developing Countries

If the broadened agenda and the deeper involvement of the World Bank and the IMF in efforts to reduce poverty and achieve financial stability are to succeed, they need broad-based global support. Yet their narrow governance base has created widespread frustration precisely when the stresses of globalization and the search for greater global economic and financial stability make support of these institutions more crucial than ever before. These institutions' original mandates were to promote cooperation and to enforce universally applicable rules and norms among member states. Now, however, they are attempting to reach deep into domestic economies of a subset in their membership, namely developing countries, by requiring far-reaching reforms to correct weaknesses in domestic financial systems and to remove structural impediments to economic growth and development. For these efforts to succeed, legitimacy in rulemaking is pivotal so that the membership at large will own the new norms, rules, and standards established by these institutions. Perhaps a symptom of stressed legitimacy is that some countries choose not to avail themselves of IMF financial facilities. Another symptom of stressed legitimacy is the weakening of the time-honored consensual decision-making process of the IMF's Executive Board. Increasingly, simple majorities push through rule-making decisions that run counter to the cooperative spirit of the institution. The strength of legitimacy depends on the extent and effectiveness of the participation of all members.

The so-called "democratic deficit" in its governance structure has become a major focal point of global debate with regard to the legitimacy of the IMF and in providing rules that govern the workings of the international economic and financial system and promoting growth and development. Thus, the mismatch between its widening agendas and the narrow base of its governance has called into question its capacity and effectiveness in preventing and resolving crises in member states and in promoting growth and employment.

To understand the crucial importance of legitimacy for the IMF in its rule-making ability, it should be noted that the IMF's Articles of Agreement created the first postmodern institution. When nation-states sign on to the Articles and become members of the IMF, they agree to give up part of their sovereignty in the realm of economic policy by assuming the obligations of IMF surveillance. Members do so in order to strengthen international cooperation and mutual confidence. The Articles of Agreement give the IMF the rights and responsibilities of surveillance to avoid "beggar-thy-neighbor" policies within an international cooperative framework. It is a conscious choice between international economic chaos and economic order, in large measure shaped by the experience of the Great Depression.

Surveillance is thus the IMF's writ and its all-important mandate. It can plausibly be argued that everything the IMF does is the outgrowth of that mandate. When surveillance is done correctly and effectively, it promotes international order within a cooperative framework; but it also promotes the emergence of a world economic community through vesting each member in the economic interest and the wellbeing of others. It is perhaps in this context that it can be said that if the IMF did not exist, it would have to be invented. Unfortunately, there are serious weaknesses in the way the IMF exercises its surveillance, among which the three most important are (i) the non-uniformity of treatment embedded in the asymmetry of surveillance of industrial and developing country members (as industrial countries no longer rely on the IMF for financial resources and thus are not obliged to adopt its advice as are developing countries through the practice of conditionality), (ii) the weakness of ownership of surveillance policies by all members, and (iii) the politicizing of its technical assessments.