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On 1 November 2007 French economist Dominique Strauss Khan (DSK) took over as the new managing director of the International Monetary Fund (IMF). He took office at a special moment for the institution, when it was necessary not only to pick a successor for Rodrigo de Rato before the end of his term, but also during a period in which the legitimacy and credibility of the institution are far from what they were in the past. Mr Rato's successor promises changes that are being demanded by many governments in the South.

Public opinion was shaken three months back when Spain's Rato - at the head of the international financial institution since mid-2004 - decided to resign his job two years before the end of his tenure, alleging personal reasons. The announcement had more repercussions and drew more speculations than was expected, since it occurred a few days after the resignation of his "colleague", president of the World Bank Paul Wolfowitz. Bank staff as well as from the European Union demanded the resignation of US's Wolfowitz in April 2007 due to the corruption scandal that involved him and a Bank employee, with whom he was romantically involved. Wolfowitz, who was also US Deputy Secretary of Defence, was succeeded by former US Trade Representative Robert Zoellick.

The IMF and the World Bank are considered "sister" institutions, since they share both their origins and overall objectives, although each institution has its specific spheres of action and obligations. According to the institutions themselves, they "share a sole objective: to improve the standard of living of member countries. The ways in which they pursue the achievement of this objective are complementary: the IMF takes care of ensuring the stability of the international financial system, while the World Bank concentrates on long-term economic development and the reduction of poverty." It could be said that these objectives have survived since the foundation of the two institutions more than six decades ago, at the Bretton Woods Agreements after the Second World War. The fact that these aims are unchanged confirms not only that they have not been met but that, unfortunately, poverty and underdevelopment are still an everyday occurrence in the 21st century. The proof of this reality, which may seem trivial, had never been questioned until various countries from the South, historically indebted to the Fund, started to pay back their debts and to expose the lack of efficiency in the performance of the multilateral financial organization.

The de-IMF-ization of Latin America

Over the last few years, a few Latin American economies finalized long decades of debt with the institution: Brazil and Argentina first, Uruguay next, followed by Venezuela and Ecuador. In December 2005, Brazil announced that it would pay the full sum of the debt, which involved paying over 15 billion dollars. The Brazilian government, which had accumulated several primary surpluses, did not bat an eyelid at such a huge sum, among other things because it held that the country would save no less than 900 million dollars in interests by anticipating payment of the debt. Days later Argentina did the same, also anticipating payment to the IMF: approximately 10 billion dollars. But this hefty sum is barely 8.9% the total public debt of the country.

In November 2006 it was Uruguay's turn to announce it would cancel in full its debt with the IMF. The total sum of its liabilities with the institution was 1.08 billion dollars, a much smaller sum than was owed by its commercial partners Argentina and Brazil, but at the time it represented around 6% of the country's GNP.

The government of Hugo Chávez was next in taking the initiative of breaking its ties not only with the IMF but also with the World Bank, in April 2007. As was to be expected, Venezuela's break with both institutions was much more radical than the case of the previous countries, and a heavy emphasis was put on the freedom the country regained through paying the debt. According to the press, the finance minister of the Bolivarian Republic gave no indication of the sum Venezuela was paying the Fund, but mentioned that when Hugo Chávez became president in 1998, Venezuela already had accumulated a debt of 3.30 billion dollars with the two organizations.

Ecuador carried on with the trend of anticipating payment to the Fund, and also cancelled its debt in April 2007. With an attitude more similar to Venezuela's than that of Brazil or Uruguay, President and economist Rafael Correa underlined the economic independence his country would attain by cancelling a 9-billion dollar debt with the Fund. Mexico is another example of a country willing to pay as soon as possible part of the debt it had with the multilateral credit institutions. In August 2006 Mexico announced it would anticipate payment of 7 billion dollars to the World Bank and the Inter-American Development Bank (IDB). To make this payment effective the government became indebted to the Bank of Mexico, which provided the international reserves needed to pay.

As these examples show, in Latin America there are basically two positions with respect to the multilateral organization: those countries who while breaking away from the debtor-creditor relationship, still keep good relations with the organizations (Brazil, Uruguay, Mexico) and those which, like Venezuela and Ecuador, show their rejection and complete breaking off with the Fund, although for the time being they continue to be member states. Argentina might be considered a “hybrid” case, where there was no open declaration of war with the Fund but when the debt was cancelled, analysts agreed that the motives for the decision were basically political. Argentina showed its ambiguity toward the institution by becoming one of the Latin American countries that pronounced itself in favour of DSK's candidature.

Whatever the reasons may be, reality shows that the IMF's interference in the region is increasingly smaller: it is no coincidence that the different governments, have successively taken the decision to end their relation of dependence with the Fund. Granted that the economic bonanza of recent years has allowed the different countries to accumulate reserves and honour some of their obligations. But even beyond that, it cannot be denied that there is a clear intention to break off - at least monetarily in all cases - ties with the IMF, and although some countries have kept good relations with the organization, some others have broken off less amicably. This is most noticeable when countries become involved in other types of indebtedness in substitution of the Fund. Although in recent years high growth rates and improvements in public accounts have been reached, there are other liabilities in the debt of the region's countries. Even specialists like Eric Toussaint, president of the Committee for the Abolition of Third World Debt (CADTM), hold that a great deal of attention should be paid to the “disindebtedness” of Latin American economies, since breaking with the Fund does not mean that the debt has fallen. In fact, "the Third World debt increased in 2006 by more than 250 billion dollars". The increase occurred mainly by means of two factors: 1) an increase of the external debt with private agents by issuing public bonds or contracting new debts with private banks, and 2) a tremendous increase of the internal public debt.

The Fund from within and the voices of underdevelopment

On the other side of the line, with respect to the Fund itself, although managing director R. Rato made congratulatory statements anticipated payments, his position is difficult to hold from the point of view of the survival of the organization itself as a lending institution and as an institution which "suggests" politics to its borrower countries. The fact that various countries anticipated cancellation of their debt goes "against" the very existence of the Fund. Indeed, the credit portfolio of the organization decreased from USD 81 billon to 12 billon in the last three years. The power wielded by the institution has diminished. Also, the organization faces competition from other financing sources when it comes to lending to countries that need the money: big private investors and countries like China, Russia or some of the Arab countries, which have large quantities of cash reserves, and can offer loans under more favourable conditions without the need for so many conditionalities.

Is the IMF destined to vanish? It does not seem a totally wild question these days. In actual practice the Fund is becoming increasingly less relevant. The next question is: "is this a 'bad' thing? Or might it be a sign that underdeveloped countries no longer depend on aid conditioned and organized from the countries from the north? Developing countries would still be subjected to the external debt of many other creditors. But a crucial difference between them and the Fund is to what extent the IMF intervenes in the economies to which it grants loans, in sharp contrast to other financing sources. Likewise, it could be argued that the ends for which the Fund was created have not been met and the greater the dependency of the countries toward it, the furthest were they from being met. To make matters worse, the latest global stock market shake-ups were managed more by the developed countries' central banks than by the IMF. It was the former that prevented the collapse of the world economy. Therefore the idea of an institution that ensures the stability of the international financial system does not seem indispensable, or at least, it could be, if the institution were really engaged in complying with its aims, and were managed efficiently.

It is on this particular point that the voices of the emerging nation are heard (particularly from Latin America), in view of the greater independence of the countries toward the institution, the relative soundness of their public finances as a result of the good economic results of the last few years, and the increased participation of some developing economies in the world scene, which increasingly stand out and attracting the attention of the traditional world powers. The global dynamics of recent years have allowed countries like Brazil, India or China to reach a more central place in the world scene. These countries feel increasingly less inhibited in putting their ideas on the table, speaking to the rich countries as peers, and demanding, in this case to the IMF, reforms that contemplate the new relative weight of countries in today's globalized world.

The G24, which includes seven Latin American countries (Argentina, Colombia, Brazil, Guatemala, Mexico, Peru and Venezuela), took advantage of the annual meeting of the IMF and the World Bank in Washington held in October 2007 to make its voice heard with respect to some aspects of the current state of the financial organization. Regarding vote reform and quotas that the majority of developing countries have been demanding for some time now, these countries held that "marginal changes in the quota structure will not be acceptable." And adding that the reform was “a sine qua non condition to give back legitimacy and efficiency to the IMF and the World Bank”. Another criticism aimed at the IMF was the role that the Fund had during the 2007 mortgage crisis originated in the USA. To sum up, the G24 demanded that the same standards be applied to all the Fund's economies.

The successor

In this context of tension, pressure and a worn out image of the IMF, Strauss- Khan from France, succeeds Rodrigo de Rato. Far from feeling intimidated by the current circumstances of the organization, the economist assumed his commitment confident that he could give back to the institution its lost reputation and credibility. DSK's interest in getting to the top of the IMF led him to campaign for his candidacy from his personal blog on Internet (since he was nominated managing director) in which he proclaimed himself candidate of the poor countries, and where statements in favour of his candidacy could be read, like China's, some African countries and others from Latin America. While declaring himself in favour of renewal of the organization in favour of the less developed countries, he also stated he was "an economist in favour of private firms", clearly intending to obtain support from all quarters. He had already made clear this position when he was head of the French Ministry of Finance (1997-1999, during Jospin's government), when he opened the way for the privatization of France Telecom and other state-owned enterprises.

On the other hand, some analysts consider that today, in the case of Latin America, the organization should act more as a consultant than as a creditor and promoter of policies. The region was the IMF's "best" customer at the beginning of this century, but in just a few years it has managed to free itself from the Fund's influence, and now demands more voice and more votes en its decisions. Latin America as well as other developing countries hold that the world scene has changed, and they demand actions within the IMF to reflect these aspects. During his campaign, Straus Khan took a progressive stance, which helped him count with the support of various countries that had been critical of the IMF. Once elected, he said he would reform the quota system as soon as possible; currently Europe and the USA have 50% of the vote. With 16.79% of the right to vote, Washington is the main shareholder of the IMF, while the 27 members of the EU have 32% in all, making it very difficult for emerging countries to go against the opinions of these stronger members.

It was Rato who first started the process of increasing the quotas of four of the most paradigmatic developing countries: Mexico, China, Turkey and South Korea. The new managing director declared his agreement to continue this policy and states: "I am determined to pursue without delay the reforms needed for the IMF to make financial stability serve the international community, while fostering growth and employment". The current system gives more voice to countries that contribute more money to the Fund. The reform would consist in applying a double majority system: a state based majority and another based on the relative weight of each economy. However the new managing director has already anticipated that the US will not lose its current weight in the new quotas, and since this is a zero-sum game the percentage would have to be found elsewhere. This assertion suggests that those who should reduce their power are the members of the European Union. It does not seem an easy task to persuade powerful actors to give up part of their weight within the Fund in favour of the emerging economies. Unfortunately, and dashing a good part of the hopes of developing countries, in the sessions of the last IMF-WB annual meeting, rumour had it that the benefits that Third World countries were promised would ultimately not be implemented, placing the poorer countries in a disadvantageous position. Today's world shows a new distribution of economic forces; the real IMF reform would be that emerging and economically strong countries also start having more political weight. However for this to happen, the rich countries have to accept it.

Related Information:

* IFIwatchnet weblog: IMF leadership selection process

* Double majority decision making at the IMF

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