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International Finance: A Blueprint for IMF Reform (Part II)

Author: Allan H. Meltzer
August 1, 2007

Summary:

Allan H. Meltzer argues that the International Monetary Fund is in need of a reduced mission and major cost-cutting in order to adapt itself to a world of floating exchange rates and massive private capital flows. These changes in the international financial system, coupled with the IMF’s shrinking budget, have left the fund less able to finance its array of activities and have weakened its ability to act as a lender-of-last-resort.

Rather than maintaining its broad mandate and traditional lender-of-last-resort role, the IMF should limit itself to only two functions: improving the quality and quantity of available information and preventing the spread of financial crises. With regard to the latter function, Meltzer argues that the IMF should serve as a lender-of-last-resort only to countries that follow stabilizing, responsible policies. Meltzer thus urges the IMF to pre-condition its loans to states on the soundness of national policy rather than continue its practice of conditional lending.

Regarding IMF governance, Meltzer cautions against strengthening the influence of developing nations. Meltzer argues that the empowerment of borrowers may undermine the future willingness of lenders to contribute to the fund.

This is part of a two-part debate. To read the accompanying essay by Barry Eichengreen, click here.

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