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The IMF: Change it or Close It

LONDON: New management usually signals a new beginning. For the International Monetary Fund, however, the opposite is needed. Michel Camdessus' successor as IMF managing director should be charged not with renewing and reinvigorating the Fund, but with either drastically curtailing its functions or closing it down.

Founded in 1944 and financed by its member governments, the IMF was designed as a type of insurance arrangement to support a system of fixed exchange rates based on the American dollar and, ultimately, on gold. The competitive devaluations that plagued the interwar years were to be made a thing of the past. Countries suffering temporary setbacks and in need of dollars to buy imports could turn to the IMF for "balance of payment support," thus saving them from devaluation. Once an economy turned around, the IMF loan would be repaid.

Back then there was a dearth of private lenders. International capital markets were small and constrained by exchange controls, a minefield of regulations, and the lack of convertibility of even the major currencies. Most capital flows were official – government to government. In such a world, the IMF's founders rightly discerned that IMF-type aid was essential.

Today, with no fixed exchange rates to defend, the raison d' tre for the IMF has vanished. The world has witnessed an explosive expansion of private international capital markets. So the IMF should have disappeared years ago, but it is in the nature of international institutions that they live on long after they have lost their usefulness. Lose one role, they create another.