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IMF at a Turning Point.

What a difference a decade makes.

Ten years ago, the International Monetary Fund was seen as one of the most influential international organizations. Today, policy-makers warn that it risks falling into obscurity and a far-reaching debate about its future is underway.

What explains this sudden change of fortune? The core purpose of the fund is to safeguard international monetary and financial stability. Its ability to serve this mandate stems from both its expertise and the loans it extends to governments.

The fund's loss of influence has been caused partly by an erosion of its intellectual standing. The International Monetary Fund's advice never met universal approval, but opposition grew particularly intense after 1997-1998 when the fund was blamed for worsening the East Asian financial crisis.

In one particularly stinging critique after the crisis, Nobel Prize-winning economist Joseph Stiglitz even suggested that the fund's staff were often "third-rank students from first-rate universities."

Further undermining the fund's reputation was the economic collapse in 2001 of Argentina, a country that had been widely seen as one of the fund's "star pupils" throughout the 1990s.

More recently, the International Monetary Fund has found its lending power curtailed, too. It still has loans outstanding to dozens of countries. But within the last six months, three of its four largest borrowers -- Argentina, Brazil and Indonesia -- have announced that they will repay their loans early and will not renew their borrowing from the fund.

Many countries in East Asia have also turned their backs on fund assistance and its accompanying advice. In order to avoid a repeat of their 1!997-98 dependence on the fund, they have been accumulating enormous reserves of foreign exchange that can protect them from future currency crises.

As demand for its loans declines, the fund faces not just a loss of influence. Its own balance sheet is also affected because its operations are financed partly by the interest payments of borrowers. The early repayments have already triggered budgetary shortfalls for the institution.

The fund's financial woes were highlighted two weeks ago when its managing director Rogrido de Rato appointed an expert group to advise him on how to develop alternative sources of income for the fund.

The importance he attached to the task is evident from the group's high profile membership, which includes former U.S. Federal Reserve chairman Alan Greenspan, European Central Bank president Jean-Claude Trichet, and People's Bank of China governor Zhou Xiaochuan.

Discontent with the monetary fund has come not just from borrow! ing countries. Prominent U.S. policy-makers have opposed the fund 's provision of large-scale assistance to countries experiencing financial crises. This bailout lending, they argue, distorts international financial markets by rewarding poor choices made by investors and borrowing governments.

Some U.S. officials are also critical of the fund's "mission creep." They would prefer to see a more streamlined fund that was no longer involved in "development" lending to very low-income countries, an activity they argue is more appropriate for the World Bank.

With critics on all sides and a shrinking set of borrowers, what is the International Monetary Fund's future? Some opponents of the fund -- on both the left and right of the political spectrum -- would like to see it abolished. But this outcome seems unlikely.

At the late April meetings of the World Bank and monetary fund, member governments endorsed instead an agenda of reform that incl! udes, among other things, a call for the fund to strengthen its surveillance of both the global economy and member countries economic policies (especially exchange rates).

Surveillance has long been one of the core functions of the fund. When it was created in 1944, the fund's architects hoped the institution could draw attention to the financial needs of the world economy as a whole and discourage countries from returning to the "beggar-thy-neighbour" economic policies of the 1930s.

While its surveillance activities are important, how much influence can the fund have in this role? In the past, the fund's advice has generally had most impact when backed up by the promise of loans. Without this carrot, and in an era when the quality of its advice is being questioned, a fund focused more on surveillance activities may be a fund with a more marginal position in the world economy.

To bring the fund back to centre stage, many analysts have concluded th! at it may be necessary to consider a radical overhaul of its governance structure. Many of the countries distancing themselves from the fund today feel they have little voice within the institution whose decision-making is dominated by rich countries, especially the United States.

To address its growing legitimacy crisis, the issue of governance reform has been placed on the agenda of the upcoming International Monetary Fund annual meetings in Singapore in September. If these discussions produce little outcome, the drift away from the institution will likely only accelerate.

Eric Helleiner is Centre for International Governance Innovation chair in international governance and associate professor in political science at the University of Waterloo. He recently authored Towards North American Monetary Union The Politics And History Of Canada's Exchange Rate Regime.

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