Panelists favor IMF involvement in building better institutions but differ on exact role Backbone of a market economy

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The failures of domestic institutions took center stage during the Asian financial crisis.Many critics faulted the IMF for not detecting these weaknesses; others felt that the IMF should not meddle too much in domestic affairs. Should international financial institutions, particularly the IMF, involve themselves in domestic institutions? In a November 8 IMF Economic Forum, part of the IMF's Annual Research Conference, Guillermo Ortiz, Governor of the Bank of Mexico; Nancy Birdsall, President of the Center for Global Development; Jeffrey Frankel, Professor of Economics at Harvard University; and Jeffrey Sachs, Professor of Economics at Columbia University, tackled this question.

The IMF cares about the quality and scope of domestic institutions, which are critical for countries' economic development, growth, and,Page 372 especially, stability, according to IMF Deputy Managing Director Eduardo Aninat, who served as the forum's moderator. But exactly what role should the IMF play in promoting sound institutions? Some critics believe that when the IMF gives advice or attaches conditions to loans- known as conditionality-it should stick to monetary, fiscal, and exchange rate issues and financial sector policies and avoid issues related to governance, accountability, quality of institutions, and standards and codes.

Institutions are backbone of society

Guillermo Ortiz noted that domestic institutions establish the "rules of the game" for a society-that is, they set the laws and practices sanctioned by custom and tradition that lend stability to the relationships between individuals and groups. Good institutions, he said, provide a framework for private agents to carry out their transactions efficiently. "They are the backbone of a market economy," he said.

So why don't governments devote more resources to improving them? One reason is a lack of knowledge and resources in the organizations that could help manage change. A second reason is that special interest groups, actively pursuing their own interests, do not allow change. A third reason is inertia.

Can international organizations help change domestic institutions? The answer, according to Ortiz, is yes. They can be very helpful in overcoming the first problem-knowledge base; somewhat helpful in overcoming the second problem-special interest groups; and of absolutely...