Diminishing Prospects for IMF Reform?
Op-ed in Handelsblatt
Senior financial officials will gather in Washington in mid-April. They will rejoice in a fifth consecutive year of robust global growth. The lack of progress on International Monetary Fund (IMF) reform, now in its third year, is another matter.
Advantage has not been taken of benign global conditions to reposition the Fund and address its legitimacy and relevance. The challenge now is to bridge deep policy and political differences and rebuild momentum toward concrete actions in the fall. Political leadership within the institution and among the major shareholders is necessary. Unfortunately, political leadership appears to be draining away, including by the United States.
Governance reform is the key to restoring the IMF's legitimacy, starting with better alignment of members' quotas with their relative positions in the world economy. (A member's quota is the principal determinant of its obligation to provide financial resources to, the scale of its potential borrowing from, and its voting share in the Fund.) The IMF governors in September 2006 took a modest first step in authorizing small increases in four members' quotas. As a second step, they called for an increase in each member's basic votes, and set a timetable for a substantive revision of the IMF quota formula and for its use to implement significant further quota adjustments.
The risk is that the second step will not materialize to the detriment of the Fund. In our recent policy brief,1 Richard Cooper and I note that agreement is not easy on the economic and financial elements to include in a simpler, more transparent quota formula. Any plausible revised formula will point to more countries receiving decreases in quota shares than increases. Many countries favor variables that tend to preserve the status quo. For example, the smaller European countries would retain economic openness despite the fact that this variable has no economic or financial justification and traditional measures of it are biased. At the same time, larger European countries resist the use of the new formula to guide a subsequent realignment of quotas via a substantial adjustment of total quotas. Europeans have taken off the table consideration of Europe's overrepresentation on the Executive Board.
Political considerations on governance are not unique to Europeans. Neither they nor the United States have embraced reform of the selection process for the managing director of the Fund (traditionally a European) and the president of the World Bank (traditionally a US citizen). Moreover, among emerging-market and developing countries, meaningful quota reform will produce substantial losers among countries with decades of poor economic performance as well as winners, reinforcing resistance to change.
Turning to relevance, results to date are modest. On policy surveillance, the IMF management has expanded coverage of exchange rate issues beyond the advanced countries, but many countries resist frank discussions of their exchange rate policies. Similarly, the review of the 1977 Executive Board decision on the surveillance of exchange rate policies has bogged down; many countries do not accept their IMF obligations in this area.
Finally, Managing Director Rodrigo de Rato's much proclaimed initiative establishing a multilateral consultation process on global imbalances is unlikely to produce anything noteworthy. The effort has foundered on the difficulty in convincing Chinese officials of their self interest in contributing to global adjustment via significant exchange rate adjustment, the unwillingness or inability of the United States to commit to an aggressive program of fiscal adjustment, the European insistence that they are not part of the problem-and therefore not part of the solution-and the cautious posture of IMF management.
The large, rapidly expanding emerging-market countries rightfully want increased representation in the IMF. They also should discharge their responsibilities in facilitating adjustment of global imbalances. At the same time, some of them may need to borrow from the Fund in the future. They support the creation of a new lending facility-codenamed the Reserve Augmentation Line-that would provide high-access financing to members, contingent on their strong macroeconomic and financial policies. The United States appears to be resigned to accepting a highly circumscribed version of this proposal. It faces substantial resistance among other industrial countries that oppose large-scale IMF lending in principle.
The IMF has also been called upon by the Committee on Bank-Fund Collaboration chaired by Pedro Malan to scale back its engagement with its low-income members, to refocus its surveillance and policy advice, and to limit its lending to short-term balance-of-payments assistance. Such a reorientation is long overdue. One can be skeptical whether it will happen. If it does, demands on the Fund's administrative budget may be somewhat reduced. The report of the Committee to Study Sustainable Long-Term Financing of the IMF chaired by Andrew Crockett emphasized deeper financial issues. Dealing with them, including via a tightly circumscribed sale of a small portion of the IMF's gold, will divide members further.
When officials gather in Washington their task will be to narrow their differences and to lay the groundwork for a package of IMF reforms that can be endorsed at the IMF annual meetings in October. The technical work is largely complete. Political leadership is now required to recognize the common interest and to implement a robust response.