by Edwin M. Truman, Peterson Institute for International Economics
Remarks made at the book release meeting "Reforming the IMF for the 21st Century"
Institute for International Economics
April 20, 2006
Remarks made by IMF Managing Director Rodrigo de Rato at the April 20, 2006 meeting are available on the IMF Web site.
It is a pleasure to participate on this distinguished panel with Managing Director Rodrigo de Rato. The managing director spoke at our conference on reform of the International Monetary Fund (IMF) in September 2005. We are releasing our conference volume today—Reforming the IMF for the 21st Century. I am delighted that about half of the 29 distinguished participants in that conference could join us here today.
In my remarks, I will provide my assessment of the progress since last September using my six-point IMF reform agenda as my framework—see chapter 29 of Reforming the IMF for the 21st Century:
Before I get to specifics, let me offer some general overview comments. The managing director and his colleagues at the Fund deserve congratulations for the progress that they have made since last September. The managing director’s Report on Implementing the Fund’s Medium-Term Strategy is a decided advance. I have few quarrels with what is included in that strategy; my concerns are primarily what is still missing from the report. The report and the managing director’s remarks today are more about process than they are a comprehensive, transformation strategy. My hope is that in the meetings in Washington over the next few days, the managing director and his IMF colleagues not only will receive a mandate to bring forward concrete proposals but also will be urged to deliver more than is now envisaged.
I score the progress to date at about 9 points out of a possible 16, for an interim grade of 60 percent. This is an interim grade because many of the managing director’s proposals are yet to be implemented and because there is room for improvement. I see two principal shortfalls. On governance, the managing director has been too timid in his proposal for a two-stage process of redistributing quota shares, and so far he has been silent on the issue of representation on the Executive Board. On policing the policies of the systemically important countries, he has proposed potentially useful process reforms and acknowledged the role of exchange rates, which was missing from his September report. However, he has not embraced the Fund’s constitutional mandate to act as umpire, or some similar analogy, over the exchange rate policies of member countries, in particular when those policies appear to “prevent effective balance of payments adjustment or to gain an unfair comparative advantage over other members.”1 He has offered a spirited defense of his views.
Turning to a more detailed assessment of progress on IMF reform, let me revert to my six-point strategy, which was informed by, but is not a reflection of consensus at, our conference in September. The first four elements, I should note, are identical with the managing director’s list, except that he mistakenly, in my view, places “governance” fourth on his list.
I. Concrete Actions on IMF Governance
On IMF governance, my strategy calls for concrete actions on chairs (representation on the Executive Board), shares (voting power), and management selection. The maximum value of this element is four points. To date, the managing director and his colleagues have scored 1.6 points, or about 40 percent.
Everyone agrees that voting power in the IMF must be redistributed to restore trust and legitimacy in the institution. The managing director has proposed a two-stage process. The first stage would involve ad hoc increases in the quotas for a handful of countries. However, the timing and content of the second stage is unspecified. An open-ended commitment to do something undefined at a later stage will not restore the IMF’s legitimacy. Similarly, the managing director’s report contains nothing on the question of Executive Board representation. He and the world know that the European countries are unsustainably overrepresented on the board today, as well as in their voting power. In my view, the managing director should advocate as a first step the consolidation of EU representation into seven EU-majority seats in the next election of executive directors this November, following the Singapore meetings.
On the other hand, the managing director and his colleagues should be applauded for placing back on the reform agenda the establishment of a transparent procedure for selecting the managing director, presumably without citizenship restrictions. It would be appropriate to apply that procedure to the upcoming choice of a first deputy managing director!
II. Better Policing the Policies of the Systemically Important Countries
On better policing the policies of the systemically important countries, my strategy calls for the IMF to do more to resolve, not just to identify, threats to the global prosperity—asserting the IMF’s role as a global umpire. To this end, I have advanced four proposals: (1) introducing more precision in policy prescriptions to name and shame the policies of members in the Article IV process, (2) developing reference exchange rates to help guide the multilateral surveillance process, (3) embracing the Goldstein triad on foreign exchange surveillance (semiannual reports on foreign exchange policies, more use of special consultations, and review of the exchange rate surveillance guidelines), and (4) conducting a collective, special Asian consultation on exchange rate and other policies. The maximum value of this element is four points. To date, the managing director and his colleagues have scored 2.8 points, or about 70 percent.
The managing director’s report proposes that Article IV consultations be streamlined, more relevant, and linked better to the multilateral surveillance process. The report also proposes that the Fund pay more attention to the consistency of exchange rate and macroeconomic policies, not quite embracing the umpire’s role in this regard. In addition, the staff Consultative Group on Exchange Rates will be revived, and its coverage will be extended to the major emerging-market economies with the results possibly appearing in the World Economic Outlook at some distant point in the future; this opens the door for using reference exchange rates as a tool of analysis and policy prescription, as proposed by John Williamson in the conference volume. The test of the success of these process proposals will lie in whether global imbalances are smoothly adjusted over the next few years. If not, the IMF will have failed to do its job.
The 1977 decision on the surveillance of exchange rate also is to be reviewed, as Morris Goldstein has proposed in the conference volume. In addition, the managing director’s report outlines a new multilateral consultation procedure with selected groups of countries. It is not clear why the managing director needs approval for inaugurating such a procedure; it should have been implemented in Asia three years ago.
Finally, in light of Randy Henning’s contribution on regional arrangements at our conference, it is noteworthy that managing director’s report suggests initiatives in this area—extra credit.
III. Restoration of the IMF’s Role as Lender of Final Resort
On restoring the IMF’s role as lender of final resort my strategy puts forward five recommendations: (1) The Fund should not exclude large-scale lending. (2) Return the Fund to its central role in sovereign debt cases. (3) Review its policy on lending into arrears. (4) Consider creating a new lending insurance lending mechanism. (5) Create the “Mussa facility” to reschedule IMF claims in exceptional cases. The maximum value of this element also is four points. To date, the managing director and his colleagues have scored 3.2 points, or 80 percent.
The managing director in his report recognizes the need for the Fund to be more predictable about making large loans under appropriate circumstances and procedures. The report argues for an IMF role in debt restructurings including specifying a “resource envelope” to assist members and creditors in their negotiations. The report unfortunately stops short of asserting an IMF role in the negotiation process by providing the outline of a sustainable and comprehensive settlement. The tattered policy of lending into arrears is to be reviewed, but the Mussa facility to reschedule IMF claims in exceptional cases has yet to make it onto the reform agenda. However, the managing director has been forceful in his advocacy of a new vehicle to provide high-access contingent financing. The question is whether the policies of the United States today would it qualify for access to this new facility.
On the whole, I applaud the managing director’s recognition of the link between the governance, surveillance, and financing elements of the overall IMF reform strategy.
IV. Refocused Engagement with Low-Income Members
On the IMF’s engagement with its low-income members, my strategy of refocusing those efforts involves four recommendations: (1) Enter into a partnership and thoughtful division of labor with the World Bank. (2) Involve the Fund centrally in macroeconomic policy assessments used by the Bank in allocating International Development Association (IDA) funds. (3) Reject greater Fund involvement in institutional building across the board. (4) Lend to countries eligible for the Poverty Reduction and Growth Facility (PRGF) only when they have short-term external payments needs. Adoption of my proposals would effectively transfer PRGF lending to the World Bank. The maximum value of this element is two points. To date, the managing director and his colleagues have scored 1.2 points, which is a somewhat surprising 60 percent.
However, this score incorporates a generous allocation to the potential results of the new Fund-Bank Task Force reviewing the 1989 Concordat on the division of labor between the Fund and the Bank. History counsels caution, but I am an optimist. The IMF’s tightening budget constraint is operating to restrain its voracious appetite to expand its turf. I am also encouraged that the managing director has been more restrained in describing the Fund’s role in institution building in general and has tended to downplay lending to low-income members. Let me be clear, the IMF has a role in global poverty reduction: Its role is to exploit its comparative advantage efficiently and effectively, and that includes temporary, balance-of-payments lending.
V. Increased Attention to Capital Account and Financial Sector Issues
In my strategy I agree with many observers that financial sector issues are central to the IMF’s mission in the 21st century. I also agree that the IMF is not yet where it should be on all this. Capital account liberalization should be an implicit not an explicit goal. IMF surveillance of the financial sector should continue, but much of its technical assistance and development work should be transferred to the Bank. The maximum value of this element is one point. To date the managing director and his colleagues have scored 0.4 points or 40 percent.
The IMF is going through another reorganization of its work on financial sector issues and integrating them with its surveillance activities. After three recent failures, it is prudent to adopt a wait-and-see attitude. In my view, a substantial amount of the IMF’s work on the development of financial sectors can and should be transferred to the Bank. In this context, it is inexplicable that the McDonough Group on financial sector and capital markets work at the Fund—not yet released to the general public—did not consider this option. That group even neglected to consult the Bank—not an encouraging sign. We can hope the new Fund-Bank task force on the Concordat will be more thorough as well as more transparent.
VI. Addressing the Need for Added IMF Financial Resources
The IMF is flush with resources to lend, as I acknowledge in my IMF reform strategy. It does not have an immediate need for additional resources to lend. Nevertheless, in light of the fact that all good things have to come to an end, key members of the Fund should change their rhetoric on this issue and recognize that an increase in IMF quotas may be necessary to square the circle on chairs and shares. I also have suggested in other remarks that once the quota increase is in place, and if IMF resources remain abundant, access limits could be temporarily reduced. In the past, access limits have been increased in anticipation of a quota increase and later reduced. This approach would provide a change in voting shares, in the distribution of financing, and in relative access without significantly changing aggregate access. I have also endorsed the establishment of a mechanism for the IMF to borrow temporarily in private financial markets that would complement consideration of the serious issue of how to finance the Fund’s nonlending activities, as the managing director emphasized in his remarks today.
To date the managing director and his colleagues, to my knowledge, have not addressed the issue of the financial resources of the Fund and possible market borrowing. The maximum value of this element in my overall strategy is one point. To date the managing director and his colleagues have scored zero.
In conclusion, the managing director and his colleagues have made impressive progress compared with where they were last September. I have raised my interim grade of their efforts from less than 25 percent at that time to almost 60 percent. The final examination is yet to come, and there is scope for extra credit. I am encouraged.
The major task moving forward lies with the political authorities, in the United States, in the emerging market countries, and in particular in Europe with its foot draggers on governance and those who want to restrict severely the role of the IMF as a lender or to transform the IMF into a development institution.
At the same time, as greater political weight is applied to these issues, IMF management and senior staff must put more on the reform agenda if the IMF is to regain its effectiveness.
1. This quotation is from Article IV.1(iii) of the IMF Articles of Agreement.
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Book: A Strategy for IMF Reform February 2006
Op-ed: The IMF Should Heed This Resignation July 25, 2012
Working Paper 11-16: Asia and Global Financial Governance October 2011
Working Paper 11-5: Integrating Reform of Financial Regulation with Reform of the International Monetary System February 2011
Policy Brief 10-29: Strengthening IMF Surveillance: A Comprehensive Proposal December 2010
Working Paper 10-14: Reform of the Global Financial Architecture October 2010
Speech: Crisis and Beyond—The Next Phase of IMF Reform June 29, 2010
Testimony: The Role of the International Monetary Fund and Federal Reserve in the Stabilization of Europe May 20, 2010
Op-ed: How the Fund Can Help Save the World Economy March 5, 2009
Article: Economists Seek IMF Reform January 26, 2009
Policy Brief 07-1: The IMF Quota Formula: Linchpin of Fund Reform February 2007
Paper: What Next for Argentina? February 2004