by Mohamed A. El-Erian, Harvard Management Company
Remarks made at the book release meeting "Reforming the IMF for the 21st Century"
Institute for International Economics
April 20, 2006
It is a great pleasure to participate in this panel, and it is wonderful to have the opportunity to see so many friends and former colleagues in the audience. I would like to thank Fred Bergsten and Ted Truman for inviting me.
I would also like to thank the managing director of the International Money Fund (IMF) for his willingness to reach out and engage broadly on the issue of institutional reforms—a topic that is of major importance not only for the Fund, but also for the well-being of the global economy. This willingness has facilitated—indeed, encouraged—an open and frank debate and one that is conducive to a more favorable outcome.
My objective today is to make some preliminary comments on the latest set of proposals that have been put forward by the managing director in the context of the institution’s medium-term strategy. These comments are subject to two important qualifications.
First, they are based on recently circulated public material—specifically, the managing director’s report that was posted on the IMF’s Web site two days ago, related speeches, and articles in the latest edition of the IMF Survey. As such, my comments have not been informed by the many internal discussions that have taken place, including in the context of the staff groups that the managing director refers to in his report, as well meetings of the Executive Board. Having benefited from many such discussions during my 14 ½ years at the IMF, I appreciate how insightful they can be. As such, my comments today reflect the fact that I am operating with partial information.
Second—and especially as I fill the “private sector slot” on this panel—I intend to focus on some key operational aspects of the reform process. This will be done using a framework that is based on the comprehensive deliberation that we held in this room seven months ago (which is reflected in the volume edited by Ted Truman and just published by the Institute for International Economics).
When we met here in September 2005 for an in-depth discussion of IMF reforms, I was struck by the overwhelming degree of consensus on one particular aspect: the risk that the IMF was losing relevance in a rapidly changing global economy. This issue is now also noted on the first page of the managing director’s report, which states “the imperative [for the Fund] to stay relevant in a changing world.”
Specific concerns centered on the erosion in the Fund’s ability to influence national policies, to signal to markets, and to be an effective cross-border conveyor of best policy and institutional practices. As a result, there were concerns about the quality and depth of the institution’s policy dialogue at the country level, about its ability to impart a multilateral dimension to national policy deliberations and decisions, and about the effectiveness and timeliness of national cross-fertilization.
These challenges were accentuated by two institutional realities: an outmoded approach to representation and governance and a declining ability to generate revenues for the IMF’s own budget. And to make things worse, the Fund’s declining role at the center of the international monetary system was occurring at a time when the system itself was becoming economically more unstable and technically more volatile.
If anything, the last six months have sharpened these concerns. Global imbalances have continued to worsen, the risk of protectionism is rising, and components of possible technical market dislocations have increased.
Rather than potentially rely on multilateral mechanisms in the event of major economic or market dislocations, several major emerging economies have continued to pursue national self-insurance and regional initiatives—an approach that is understandable but less than optimal from a potential welfare perspective. At the same time, the IMF’s revenue generation ability has been further and importantly undercut by the prepayment of fund obligations by large countries such as Argentina and Brazil. Finally, the institution’s governance and representation deficits were further highlighted by developments in other multilateral fora.
In light of all this, it is not surprising that we have witnessed a proliferation of public commentary on the challenges facing the Fund as it attempts to remain relevant in a fluid global economy. The comments have not been limited to researchers and market participants. We have also seen an unusually candid set of remarks from current and past policymakers.
Against this background, the managing director’s report represents a timely opportunity for the IMF to regain a leadership role in the debate and helps guide it toward the implementation of a critical mass of measures that can command early consensus. With this in mind, I would suggest evaluating the latest set of proposals against the following criteria:
Against these criteria, and recognizing the limitations that come with responding on the basis of partial information, I have two initial impressions.
First, the latest proposals constitute important progress compared to what was previously circulated in September by the IMF. Specifically, they include a clear identification of the major challenges facing the institution and highlight actions that are needed for reestablishing over time its role at the center of the international monetary system. Accordingly, the proposals satisfy an important necessary condition for an effective IMF reform process.
Having said that—and this is my second impression—the question of sufficiency is still an open one. And this speaks to something that comes up at the end of the managing director’s report under Moving to the implementation stage and Next steps. Specifically, there is a question in my mind as to the robustness of the operational approach, an approach that has to navigate what has proved in the past to be a challenging journey for gaining approval on measures that involve a change in the balance of national entitlements—both among countries and between national and multilateral jurisdictions.
In the few minutes I have left, please allow me to elaborate a little on these two impressions.
The proposals appear to satisfy the “necessary condition” because they meet what I argued at the September Conference may be seen as constituting the four minimum deliverables of a successful reform initiative, namely:
There is inevitably a degree of judgment in the specification of any proposals. And, in the situation in front of us, several of us (including me) may differ on the exact formulation and balance. Specific questions may be raised about whether enough is being done to upgrade the approach to bilateral and multilateral surveillance. Is the approach to governance and representation too timid and partial? Is there an implied overreliance on the expenditure side in the approach to IMF budget strengthening? And does the new financial instrument overcome what are arguably inherent constraints associated with IMF contingency lending instruments?
Having said this, there is an old saying that I came across in a mission in the 1980s when I was at the IMF. In the midst of a particularly heated policy discussion, the minister of finance cautioned us “not to make the best enemy of the good.” In this context, I feel that the proposals in front of us appear to deserve the benefit of the doubt when it comes to meeting the minimum deliverables. Put another way, they constitute enough of a critical mass to proceed in a timely manner to the implementation stage. Tweaking them could improve the situation at the margin, but there is also the risk that this could erode the effectiveness of the whole process through lengthening it further or losing the required degree of cross-fertilization.
Where I believe important focus is needed at this stage is elsewhere: It is on the implementation strategy. Given the nature and magnitude of the challenge facing the IMF as well as the current state of the global economy, I worry that the reform measures cannot be implemented in a piecemeal, business–as-usual fashion. Instead, what may well be required is a bolder approach aimed at addressing the main operational challenge: getting agreement in a timely fashion to ensure that the reforms gain early traction and increasingly be subject to a virtuous cycle.
To this end, the reform proposals need to be accompanied by a clear implementation strategy that would
Based on the available information, the current proposals appear to constitute a critical mass for progressing to the next stage of a bold and comprehensive reform of the IMF. A critical mass does not always imply a "perfect" set of measures. Indeed, one could quibble with the specifications of some of them and try to tweak them accordingly. But this is not a riskless exercise. Indeed, rather than improve matters, one may end up with something that is too late, too partial, and thus too little.
It is thus good news that we can now discuss implementation modalities, as opposed to where we were in September when the main focus was on the general items that should feature on the menu of a reform initiative. Specifically, it is now time to ensure that the degree of common (albeit not universal) understanding on the diagnosis can be extended to an execution strategy that would avoid a protracted and inefficient action phase. This would require departing from a business-as-usual implementation approach, similar to what has occurred in the design stage.
Op-ed: The G-20 Is Failing April 12, 2012
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
Congressional 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