by Edwin M. Truman, Peterson Institute for International Economics
Remarks at the High-Level Dialogue on Asian Perspectives on the
Future Role of the International Monetary Fund
January 18, 2008
© Peterson Institute for International Economics
It is a pleasure to return again to Singapore to participate in this dialogue on Asian perspectives on the future role of the International Monetary Fund (IMF). I thank the organizers from the Friedrich Ebert Stiftung and the Lee Kuan Yew School of Public Policy at the National University of Singapore for inviting me.
From the mid-1990s until 2001, I spent a considerable amount of time in Asia when I was an official of the Federal Reserve and US Treasury. This background may qualify or disqualify me from understanding of Asian perspectives on the IMF, but I necessarily speak from that experience as well as from more than 35 years of interaction with, and observation of, the Fund. However, I do not speak for the US government. I left office seven years ago. These remarks are solely my views.
It is fitting that we are meeting here. Singapore has reaped enormous benefits over the past five decades from the increasing globalization and openness of the world economy and financial system. Although much of rhetoric in Asia today focuses on exciting trends toward increased regional integration, the simple fact is that Asia as a whole is more highly integrated with the global economy than any other region of the world.
In 2006, exports of emerging Asia to countries outside the Asian region still amounted to almost 25 percent of regional GDP compared with less that 15 percent for the EU-15 and about 5 percent for NAFTA. As of September 2007, the Asian region held about $3.75 trillion in international reserves, 60 percent of the global total, and almost $2 trillion in sovereign wealth funds, 40 percent of the world total. For individual countries, those reserves and other financial assets may be invested within the region, but the region as a whole is in current account surplus of more than 5 percent of GDP. This means that on balance the region’s excess of saving over investment must be invested outside the region.
It follows that the Asian region has an overriding self interest in the continued economic prosperity and financial stability of the entire world and, therefore, in strengthening the principal institution of global governance that is dedicated to sustaining and maintaining that prosperity and stability—the IMF.
Today, the Fund is under stress, threatening its capacity to play its assigned role. It faces an existential crisis, an identity crisis, a sharply reduced demand for its lending, and a lack of consensus about what its role in the global economic and financial system should be. The Fund’s past and present contributions are badly misunderstood in the United States as well as here in Asia. Over the past 60-plus years, the Fund has evolved constructively to deal with problems that, in effect, have been assigned to the IMF because it was there. I would submit that this approach is more efficient than creating an additional institution and bureaucracy every time a so-called “new problem” arises either globally or regionally.
Despite becoming the repository of worthy new initiatives, today the Fund’s major problem is that it has been phenomenally successful in discharging its fundamental mission. However, the Fund has not continued to evolve with the global economy and financial system over the past decade. At the same time, too many of the Fund’s principal shareholders have endeavored either to perpetuate the status quo or to reduce its role. Many other countries with growing stakes in the continued successful globalization of the world economy have turned their backs on the Fund. Over the past five years, both groups of countries have been lulled into complacency by the remarkably benign global economic and financial conditions that prevailed until about six months ago.
Consequently, the achievements in the IMF reform process, which has been underway for about three years, have been limited. One significant, but partial and minor, milestone was passed here in Singapore in September 2006 with agreement on a first stage of adjustments in IMF quotas. However, the risk now is that the expectations established 16 months ago will not be fulfilled. If they are disappointed, the damage to the Fund and the international economic and financial system will be lasting. It is difficult to exaggerate the collateral negative effects on the Asian economies that are highly dependent on the prosperity of the world economy.
The IMF faces twin crises of relevance and legitimacy. Managing Director Strauss-Kahn has acknowledged this reality, but he cannot resolve the IMF’s twin crises alone. He needs all the help he can get.
What needs to be done? In my view, the relevance agenda should include four elements: enhancing the IMF’s role in surveillance, modernizing its lending facilities, leaving broad issues of economic development to other better-qualified institutions, and revamping the IMF’s financial and business model. The legitimacy agenda should encompass five elements: management selection, internal governance, external accountability, realignment of representation on the executive board (what I call chairs), and redistribution of voting power within the Fund (what I call shares). I do not have time to cover each of these elements in detail; I will only hit the key points that, in my view, should be of greatest concern in the Asian region.
IMF surveillance activities are central to its mandate to promote sustainable economic growth and to maintain financial stability. Effective surveillance is a global public good. It is about coaxing and cajoling members to adopt and modify economic and financial policies in the national and global interest. In discharging this mission, the Fund (staff, management, and the executive board) should act forcefully to articulate the risks associated with unchanged policies and to monitor members’ compliance with global norms and obligations. It is not enough just to be a good friend to member governments.
For example, the Fund should be concerned about the resolution of global imbalances and the role of members’ exchange rate policies and other economic policies to ensure against the risk, even if small, that the resolution of global imbalances will undermine global prosperity. If there is a crisis in the global trading or financial system associated with disruptive global adjustment, the IMF will be, and should be, held responsible for failing to do its job.
As part of the reform process, the Fund has taken some tentative positive steps in this area. The role of the internal Consultative Group on Exchange Rate Issues (CGER) has been expanded and strengthened, and the internal Surveillance Committee has been revived. After almost two years of debate and discussion, unfortunately almost entirely conducted behind closed doors, the Executive Board agreed in June 2006 to revise the 1977 decision on surveillance of members’ exchange rate policies. It pointedly creates no new obligations for members, but it also fails to reinforce their current obligations. The sharply critical report by the Independent Evaluation Office (IEO) of the IMF on IMF policy advice demonstrates that recent practice of the IMF management and the executive board has been to ignore those obligations.1 The new decision does introduce into bilateral surveillance a new concept of “external stability.”
Whether these reforms, which on paper appear to be modest, bring about real change and reinvigorate the Fund to discharge more effectively the surveillance responsibilities assigned to it in the Articles of Agreement remains to be seen. Asia as a region is home to some of the largest global imbalances as well as distortions among effective exchange rates within the region that are caused by the exchange rate regimes and policies adopted by the major regional players. It follows that this region’s continued prosperity crucially depends on the success of the IMF in this central area of its responsibility.
Representatives of many countries in Asia and around the world ask why the Fund is paying so much attention to their exchange rate policies and so little attention to the wide swings in the exchange rates among the major currencies and how they are affected by economic policies. This issue was also highlighted in the IEO report on IMF exchange rate policy advice. It noted that the most recent review by the executive board of the global system of exchange rates and its stability was in 1999. How have the management and executive board responded to this criticism? A review has been scheduled for 2009! This is highly disturbing.
In the multilateral area, the new decision on exchange rate surveillance explicitly sidesteps the injunction in the Articles that “the Fund shall oversee the international monetary system to ensure its effective operation.” Managing Director Rodrigo de Rato, in April 2006, did finally initiate a multilateral consultation process bringing together representatives of China, the euro area, Japan, Saudi Arabia, and the United States to address global imbalances. The initiative was late but welcome. Its accomplishments fell far short of what was promised because of excessive timidity, unsound analysis (for example essentially ignoring the role that exchange rates play in the adjustment process), and lack of cooperation by the participants.
The only positive result for the Fund was one of process: The Fund dealt itself into the center of the international economic policy coordination business essentially for the first time since the collapse of Bretton Woods. However, as far as one can tell, the management of the Fund exerted no pressure on the participants to make new or more specific policy commitments, and none were put forward by the participants. The statements of policy intention were not new and not news; in some respects they were less explicit than those contained in the G-20 Accord for Sustained Growth issued in Melbourne, Australia, in November 2006. They envisage a process of “immaculate adjustment,” in other words adjustment without significant exchange rate changes. The only mention of exchange rates was by Saudi Arabia, which said that it would not alter its peg to the US dollar, and by China, which again said that its “exchange rate flexibility will gradually increase.” For the United States, Japan, and the euro area, there was no mention of exchange rate adjustment. This is not Hamlet without the Prince; it is Hamlet set in never-never land.
Turning to IMF lending, a year ago who would have thought that the world would now be facing a potential financial meltdown. The IMF is not the only institution that can help diagnose and deal with these problems, but at a minimum there are lessons to be learned; they will be lessons for countries and financial institutions around the world, and the IMF is the unique global institution positioned to assist in this educational process. Moreover, we are most likely facing a slowing of global growth by at least half a percentage point, if not worse. It is inevitable that there will be consequent, adverse external financial repercussions for some countries and the Fund will be back in the lending business on some scale.
IMF lending itself is also a public good. Its purpose is to mitigate the costs of crises and policy mistakes for the residents of the particular member country that is borrowing and for other members who would receive the adverse spillover effects if that particular member country had to adjust without the availability of external financial assistance. More than half the IMF’s 185 members do not have meaningful access to international capital markets. For about half of the remaining countries, access is intermittent, in particular for countercyclical borrowing. Although healthy on balance, the increased scope and scale of private financial markets means that the potential adverse economic and financial effects of inherently volatile private capital flows have increased not declined.
In this context, it is highly unfortunate that discussions have stalemated on the establishment of a new IMF liquidity instrument for market access countries. This is a vexed and contentious issue. In my view, if the Fund is to be relevant in the 21st century excessive concerns about moral hazard and short-term policy conditionality should be set aside and a facility should be established with the potential to make generous amounts of funding available to countries that have a record of sound policies.
Third, one area where the Fund is not centrally relevant is in the development business. Starting three decades ago, the IMF was pulled into long-term development lending. Over the past decade, the Fund has begun to extricate itself from this role. The recent report of the IEO on structural conditionality in IMF-supported programs concludes that more should be done.2 This does not mean that the IMF should stop providing policy advice to low-income members in areas of its expertise or should not provide short-term balance of payments financing (possibly on subsidized terms) to those members. It does mean that the Fund should avoid a deep programmatic or financial involvement in the development process where it has no comparative advantage.
Turning to the final point on the relevance agenda, let me offer a few words on the Fund’s financial and business model. There is no doubt in my mind that the size of the Fund’s staff can be reduced by 10 to 15 percent and the staff’s composition can be realigned without impairing the IMF’s capacity to continue to discharge its current and its likely expanded responsibilities. In a bureaucracy, it is appropriate to apply constant pressure to do more with less. It is a painful process. However, it is the principal way that efficiency and effectiveness are enhanced—doing more with less. During my almost 30 years at the Federal Reserve Board, I went through three major exercises in staff and budget reduction on the order of 10 percent on each occasion. The net result was that by 1998, when I left, the international staff was the same size that it was in 1972 when I joined the staff. Our responsibilities were vastly increased reflecting the increased salience for the US economy of global economic and financial conditions.
I also have no doubt that the Fund’s income model needs to shift away from a reliance on income from its lending operations, which absorb only about a quarter of its administrative expenses. The Crockett Report on sustainable long-term financing of the IMF lays out some attractive options. The risk is that the sensible reforms will be sidetracked by efforts to “starve the beast” of the IMF bureaucracy, as we say in Washington, or get hung up by other, political considerations.
Turning to the Fund’s legitimacy crisis, in my view this is the most serious set of issues facing the institution: The Fund is widely perceived to lack the kind of legitimacy that is necessary if it is to carry out its mission. This perception may not be well grounded—and it is probably exaggerated—but it is widespread and persistent. Something has to be done about that perception if the IMF is to overcome its existential crisis.
With respect to management selection, although some progress was made this fall toward overturning the convention on the nationality of the leaders of the Fund and the Bank, the reality was the same. However, this element of the legitimacy agenda does not start and end with the choice of the managing director. It would be desirable to develop a process of performance review for the incumbent, to reform the process for selecting the first deputy managing director and for selecting of the rest of the management team, only one of whom is from a developing country.
The issues with respect to the IMF’s internal governance are more complicated. The Fund is an international organization, its members are countries. Its structure was established more than 60 years ago with only modest modifications in the meantime despite a quadrupling of its membership and a wholesale transformation of best practices in public sector governance. The respective roles and responsibilities of the IMF governors, the International Monetary and Financial Committee (IMFC), the management, and staff are ambiguous. Consequently, responsibilities are blurred. Radical change in this area is not a realistic possibility. However, constructive evolution is necessary. One can hope that the forthcoming IEO report on IMF Corporate Governance will contribute to this process. I have no doubt that the fulcrum for change lies in the executive board. The activities of the executive directors should be more focused, and management and staff should be given more responsibility along with an increase in their accountability.
Third, external accountability is a crucial complement to the IMF’s internal governance. Transparency is a key tool of accountability. Although the transparency of the Fund has increased substantially over the past decade, it is far from ideal. In my view, a principal obstacle to the greater transparency of the Fund and barrier to accountability is in the collective attitude of the executive directors, who sit astride the nexus between the work of the staff and the priorities and perspectives of the authorities who appointed or elected them. The credibility of the Fund is undermined by the paucity of information released to the general public about board positions taken by executive directors, policy guidance to the staff, and ongoing discussions of major policy issues such as those involved in reform of the quota formulas and revision of the 1977 decision on surveillance of exchange rate policies. However, the fault does not rest entirely with the executive board. It also is a disturbing symptom of attitudes of staff and management that the Fund’s new “communications strategy” focuses on plans about how better to “convince” the general public about the importance and relevance of the IMF’s work and does not mention the need for greater efforts to “listen” to what observers, critical or not, are saying about the Fund.
Fourth, with respect to chairs—representation on the executive board—there are two issues. Is the board too large to be effective? It may well be, but its size cannot be reduced without dramatic changes in representation, where at least half the seats are occupied by representatives from the 27 traditional advanced countries, not counting Russia, and at least 7 seats are occupied by representatives from members of the European Union. Everyone knows what needs to be done to break this logjam: dramatic consolidation of European representation. The Europeans as a group have taken this issue off the table. Although the topic has been raised from time to time by officials from individual European and from other industrial countries including my own, my impression is that no pressure in this area has been exerted by the Asian countries.
Perhaps, the issue of chairs will never be resolved until the issue of shares is fully addressed and implemented so that voting power in the Fund is substantially redistributed. Some argue that relative voting power is not an important issue because most decisions are reached by consensus or because any likely redistribution of votes in the near term is likely to be minuscule. However, it is important for three reasons: Perceptions matter; the topic has been on the front burner for more than a decade; and solemn commitments were made here in Singapore 16 months ago which if not fulfilled on schedule would decisively undermine the credibility of those all those who participated and seriously weaken the Fund. As Managing Director Strauss-Kahn stated bluntly a month ago in his statement on the work program of the executive board, “Time is running out.”
In my view, there are two tests for success on the issue of shares: First, will the new quota formula point toward a substantial redistribution of voting power away from the traditional industrial, or “advanced,” countries as a group? Second, once adopted, will the formula be used transparently to implement a significant, immediate realignment of voting power away from those countries on the order of 10 percentage points including, but not highly dependent, on a permanent boost in basic votes?
Most people participating in this high-level dialogue know the issues involved in this area, and they are better informed than I because they have had access to staff papers and datasets, which have been denied to the general public. Therefore, I do not have to remind you of the facts. I will make two comments about the status of the discussions as I understand them.
First, the set of options for the quota formula that I understand is currently on the table fails to point in the right direction. At best, the narrow range of alternatives points toward maintaining the existing voting strength of the advanced countries. Moreover, a second round of selective quota adjustments for a limited set of countries implemented via gimmicks such as filters to achieve a limited, politically correct result would fail to receive a passing grade.
This is a complex and challenging topic. Some argue it is impossible to achieve a meaningful result. That is not true. Among others, my friend and former colleague, Ralph Bryant, and I separately have advanced several alternative ways to accomplish meaningful reform of the quota formula. I do not have time or space to go into them here, but the job can be done if there is a will to do it right.
Second, if the cumulative size of the increase in total quotas is limited to less than 12 ½ percent. Even if combined with a tripling or more of basic votes, the result will not produce a “significant further realignment of members’ quotas” in line with their “relative positions in the world economy” as called for in the Singapore resolution. The reason is that a substantial proportion of the total increase would and should go to underrepresented industrial countries. To achieve the type of realignment in voting power called for in the Singapore resolution will require at least a 25 percent, and more likely a 50 percent, increase in the size of the Fund—total quotas.
In my view, every member of the Fund should receive some increase it its quota at this time. Although it is true that the Fund’s liquidity is at an all-time high, that should not be the only consideration. It is unfair and would be a mistake to limit the amounts that countries inevitably will borrow from the Fund over the next five years to the size of their quotas that were set a decade ago. Thus, it is unfortunate that the executive board has recommended to the IMF’s board of governors that the Thirteenth General Quota Review be concluded without taking any action on the overall size of quotas. This action can be overturned as part of an agreement on the overall issue of quotas, but it sends all the wrong signals.
As a concerned and informed, but outside, observer, my impression is that many leaders in Asia fail to appreciate the interest that Asian countries have in successful IMF reform in both the relevance and legitimacy dimensions. Perhaps because many Asian officials and influential thinkers are preoccupied with exciting, regional projects, Asian leaders have been passive, at best, and asleep at the wheel, at worst, about Asia’s stakes in IMF reform.
Some may see Asian integration and IMF reform as an either-or proposition—either Asian integration is advanced or the IMF is reformed, but you can not have and do not want both. In my view, nothing can be further from the truth. Successful Asian economic and financial integration depends crucially on the continued prosperity of the global economy; the principal guardian and promoter of that prosperity is the IMF.
The forces favoring the status quo are winning. If they do win, their victory will result in a progressively declining role for the Fund, are winning. It is in Asia’s interests constructively to confront those forces and to turn them back. Once substantially diminished, it will be very difficult to restore the Fund to the role it should play in promoting economic growth and maintaining financial stability for the world as a whole.
My assignment today was to comment on Jack Boorman’s excellent, comprehensive paper on the IMF reform agenda.3 I have largely ignored that assignment because I agree with almost all of what he says with two minor and one major exception.
The first minor exception is that I favor a narrower rather than a broader role for the Fund in low-income countries though I definitely see a strong substantive IMF role in those countries.
Second, I am skeptical about incorporating additional double majorities into Fund decision making with the possible exception of choosing the managing director. The problem with decision making in the Fund generally is not that decisions are taken too rapidly without sufficient consensus. The problem is that the Fund has difficulty making decisions. Double majorities would slow down, not speed up, the decision-making process.
My major difference with Jack Boorman concerns the implicit view conveyed in his paper concerning the urgency for IMF reform. He suggests at several points a need to go back to first principles. In my view, not only would such an exercise be sterile, but the resulting, substantial delay addressing the Fund’s serious twin crises would play into the hands of those who, mistakenly, want to reduce substantially and permanently the IMF’s role.
1. Independent Evaluation Office of the International Monetary Fund, An IOE Evaluation of IMF Exchange Rate Policy Advice, 1999–2005, International Monetary Fund, May 17, 2007.
2. Independent Evaluation Office of the International Monetary Fund, An IOE Evaluation of Structural Conditionality in IMF-Supported Programs, International Monetary Fund, November 27, 2007.
3. Boorman, Jack. 2008. An Agenda for Reform of the International Monetary Fund (IMF). Dialogue on Globalization, Occasional Paper No. 38. New York: Friedrich Ebert Stiftung.
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
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