The Agenda For IMF Reform
The Agenda For IMF Reform
The Agenda For IMF Reform
The world needs a strong and effective International Monetary Fund (IMF)
as the principal multilateral institution responsible for international eco
nomic and financial stability. A consensus on the role of the Fund and the
scope of its activities in the 21st century is needed to achieve this objec
tive. However, such a consensus does not exist today in official circles or
among private observers. In the view of many observers, the Fund has
failed to effectively exercise its intended role as steward of the interna
tional monetary system. Consequently the IMF, once the preeminent in
stitution of multilateral international financial cooperation, faces an iden
tity crisis.
No single change by itself can restore the IMF to its prior position as a
highly respected international monetary institution. Effective reform of
the IMF must encompass many aspects of the IMF’s activities—where it
should become less as well as more involved. During the past decade, a
large number of changes in the international financial architecture and in
the IMF’s operations have been put in place. Those reforms have not been
sufficient to restore the IMF’s luster at the center of today’s international
monetary and international financial system.
Successful reform of the IMF must engage the full spectrum of its mem
bers. The IMF should not focus primarily on its low-income members and
the challenges of global poverty. It should not focus exclusively on inter
national financial crises affecting a small group of vulnerable emerging-
market economies. Instead, it must be engaged with each of its members
on the full range of their economic and financial policies. However, the
Fund should give priority attention to the policies of the 20 to 30 systemi
cally important countries that impact the functioning of the global econ
omy, including the policies of its wealthiest members that remain the prin
cipal drivers of the world economy and, therefore, are the source of the
greatest risk to global economic and financial stability.1
1. The systemically important countries include primarily the Group of Twenty (G-20) coun
tries: the United States, the European Union as a group, Japan, Canada, and possibly one or
two other industrial countries; also Argentina, Brazil, China, Egypt, India, Indonesia, Korea,
Mexico, Nigeria, Russia, Saudi Arabia, South Africa, Turkey, and possibly a few other large
emerging-market countries. See also footnote 3.
2. In several places, this policy analysis cites chapters in the forthcoming conference vol
ume, Reforming the IMF for the 21st Century, ed. Edwin M. Truman (2006, Institute for Inter
national Economics).
� address the governance issue of fair quotas and voice (representation) in the
Fund.
Against this background, the report discusses nine issues and proposes 31 ac-
tions or “deliverables” as next steps in the strategic review of the Fund by IMF man-
agement, the Executive Board, and member countries. Most proposed actions are
process oriented, a few involve reoriented research efforts, and a larger number
concern internal organization and management.
The report highlights four new proposals: intensified analysis of globalization,
including a possible new report on the macroeconomics of globalization; a re-
designed “contextually savvy” program of communication; a work program on is-
sues surrounding capital account liberalization; and the assessment of the achiev-
ability of the Millennium Development Goals with available financing.
In keeping with the theme of a strategic review, the managing director’s report
suggests that these initiatives might be financed by scaling back the Fund’s activ-
ities in five areas: a sharper delineation of the Fund’s role in low-income countries;
less time spent, in particular by the management and Executive Board, on proce-
dures and documentation; less work on standards and codes; less research in other
(unspecified) areas; and less spending on overhead and support activities, includ-
ing the possibility of more offshoring of information technology services.
monetary cooperation.” He suggests that the Fund can rest on its 60-year
history of accomplishments, but he also acknowledges the need for changes.
In fact, a few days earlier the IMF released a report by de Rato on the
Fund’s medium-term strategy (IMF 2005k; also box 1.1). In the report, de
Rato argues that the Fund is being pulled in too many directions and ac
cumulating new mandates: “The question [is] whether the Fund is fully
prepared to meet the great macroeconomic challenges that lie ahead.” On
the other hand, he argues that the IMF’s principal power in meeting the
challenges of the 21st century is the soft power of persuasion. He im
plicitly dismisses proposals that the Fund should use or develop other
instruments to carry out its mission. One detects little sense of urgency in
his remarks.
Remarks by US Under Secretary of the Treasury for International Af
fairs Timothy Adams (chapter 4) convey a greater sense of potential insti
tutional crisis than those of the IMF managing director. Adams declares
he is a “believer in the IMF . . . as a facilitator of international monetary
cooperation” but notes “the IMF now faces fresh, tough questions about
3. The G-7 comprises Canada, France, Germany, Italy, Japan, the United Kingdom, and the
United States. The G-10 grouping comprises the G-7 countries and also Belgium, the Neth
erlands, Sweden, and Switzerland. The G-24—formally the Intergovernmental Group of
Twenty-Four on International Monetary Affairs and Development—comprises representa
tives of 24 Asian, African, Latin American, and Middle Eastern countries plus observers. The
industrial-country members of the G-20 are the G-7 countries, Australia, and the country
holding the EU presidency when not a European G-7 country; the nonindustrial-country
members are Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Ara
bia, South Africa, and Turkey.
The Institute’s conference on IMF reform did not attempt to reach con
sensus on an IMF reform agenda. However, the elements of an overall strat
egy emerge from the conference and contemporaneous developments.
A critical mass of reforms should encompass six components: governance,
policies of systemically important countries, the central role of the Fund
in external financial crises, refocused engagement with low-income coun
tries, increased attention to capital account and financial-sector issues,
and the case for additional financial resources.
1. The transfer of real resources to a country is conventionally defined as net long-term cap-
ital inflows plus net foreign direct and portfolio equity investment inflows plus grants minus
associated net interest or income payments deflated by a relevant price index such as the
country’s export price index.
4. The four smallest constituencies by size currently are represented by executive directors
from Brazil, India, Argentina, and Equatorial Guinea.
5. Reform of voting shares also involves rectifying some of the distortions that have devel
oped in voting shares within these groups of countries.
6. Calculated quota shares are derived from formulas that have been used in the past to guide
quota negotiations. The estimates presented in this paragraph are based on IMF (2004g).
7. The order of absolute discrepancies is Singapore, China, Korea, Mexico, Malaysia, and
Thailand.
8. The combined calculated quota share of the EU countries as a group is estimated as five
and one-half percentage points higher than their actual combined share today. Moreover, the
hypothetical four percentage points in downward adjustment in the combined quota share
of the United States, Europe, Canada, and Japan would be about half as large as implied by
Lorenzo Bini Smaghi (chapter 10 of the conference volume) and less than one-third of the ad
justment that I consider in chapter 9.
Today the IMF is behind the curve on the central issue of the first decade
of the 21st century: promoting macroeconomic and exchange rate adjust
ments. Moreover, the benign economic and financial conditions that have
sustained those imbalances during the past few years are unlikely to per
sist. Unless the IMF as an institution can more effectively discharge its
responsibilities for the identification and resolution of global imbalances
and other systemic threats to global prosperity, it will become increas
ingly ignored. The performance of the global economy and financial sys
tem will suffer.
9. In this area of institutional governance, the IMF and World Bank lag substantially behind
the World Trade Organization, the Organization for Economic Cooperation and Develop
ment, and UN agencies such as the United Nations Development Program in implementing
more transparent leadership selection procedures.
10. Managing Director de Rato (IMF 2005k) made a similar proposal for the advanced or in
dustrial countries; it should be applied to all systemically important countries.
The IMF remains bedeviled by philosophical disputes about the scale and
scope of its lending activities. These disputes distract the institution from
its role as the global lender of final resort. This component of the IMF re
form agenda should include three elements.
First, members of the Fund should reaffirm the central role of the IMF in
international financial crises, including through its potentially large-scale
lending activities. Unless the IMF distances itself from ideological preoc
cupations with excessive crisis lending and moral hazard concerns, the
Fund will go into eclipse as an international crisis lender and the interna
tional community will lose its leverage over antisocial national economic
policies.11 Note that if the quota shares of the large emerging-market coun
tries are increased as advocated in my agenda, those countries will be sup
plying the bulk of the additional financial resources for the IMF to lend.
This shift in responsibility would be consistent with the original intent of
the revolving character of IMF resources.
Second, in cases requiring debt restructurings, in particular those in
volving a sovereign default to private creditors, the Fund should embrace
the proposal by William Cline (chapter 14 of the conference volume). To
11. Observers and critics from European countries, in particular, fail to recognize the impli
cations of a world that differs from when their countries faced balance of payments crises in
the early 1950s through the middle of the 1970s. Those countries during that period received
large amounts of financial support from the IMF often supplemented by special bilateral fi
nancial arrangements even in the context of the protection offered by their capital controls.
No one raised a peep about moral hazard at that time. Today, no sensible observer or critic
advocates returning to a world of comprehensive capital controls. As a consequence, the po
tential need for the IMF as a lender of final resort has increased, not decreased.
Capital account and financial-sector issues are central to the IMF’s role in
the 21st century. Technology, demography, and policy have converged to
12. The CPIA system is the World Bank’s internal mechanism used to provide guidance on
the scale of its lending to individual members. In the past, countries’ performances have
been grouped by quintile and published. Starting in 2006, the individual country assess
ments will be made public.
13. Today, most IMF lending to low-income countries eligible for Poverty Reduction and
Growth Facility programs involves resources that have been lent voluntarily to the IMF, not
its own quota-based resources.
The first three components of the six-part agenda for IMF reform offered
here—governance, systemically important countries, and external financial
crises—are time critical. Concrete progress on IMF governance is necessary
to underpin the relevance of the IMF’s role with respect to the second two
components. The last three—low-income countries, the capital account and
financial sector, and IMF resources—are less time critical because, unless
the triad of principal components is successfully confronted, how the IMF
performs on the other components will not matter. The IMF will become an
ill-equipped development institution, offering advice of limited global rel
evance and without the need to supplement its financial resources because,
in effect, it will be in the business of administering grants to low-income
countries to support macroeconomic policy adjustments.
Reforming the IMF to enable it to discharge its core mission of promot
ing international economic growth and financial stability in the 21st cen
tury is urgent if the Fund is not going to sink into irrelevance. No one can
predict accurately the tipping point at which the IMF loses the support of
its 20 to 30 systemically most important members and thereby loses its
capacity to provide financing to those countries if they should need fi
nancial support, or to support their other global economic and financial
objectives even if they should not. However, at some point—and on the
present trajectory I suspect that point is not too distant—enough IMF
members will conclude that the institution as currently constituted is not
sufficiently relevant to their national interests, and they will cease to sup
port the Fund and its provision of international public goods.
Therefore, the IMF needs a proactive reform agenda, an agenda with
more precision and promise than that put forward by Managing Director
de Rato. The agenda must contain a critical mass of reforms covering the
six components listed in this chapter. It must address the interests of all
members. It must be a package that provides something for each country
even if each country does not get everything it wants and has to swallow
some elements it would prefer to leave out.
The agenda outlined above does not require an amendment to the IMF
Articles of Agreement at this time or in the next few years. On the other
hand, if over the next year or two a consensus emerges to increase IMF
quotas in 2008 and, much more important, if agreement can be reached
on a more ambitious reform package than the one sketched out here, a
fifth amendment of the IMF Articles of Agreement might be part of that
package.14
14. The fifth amendment might include (1) an increase in basic votes, discussed in chapter 4
of this policy analysis, (2) authorization for special, temporary SDR allocations to help the
IMF deal with external financial crises, discussed by Lachman (chapter 23 of the conference
volume), (3) adjustments in the provisions of the current Articles to facilitate the consolida
tion of EU representation in the IMF, which I discuss in chapter 9, even though substantial
if not total consolidation of EU representation could be accomplished without an amend
ment, and (4) establishing a framework for IMF membership and relations with regional
monetary arrangements, discussed by C. Randall Henning (chapter 7). Presumably such an
expanded package would include a commitment from the US government to push for pas
sage of the Fourth Amendment of the Articles authorizing a special, one-time allocation of
SDR principally to those members, including Russia and most of the former Soviet Union
and Eastern Europe, that were not members of the IMF in 1970–72 or 1979–81 when SDR
were allocated. The United States promoted the amendment, 131 members of the IMF with
77 percent of the weighted votes have ratified it, and the IMFC routinely calls for the com
pletion of the ratification process, which cannot happen without US action.