A mid hectic meetings of world leaders trying to stem the collapse of the financial system, leading economists and politicians debated the IMF’s future role and governance in a reformed financial order.
British Prime Minister Gordon Brown said on October 15 that the IMF should be reshaped to help regulate the world’s financial system and avoid a repeat of the global credit crisis, a proposal similar to that of the Egyptian Finance Minister Youssef Boutros-Ghali, the new head of the IMF’s policy guidance committee, the International Monetary and Financial Committee.
“The IMF should, in the near future, step in to put some coherence in financial regulations and in the surveillance of financial markets—cross-border surveillance, cross-border coherence between regulatory practices, accounting practices, and so on,” Boutros-Ghali told the IMF Survey in an interview. “Many of these things have been suggested by a number of study groups and experts, and I think the IMF is eminently capable of being the institution that implements these recommendations.”
Taking on new role
How the IMF should be reformed to take on a new role following the financial crisis was debated by a high-level panel organized by the Per Jacobsson Foundation during the IMF–World Bank Annual Meetings on October 12.
Acting as moderator, Andrew Crockett, Chairman of the Per Jacobsson Foundation and President of JPMorgan Chase International, said that the IMF, in the course of its 64-year history, had shown itself to be quite adaptable as the world economy changed. But this time, he said, “the transformation of the IMF’s role in the international financial system will need to be more wide-ranging than in the past.”
He asked the panel to consider four questions:
• How can the IMF be more effective in helping prevent, and deal with, global financial instability?
• How can the IMF be more effective in ensuring that exchange rates play their appropriate role in facilitating adjustment?
• How can the IMF adapt its lending facilities in the light of changing realities?
• If governments were starting afresh in 2008, how would the international monetary institution they might design differ from the IMF?
Trevor Manuel, South Africa’s Finance Minister, said the IMF had, until now, seemed remote from the crisis, a bad sign for the relevance of the institution. “The big challenge, then, is to try and bring the IMF back into center stage.”
At the heart of the issue of the IMF’s relevance was the issue of legitimacy—developing and emerging market economies must feel that their voices are being heard. “Ownership at a time like this is fundamentally important,” Manuel said.
Raghuram Rajan, a former IMF Economic Counsellor and now Professor of Finance at the University of Chicago Graduate School of Business, said the origins of the current crisis went much beyond the role of the IMF. “Clearly, the United States tried to boost demand to compensate for a collapse in demand elsewhere,” he said. “The multilateral system has been failing over the last so many years in putting the onus of being the demander of last resort on the United States.”
Stanley Fischer, a former IMF First Deputy Managing Director and now Governor of the Bank of Israel, said there were good reasons why the IMF had not been successful in addressing the buildup in global imbalances that had preceded the crisis. “The Fund’s role in patrolling the exchange rate system didn’t work—something we already know.”
“But we also know why it didn’t work,” Fischer continued. “For the Fund to have succeeded, it would have had to mediate between the country with the largest population in the world and the country with the largest GDP in the world, and get them to reach an agreement that they were incapable of reaching bilaterally. China was not willing to change its strategy of operating with an undervalued exchange rate, which has been an extremely successful one from the viewpoint of growth,” he said.
Jean Pisani-Ferry, Director of Bruegel, the Brussels-based think tank, agreed that the IMF wasn’t solely to blame for its lack of influence and ability to prevent the current crisis. The IMF’s Spring 2007 Global Financial Stability Report (GFSR) had accurately described the first phases of the crisis, he said, and the Spring 2008 GFSR had also been much more accurate than analysis provided by other international institutions and national governments. “The IMF has gained—or regained—intellectual credibility,” he said.
Fischer agreed with Pisani-Ferry on the quality of the IMF’s analysis, which was criticized in April 2008 for being overly pessimistic. “The Global Financial Stability Report can rightly claim to have foreseen and warned about many of the developments that led to the present situation,” he said.
The panelists had less kind words for the IMF’s policy dialogue with its member countries. Pisani-Ferry suggested that recent Article IV consultations with the United States represented a missed opportunity. “We cannot remember what the IMF told the U.S. authorities,” he said.
Panelists also commented on the impact of the IMF’s 2007 Decision on Bilateral Surveillance on its monitoring of exchange rates. “After the revision of the 1977 decision on surveillance, the only thing that has been weakened in the process is the credibility of the Fund because it has not been able to resist U.S. pressure, and it has not been able to tell China what it was supposed to tell it about its exchange rate policy,” Pisani-Ferry said.
Rajan used another example—the IMF’s advice on short selling, a practice that some viewed as exacerbating the recent collapse of stock market prices—to illustrate what he saw as a lack of evenhandedness on the part of the Fund. In 2007, the IMF had explicitly encouraged the Indian authorities to allow short selling by all institutional investors, he said. But the Fund did not publicly criticize the United States when it banned short sales in the middle of the financial crisis.
“What we are missing in these moments is the absence of a strong international, independent voice which stands for the world economy and fights for the world economy,” Rajan said.
Most speakers saw an enhanced role for IMF lending. Fischer accurately predicted that a number of countries at the periphery of the financial crisis would be needing help and would turn to the Fund for support.
“There will be more IMF programs in the months ahead,” he said. And if IMF programs could help leverage financing from other sources, including surplus countries such as Japan, “that would be very useful in ensuring the success of those adjustment packages.”
Reinventing the IMF
There was agreement among the panelists that the world still needed an IMF. But the Fund faces significant challenges in fulfilling its mandate in today’s world. As Fischer put it, “How should the Fund operate in the modern world in which financial markets are a much more important source of financing than they were 60 years ago, in which governments are less inclined to think in terms of what’s good for the international system as a whole, and in which there are many more international economic organizations? This is really at the heart of many of the dilemmas currently facing the Fund.”
According to Manuel, it is not just up to the Fund: countries must accept the rules of multilateralism. “One has to start from the fundamental view that if you accept public policy and you accept the interconnected-ness of the global economy, then you need an institution appropriate to its regulation.”
The problem is that not all players in the international system are willing to accept the need for such rules and regulation, while other players are trying to use international financial institutions as levers for their own foreign policy goals. “You either accept multilateralism and the need for it, or you try and opt out,” Manuel said.
Fischer also spoke about the need to strengthen the IMF’s role in ensuring global financial stability and its relationship with the Financial Stability Forum (FSF), established in 1999 by the world’s advanced economies to promote international financial stability through information exchange and international cooperation in financial supervision and surveillance. “The FSF was set up after the Asian crisis in a way that ensured the IMF would not be closely involved in this area. It was an industrialized country move to keep the IMF in its place—that is, as an institution that the G-7 would not have to listen to. That was simply a mistake.
“The FSF is doing excellent work, but it is not a global institution as is the Fund. There is a need for much closer cooperation between it and the Fund, and this requires more than lip service from the industrialized countries. It requires that they increase the IMF’s role in the area of financial stability,” Fischer said.
There were a number of questions and comments from the audience following the panel debate. Edwin M. Truman of the Peterson Institute for International Economics wondered whether the current financial crisis was “made in Washington or made in the world.” And was the crisis brought on by failures at the microeco-nomic level—lack of proper supervision and oversight—or by the imbalances at the macroeconomic level that contributed to the buildup of the massive housing bubble in the United States?
“There is an important, new, practical, and urgent mission for the IMF, and that is to protect the countries at the periphery from the consequences of a storm at the center,” George Soros, the well-known investor and philanthropist, said. “One way to do that would be for the IMF to act as an honest broker, helping channel funds from surplus countries, such as Japan, to countries in urgent need of financing.”
And according to Nancy Birdsall of the Center for Global Development, “the IMF had benefited in the 20th century from the reality that the United States was a benign hegemon, at least for the market economies. But in this century, as demonstrated by the current crisis, the United States, although it still is the superpower in many respects, cannot act alone—and yet that is not yet reflected effectively in the way the IMF is organized, managed, and governed.”
IMF External Relations Department