Over the past decade, Boorman observed, the IMF has continued to evolve in response to a changing world. It has concentrated increasingly on crisis prevention, created new lending facilities and closed down such facilities no longer in demand, transformed itself into an exceptionally transparent institution, changed its staffing and structure, and vastly expanded its well-respected and heavily demanded technical assistance and training activities. At the same time, it has taken on new responsibilities.
The important thing now, Boorman argued, is to build on this record. He focused his remarks and suggestions on three specific areas for further change at the IMF: governance, surveillance, and the institution’s role in emerging market countries.
Governance at the IMF
Perhaps the broadest issue concerning governance for the IMF as an institution involves the “voice and vote” of its members, Boorman said. As the world becomes more complex and more closely integrated, there may have to be a different balance within the IMF and other international institutions between the ceding of more sovereignty by nations to the broader international community and applying the principles of subsidiarity. And, he emphasized, whatever sovereignty is ceded by the membership under the IMF’s Articles of Agreement, it should not be taken back over time through individual decisions. Major countries, in particular, need to play by the rules and refrain from using political power outside the IMF to force decisions within it. Smaller countries, for their part, need to resist the temptation to be passive when the major countries act this way. Moreover, all members must show renewed commitment to working through consensus.
The failure of voice and vote to keep up with changes in the world economy is reflected in distorted representation at the IMF, Boorman noted, citing, for example, the seven largest Asian countries (other than Japan) having lower aggregate quotas than Austria, Belgium, Denmark, Finland, Norway, Sweden, and Switzerland—despite having seven times the share in global GDP and significantly larger trade. While not making an argument for any particular quota formula, he did suggest that quotas be based primarily on members’ participation in trade and financial flows. In the absence of change in this area, Boorman warned, such distortions would tarnish the legitimacy of the IMF’s decision making. To improve the institution’s efficiency, Boorman also suggested that the number of chairs on the IMF Executive Board be reduced, combined with an upgrading of the seniority of Executive Directors within their own governments.
Turning to the issue of surveillance—the IMF’s oversight of its members’ economic policies—Boorman remarked that this remains a poorly understood responsibility of the IMF and of its members—often visible only to a small group of officials. While the IMF is recognized as having staff that do first-rate work in this area, there remain basic questions as to the purpose of surveillance, as well as its audience and effectiveness.
In the first instance, Boorman noted, surveillance is a means of determining whether each member country is respecting its responsibilities under Article IV of the Articles of Agreement with regard to its exchange rate policies. The breadth of policies this encompasses is, in fact, wide. The IMF also advises and assists its membership through surveillance. In addition to macroeconomic assessment, which is the “stock in trade” of surveillance, country officials want IMF staff to bring the experience of other countries to the problems they are currently confronting. To be better able to share experiences and lessons across its membership, the IMF needs to distill the broad experience of its members and make sure the staff are conversant with those lessons, Boorman said.
The first requirements for effective surveillance are technical competence and some degree of political savvy. But another requirement—and the essence of crisis prevention—is the ability to get country authorities to take proper action when vulnerabilities threaten. Boorman raised the question as to whether this is best done by private persuasion or public warnings and asked whether this issue had been fully resolved in the IMF’s otherwise welcome moves toward greater transparency. Although much of the push toward transparency has been done voluntarily, the challenge as to how this would affect the IMF’s role of confidential advisor and spur to policy action, versus its new role as informer of markets, requires further reflection. A difficult question, Boorman said, is whether the willingness of country officials to openly share information can be preserved if the staff are also writing, in effect, for markets.
IMF’s role in emerging market countries
Four issues concerning the IMF’s role in emerging markets are worthy of particular attention, said Boorman: signaling, access policy, debt workout mechanisms, and the IMF’s policy on lending into arrears.
Signaling is most obvious through the IMF’s approval, or not, of financial arrangements with its members. With increased transparency over the last decade, virtually anything the IMF does or says may be interpreted as signaling its views on a particular country, Boorman observed. The most obvious signals derive from approving, continuing, delaying, or halting lending arrangements with countries. But the nature of the arrangement itself also contains signals.
There are continuous calls for IMF signaling mechanisms, but some attempts at response have faltered. For example, the Contingent Credit Lines (CCL), created in 1999, were intended to protect countries from contagion, but the CCL failed from lack of use and have been allowed to expire. The problems are well known: creditors wanted more conditionality and slower disbursements, while borrowers wanted less conditionality and more money up front; the entry signal would likely be positive and welcome, but the exit could be a problem; some saw moral hazard, others saw policy discipline. And yet others saw a risk of the IMF gravitating toward becoming a rating agency. Boorman noted that these issues will continue to bedevil attempts to create new and more imaginative signaling mechanisms in the IMF, but recommended that any such mechanisms be kept simple. Perhaps the answer, he suggested, is to stay with the blunt instrument of approval of a Stand-By Arrangement (SBA), and greater use of precautionary SBAs, and the more subtle (and public) assessment of a staff appraisal in the context of surveillance—and give up the search for something in between.
The issue of accesspolicy, which helps to determine how much a member country can borrow from the IMF, also remains generally unsettled, said Boorman. Calls to restrict access are motivated by moral hazard considerations, alleged benefits of greater predictability for markets, and a desire to rein in IMF management following the Fund’s responses to the financial crises of the 1990s.
But each of these motivations is subject to challenge. Few see moral hazard on the debtor side: most governments do not survive crises and are unlikely to invite them simply because the IMF may be there with large amounts of money. On the creditor side, there is an issue, Boorman conceded, but he did not see it as an overriding one, and limiting access to IMF resources is neither a necessary element nor a sensible response to this phenomenon. And, he continued, having the IMF deal more predictably vis-à-vis markets may be a recipe for one-way bets and well-timed exits, instead of appropriate caution.
Moreover, as liquidity needs can at times be large—and it can be appropriate to meet them (as in Mexico in 1995)—the IMF should be able to respond appropriately. Boorman welcomed the moves to put the burden of proof on those recommending exceptional access but hoped that this would not tie the IMF’s hands when large resources are appropriate for a country in trouble. In this connection, he also noted that access would not look so large and would not be classified as exceptional if the size of the IMF’s resources were better tailored to the new realities of the global economy.
Debtworkoutmechanisms. Related to access policy—and on the positive side—Boorman said he considered the debate and discussions over the sovereign debt restructuring mechanism, collective action clauses (CACs), and codes of conduct to have been enormously productive. This has not only pushed practice forward by moving emerging market countries to include CACs in their bond issues but also greatly increased the international community’s understanding of the issues. While he did not see CACs as having the power to do what is needed in more complex cases, the international financial system is nevertheless better off than before they became more extensively used. Boorman believes the discussion of some kind of statutory mechanism will be revived in the not too distant future, thereby urging that all of the institutional, academic, and legal work that had been done in the context of the recent debate be kept near at hand.
Concluding his speech with remarks on the IMF’s policy on lendingintoarrears, Boorman described this as straightforward, built on experience, and attempting to strike a balance. If a country falls into arrears to its private creditors, he noted, the international community cannot hand the discretion to help that country to those same creditors, who may demand that agreement on a debt deal precede any IMF lending. At the same time, the official community needs to recognize creditors’ legitimate rights. The country must be judged to be acting in good faith with its creditors in finding a solution to its debt problem in order for the IMF to initiate or continue lending to the country.
Referring to the case of Argentina, he argued that it is untenable to pursue a policy that leaves the determination of such a country’s medium-term fiscal path—beyond that required to service debt to the international financial institutions—to the debtors and private creditors rather than to the IMF. This is because, ultimately, the IMF will have to judge the sustainability of Argentina’s position under any debt deal that is struck. He further emphasized that if the IMF is to distance itself from a hands-on role in the debt restructuring process, then some will demand that its preferred creditor status be rethought. And this, Boorman said, is a development that would do irreparable harm to the IMF and to its future role in helping countries deal with the debt crises that inevitably will continue to occur.
Highlights of roundtable discussions on developing a vision for the IMF’s future
Coinciding with the 60th anniversary of the IMF and the World Bank, the first roundtable in the series “Sixty Years After Bretton Woods: Developing a Vision for the Future” was held to take a new look at the architecture of the international monetary system. The roundtable discussion gathered senior policymakers from 14 countries, leading financial market executives, and many of the world’s foremost academic experts to discuss how international monetary institutions and arrangements should be adapted to meet contemporary challenges. A few central themes dominated the discussions:
AretheU.S. deficitandAsiansurplusessustainable? Views on the U.S. current account deficit, the related Asian surpluses and reserve accumulation, and the sustainability of each diverged considerably. One side pointed to the U.S. deficit’s relatively small share of world savings (10 percent) and the dynamism, growth record, and stability of the U.S. economy. Counterarguments underscored the continued buildup of U.S. liabilities held overseas by official entities, and suggested these were both untenable and risky.
Shiftingpowertotheperiphery. Countries at the international monetary system’s periphery now have the power to affect the center. With many countries at the periphery maintaining fixed or pegged exchange rates and capital controls, participants argued that different rules are required for different IMF member countries, with some suggesting a renewal of the debate that took place in 1996–97 on whether the IMF should be given jurisdiction over the capital account as a means to better develop these rules.
Qualityinstitutionsmatter. Institutional development has lagged stabilization and the improvement of macroeconomic policies in many countries. Participants were nearly unanimous in urging more attention to areas such as governance, the development of supervisory and regulatory agencies, the rule of law, and labor market reform to enable the open market model to succeed and be sustained in the developing world.
Howmuchconditionality? The appropriate extent of conditionality in IMF arrangements was debated, with some participants arguing that the problem was more one of focus and the IMF’s will to stick to its demands and resist granting waivers.
Resolvingcrises. While there was little support for an early reconsideration of the proposal for a sovereign debt restructuring mechanism, there was a widespread and sympathetic view on the need for some kind of standstill mechanism and guidelines for its use as a complement to the IMF’s role in capital market crises.
ClarifyingIMFandWorldBankroles. Some participants called for elimination of the overlap between the functions of the IMF and the World Bank. They saw the IMF as the “financial watchdog” that intervened in financial crises with short-term conditional loans, with the Bank handling the longer-term development and poverty reduction work.