Over the past 60 years, the world’s financial landscape has undergone extraordinary changes, and the IMF “has continually evolved to meet the needs of its members and the international economic system,” according to Managing Director Rodrigo de Rato, addressing a joint IMF-Bundesbank symposium on June 8 in Frankfurt, Germany. He reviewed the origins and principal changes in the organization and shared some key ideas that are emerging from the IMF’s current medium-term strategic review, which he initiated. The following is a summary of his remarks; the full text is available on the IMF’s website (http://www.imf.org).
The IMF has always had as its central concern the health and stability of the world economy, but just as the world economy has had to absorb significant changes in technology, politics, culture, and economics, the IMF, too, has had to adapt. After the Bretton Woods system of fixed exchange rates collapsed in the early 1970s, an amendment to the IMF’s Articles of Agreement led to a reorientation of its functions. In particular, in recognition of the close relationship between domestic economic policies and international stability, the IMF established a surveillance process that, de Rato observed, “to this day forms the basis for our systematic and comprehensive review of economic conditions and policies in each member country.”
Similarly, its work with new members led to requests for advice and assistance beyond the traditional macroeconomic areas of fiscal and monetary policy and exchange rate systems. The IMF found itself helping countries establish institutions of monetary and fiscal policy, and devise supply-side structural policies to promote growth. After the dissolution of the former Soviet Union, the IMF provided assistance for formerly centrally planned economies to make the transition to market-based systems.
IMF financing underwent a great transformation, too, with concessional lending to low-income countries being added to its traditional short-term lending for balance of payments needs. Rapid development of international capital markets occasioned special financing policies to allow the IMF to assist countries facing capital account crises, and the IMF began to play an unanticipated role in facilitating the resolution of sovereign debt problems.
Meeting future needs
As it continues to serve the interests of its member countries and the international community, the IMF “has to be in a position to deal with the influences that are expected to shape the global economy in the coming years. We must not remain static, nor must we change only in a reactive manner when forced to.” Although the IMF’s strategic review is still in its early stages, there is a sense, de Rato said, that the continuing evolution of the IMF must remain grounded in its main areas of responsibility: facilitating international monetary cooperation, fostering a liberal system of international trade and payments, and promoting macroeconomic and financial stability as a condition for sustained growth. What have emerged thus far, he indicated, are key ideas in five areas:
Surveillance. IMF surveillance provides the foundation for cooperation among members in promoting stability and growth in the global economy. With increased trade and financial linkages among nations, and strong connections between economic performance, poverty, and security issues, cooperation in addressing shared problems is more important than ever. The IMF should continue strengthening its bilateral surveillance process, while remaining fully informed by regional and global perspectives. Systemically important countries continue to deserve special attention.
Financial sectors and capital markets. The IMF is the one international organization capable of carrying out financial sector surveillance universally and comprehensively. Further work is needed, however, to deepen the IMF’s role in anticipating sources of instability and generating timely responses, and in helping countries strengthen their financial sectors and adapt their prudential and administrative frameworks to benefit more from private capital flows.
Another top priority will be to strengthen the IMF’s understanding of what drives global capital asset allocation, and capital flows across sectors and national borders. Early identification and assessment of capital flows can help the IMF evaluate vulnerabilities in a timely manner. For members seeking to access international capital markets and integrate their economies into the global financial system, the IMF can provide advice on appropriate sequencing.
Financing and lending. The IMF must continue to provide temporary financing to help smooth the adjustment of current account imbalances and prevent, or mitigate, capital account crises and cross-border contagion. But to succeed in this, de Rato said, “the IMF must be able to exercise selectivity in supporting only those adjustment programs that will put the relevant members firmly on the path to external viability.” Robust domestic institutional frameworks and strong national ownership of programs will also be key. He added that the IMF “will continue working toward a clearer consensus on the appropriate circumstances and scale for IMF lending, the possible need for additional financial instruments, and the adequacy of the present framework for the orderly resolution of sovereign debt problems.”
Role in low-income countries. Low-income countries present the international community with profound challenges. Lasting poverty reduction can be achieved only with stable and sustained growth. The IMF can help countries put in place strong macroeconomic frameworks that will lead to economic expansion and debt sustain-ability, and help them reach the UN Millennium Development Goals. Issues that may warrant closer examination, de Rato said, include ensuring adequate resources in the Poverty Reduction and Growth Facility, developing new ways to help low-income countries deal with economic shocks, enhancing the IMF’s role in signaling to others the strength of country policies in instances where low-income countries do not need or want IMF lending, and taking a closer look at the IMF’s role in supporting countries’ poverty reduction strategies and its relationship with donors and aid agencies.
Internal governance and management. To maintain the IMF’s effectiveness, the membership must resolve its own governance issues. De Rato called for all members to have adequate voice and participation in the institution’s decision making and for a distribution of quotas that reflect developments in the global economy.
Further, the institution’s resources must be commensurate with the tasks it is asked to perform. The IMF’s management and Executive Board remain committed to the most effective use of available resources, and the strategic review will help to identify needs, define priorities, and consider possibilities to redeploy resources to higher-priority areas.
IMF Managing Director Rodrigo de Rato on June 6 announced the formation of a Review Group on the Organization of Financial Sector and Capital Markets Work in the IMF. William J. McDonough, Chair of the U.S. Public Company Accounting Oversight Board and former President of the Federal Reserve Bank of New York, will head the group, which has been formed to provide the IMF with an independent perspective on its financial sector and capital markets work, and how this work is allocated among its departments, especially the International Capital Markets and the Monetary and Financial Systems Departments, as well as the Research and the Policy Development and Review Departments.
The rising importance of private capital flows and of a stable and well-functioning financial sector have led to a greater emphasis on these areas in the IMF’s work. “It is now time,” de Rato said, “to review the ways in which the IMF has adapted.” Also, as part of an ongoing strategic review of the IMF, the organization’s Executive Board has asked that increased attention be given to financial regulation and oversight and to the determinants of capital flows and their regulation. “This increased attention would mean that in Article IV surveillance, IMF missions would increasingly examine the regulations and environment in which domestic financial institutions and private capital markets operate, with attention to factors governing inward and outward flows of lending, equity investment, and direct foreign investment,” de Rato stated.
In addition to McDonough, others participating in the review group are Jaime Caruana (Governor, Bank of Spain, and Chair of the Basel Committee on Banking Supervision), Terrence J. Checki (Executive Vice President, Emerging Markets and International Affairs, New York Federal Reserve), Mohamed El-Erian (Managing Director, Pacific Investment Management Co.), Paulo Leme (Managing Director, Emerging Markets Economic Research, Goldman Sachs & Co.), Toshiro Muto (Deputy Governor, Bank of Japan), and Joseph Yam (Chief Executive, Hong Kong Monetary Authority). Andrew Tweedie, a senior advisor in the IMF’s Finance Department, will serve as the secretary.