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Interview with Leo Van Houtven: Former IMF Secretary and Counsellor examines strengths and weaknesses in IMF governance

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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IMF Survey: In terms of IMF governance, where has the record been satisfactory, and where are improvements called for?

Van Houtven: IMF governance refers to how the institution pursues its purposes for the benefit of its members and how it demonstrates leadership by adjusting its mandate in light of changes in the global economy and in members’ circumstances. Since its creation, the IMF has been scrutinized by academia, the media, and others. For years, IMF governance appeared beyond reproach, with criticism focusing largely on such policy issues as conditionality.

That changed sharply in the 1990s, when civil society questioned the relevance of the IMF’s mandate and the adequacy of its governance structure to serve the needs of the global community in the twenty-first century. Critics saw the IMF as a lopsided instrument in the hands of the rich countries, and some member countries’ authorities became more hesitant to express their support for the IMF. But the quality of the IMF’s own governance will enhance the effectiveness of its involvement in issues that affect the welfare of citizens in its member countries.

The IMF’s rapid reaction to the Asian crisis—its development of a program focusing the financial architecture on crisis prevention and resolution—was an important show of good governance. Similarly, the IMF showed leadership in its search for monetary reform following the breakdown of the par value system in the early 1970s, its creation of the Interim Committee to strengthen political oversight of the IMF, and its adaptation to the growing weight and needs of the developing countries.

But IMF governance has been less satisfactory in the distribution of its quotas, used to meet the IMF’s capital requirements, and voting power, which has become distorted over time. To the detriment of Asia and developing countries in other regions, the current system is geared to defending the status quo. The quota formula, which attaches sizable weight to foreign trade and official reserves, plays to the advantage of Western European countries, which needed large quotas when they were still candidates for the use of IMF resources.

Quotas attempt to reflect member countries’ economic and financial importance. The industrial countries are the predominant creditor countries and should remain the majority shareholders. But a small number of industrial countries hold 60 percent of the voting power, while the vast majority of member countries—and of the global population—have only 40 percent. That is increasingly seen as evidence of the lopsidedness in the governance of the monetary system.

At the IMF’s recent Annual Meetings, the Managing Director called for further work to improve the structure of the IMF’s governance and achieve a distribution of quotas that would better reflect members’ relative economic positions.

IMF Survey: Is the IMF’s surveillance (or oversight) effective, and what deficiencies do you see in current practice?

Van Houtven: The 25 years of experience with the Interim Committee in a period of considerable turbulence was fruitful. The committee immersed itself in the major issues on the IMF’s agenda, leaving the IMF’s day-to-day management to the Executive Board. But it failed to strengthen multilateral surveillance over the policies of major industrial countries. It also failed to provide leadership in the 1980s and 1990s on the implications of global financial markets for national economic policies and for the evolution of the international monetary system. This lapse in leadership became part of the prologue to the Mexican and Asian crises.

In 1999, the Interim Committee was transformed into the International Monetary and Financial Committee (IMFC), but this has not, thus far, opened a new chapter of political leadership and IMF governance. Leadership could perhaps be strengthened if the IMFC were made into a decision-making council. It’s not necessarily the right solution, however, because of the concern that the industrial countries may be tempted to impose their voting power superiority rather than take the time to work toward consensus decisions. We are still looking for ways to make political oversight of the IMF more effective.

IMF Survey: Should the institution be so dominated by the Group of Seven?

Van Houtven: The existence of groups of members, regional caucuses, and constituencies within a global institution is natural and useful. Groups promote their agendas and have an opportunity to influence decision making. In all this, the Group of Seven plays a unique role. Its original intent was to improve the performance of the world economy and to strengthen multilateral surveillance over the participating countries. Gradually, however, the group’s surveillance ambitions faded, but it was determined to keep to itself the consideration of multilateral surveillance, which affects the health of the world economy as a whole.

When new systemic issues and financial crises took center stage in the 1990s, the role of the Group of Seven increased. In recent years, IMF members and observers have voiced concern that these countries—holding nearly one-half the total voting power in the IMF—are setting the institutional financial agenda. Their leadership in the management of the system is natural. However, their dominance could endanger the IMF’s cooperative character unless they exert their influence within the global framework of the IMF rather than appear to impose it from above. Also, the group’s insistence that IMF members strengthen their policies and that the institution have a reduced financing role appears to be out of balance with its weak surveillance over its own members, with the lackluster economic activity in major industrial countries, and with the urgent need for structural reform in a number of them.

IMF Survey: Is it appropriate for the IMF to continue to make its decisions on a consensus basis?

Van Houtven: Consensus decision making, a feature of IMF governance since the institution’s creation, ensures that all members are involved in the process. IMF policies are developed through deliberate and thorough consideration by the Executive Board, the management, and the staff of all aspects of an issue. And the diversity of interests among the IMF’s membership makes consensus decision making even more important.

Policymaking by consensus continues to be broadly supported and provides particular protection for the developing countries, which are keenly aware that it is in their interests to have strong Executive Directors who will participate actively in decision making. In the Board environment, the influence of an individual Director can, and frequently does, reach well beyond his or her voting power. Complex issues often involve financial matters requiring a special majority of 70 percent, providing the developing countries with potential veto power, which they have used effectively over the years.

For consensus decision making to work well, Executive Directors must have seniority in their capitals and the authority to engage in give-and-take. Moreover, the system needs protection against forces that can put it at risk. The Group of Seven increasingly tends to act as a self-appointed steering group of the IMF, raising questions about whether its Executive Directors have the necessary room to maneuver to shape decisions in a framework based on consensus. The creation of the Group of Deputies within the IMFC raises similar concerns.

IMF Survey: Is transparency working?

Van Houtven: Transparency is one of the best things to happen to the IMF in the 1990s. The institutional discourse has been much broadened: parliaments in member countries take a more direct interest in IMF affairs, civil society has opportunities to contribute to the development of policy initiatives, and the publications program and coverage of the IMF’s daily activities on the website allow outsiders to follow what is happening in the institution.

The creation of the Independent Evaluation Office in 2001 also enhanced IMF transparency and accountability. Although no backsliding in transparency should be tolerated, care should be exercised to ensure that transparency does not interfere with members’ confidentiality requirements and the IMF’s operational needs.

IMF Survey: How can the IMF be made more accountable, particularly to the people its decisions most affect?

Van Houtven: Good governance and accountability will enhance the IMF’s legitimacy and its mandate for the benefit of its members. Public opinion increasingly accepts the importance of price stability and fiscal discipline to foster sustainable growth and free resources for social priorities. The transformation of IMF program design and conditionality to program ownership by members and the publication of the related documents have involved public opinion more closely. Although the IMF is accountable to member governments, it needs to explain itself better to members, civil society, and electorates. Much progress has been made through IMF transparency and an active media policy.

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