VIII. An Appraisal of IMF Governance
- International Monetary Fund
- Published Date:
- August 2002
The IMF’s mandate, established in the Bretton Woods agreement of 1944, to maintain orderly exchange arrangements was unprecedented and required members of the new institution to give up part of their authority over an important instrument of national economic policy. To be able to accept the obligations of membership, including the rule-based fixed exchange rate system and the code of conduct in international economic relations that required them to pursue the external (current account) convertibility of their currencies, members insisted on close oversight of the IMF through a Board of Governors that would take key political decisions and an Executive Board, chaired by the Managing Director, that would be in charge of day-to-day management.
Three decades later, after the breakdown of the par value system, the creation of the Interim Committee to oversee the reform and the continued adaptation of the international monetary system were major steps toward strengthening the governance structure of the IMF at a time of considerable turbulence in the system and in the world economy. The quarter-century experience of joint oversight of the IMF by the Interim Committee and the Board has been fruitful. The Interim Committee gave “political advice” to the Board on major issues while respecting the Board’s authority over the day-to-day business of the IMF. Nevertheless, the experience demonstrated that the Interim Committee should have insisted that the IMF’s multilateral surveillance over its major industrial members was strengthened. The Committee should also have been more vigilant in focusing the attention of members on the implications of the globalization of capital markets for the evolution of the international monetary system and for national economic strategies. Moreover, during the 1990s, the major industrial countries exerted a growing political influence in the management of IMF affairs during a period of financial crises. With the transformation of the Interim Committee into the IMFC in 1999 and the creation of a group of Deputies to the IMFC, the search for more effective and balanced political oversight of the IMF continues.
The system of quotas and voting power in the IMF has, over the years, created distortions and lacks equity. A group of 24 industrial countries controls 60 percent of the voting power, while more than 85 percent of the membership—159 out of 183 IMF members—together, hold only 40 percent of the votes. The imbalance reflects the fact that, in order to meet the capital requirements of the institution, quotas attempt to reflect the economic and financial importance of members in the world economy. However, in today’s global IMF, quotas and voting power have acquired a broader meaning. The existing imbalance is seen as evidence of the lopsidedness of governance of the international monetary system. Thus, a more equal distribution of quotas and voting power between the developing world and the industrial countries should enhance the IMF’s governance and credibility. At the same time, the IMF, as a financial institution, must maintain the confidence of the creditor countries. It is, therefore, essential that the membership reach the consensual decision that the industrial countries, who are the preponderant group of creditor countries, should remain majority shareholders, a position that will be supported by the capital markets and will be strengthened by the fact that the weight of the industrial countries in the world economy continues to grow.
The combined voting strength of the 15 member states of the European Union (29.9 percent), which is very much larger than that of the United States (17.2 percent) or that of the Asian region as a whole (18.0 percent), and the heavy presence of Western Europe in the Board, with 8 (and periodically 9) Executive Directors, one-third (or more) of the total Board, have become distortions that call for correction in the light of the sustained progress toward European Union as well as through technical adjustments in the application of the quota formula. In the process, Europe’s voting power and its representation in the Board would be reduced and equity in the system would be enhanced by the emergence, over time, of a majority in the number of Executive Directors from emerging market economies and developing countries in the Board, while the industrial countries, the predominant creditors of the IMF, would remain majority shareholders.
Intensive collaboration between the Executive Board, the Managing Director, and the staff has been a basic feature of IMF governance from the outset. All aspects of the IMF’s work take place under the supervision of the Board, which is—literally and figuratively—“in continuous session.” Executive Directors channel the views of their authorities, thus providing the link that secures the input and support of capitals; at the same time, they are officials of the IMF who form a college that is responsible for “conducting the business of the IMF.” The Managing Director has the multiple tasks of being the principal spokesman of the IMF and of maintaining contacts with members at the political level while at the same time functioning as Chairman of the Board and head of the staff. Good governance of the IMF requires that the chief executive be selected in a transparent and consensual manner.
Effective governance of the IMF demands that the institutional benefits and burdens are equitably shared among the membership and that checks and balances operate efficiently in decision making. The development of IMF policies is a process of deliberate and thorough consideration by the Executive Board, the management, and the staff of all the aspects of an issue in order to arrive at decisions that all, or nearly all, can support. Qualified majorities of the total voting power for certain decisions are important to ensure that major decisions command very wide support. Judicious restraint and reflection are required in the use of veto power. Special voting majorities are a double-edged sword of protection as well as hindrance against change. The high majority required for amendment of the Articles of Agreement ensures thorough consideration of proposals for major change, and a steady course in the governance of the IMF.
Decision making by consensus in the Executive Board was adopted at the outset, in order to ensure that policies in the new institution would be set in a collaborative manner by all and for all. The value of that approach was confirmed over time and particularly since the late 1970s, when the industrial countries ceased to use the IMF’s resources and the membership became divided between a group of creditor countries and a group of de facto users of IMF financial resources. Consensus decision making is a hallmark of the IMF and provides valuable protection for developing countries who are the minority shareholders. Special vigilance is required to ensure that the rules of the game continue to reflect a reasonable balance between different groups of members. This has been highlighted in recent years when the Group of Seven showed an increasing tendency to project themselves as a “steering group” or “Directoire” of the IMF, which might not always leave enough room to promote consensus building. While the consensual method has been embraced by all, it is not a miracle solution and it needs to be actively protected because, as can be expected in human affairs, issues do arise in which the force of voting power strongly comes to the fore.
In this essay, the process of consensus building in the Executive Board has been explained in some detail and has been illustrated by several examples. The strength of argument and personality, the timing and manner of presentation, and the power of persuasion of individual Executive Directors are essential elements in the way in which the Board comes to decisions. Moreover, in policy debates, the constituencies that are led by Directors from small industrial countries but also include middle-income and developing countries frequently occupy the “middle ground” between the Directors from major industrial countries and the constituencies of developing countries. The views of the Directors from developing countries often find a receptive ear with colleagues from the “mixed” constituencies, whose positions are carefully calibrated to reflect the diversity of views among the countries in their groups. Similarly, the Executive Directors from major industrial countries look to their colleagues from mixed constituencies for avenues toward broadly acceptable solutions. Experience has amply demonstrated that with good arguments and good tactics the developing countries turned many Board debates and decisions in their favor. In fact, the developing countries are acutely aware of the importance of electing strong personalities to defend their interests in the Board.
The objective of the conversion in 1999 of the Interim Committee into the IMFC and the creation of a group of Deputies was that it should provide more effective political guidance of the IMF in its core tasks of crisis prevention and crisis resolution, and of making global economic integration work for the benefit of all member countries, including the poorest. In that regard, it is important that the IMFC and the Deputies avoid immersing themselves in what the Board does best, while Executive Directors should have the necessary support from their capitals to conduct the IMF’s business. The conversion of the IMFC into a decision-making council—a move that was turned down in 1999—remains an option, but is not necessarily the solution. There is the legitimate concern that, in a council, members from industrial countries may not always show the necessary patience and willingness to work toward consensus and may be tempted to settle issues through up or down voting.
The former Managing Director, Michel Camdessus, proposed that the IMFC meet periodically at the level of heads of state or of government. This would greatly enhance the legitimacy of the IMFC, and of the IMF, as the representative of the global community in financial affairs. It would also constitute an important counterweight to the economic summits of the major industrial countries. While there has been little reaction to the suggestion of Michel Camdessus, the Group of Seven proceeded in 1999 with the creation of two new groups outside the IMF, the Financial Stability Forum and the Group of 20. The raison d’être of both groups overlaps in large part with the core responsibility of crisis prevention of the IMF and suggests that the Group of Seven remains ambivalent about the IMF and the IMFC.
The more accountable the IMF is to the totality of its members, the stronger its legitimacy, particularly in dealing with issues that infringe on national sovereignty. Political oversight and accountability should involve members sharing in the responsibility for the decisions taken by the institution. Political oversight should not be confused with arm twisting by individual members or groups of members that interferes with consensus building. The leadership and the impulse of the Group of Seven are essential toward the resolution of the major issues in the management of the international monetary system. However, it is important for the balanced and cooperative working of the system and for its accountability that the Group of Seven exert their influence within the global framework of the IMFC and the Board, rather than appear to impose it from “above.” In that regard, the credibility of the Group of Seven would be much enhanced if multilateral surveillance of their group—which has lost muscle in recent years—were revitalized.
The role and the vision of the United States in the mission of the IMF are unique. Over the years, U.S. support for the IMF has been forthcoming in critical moments and it remains essential for important policy initiatives. The U.S. Congress is keenly aware of the country’s premier position in the IMF. While the European countries have generally supported the IMF, they have left the United States—too long—alone in the driver’s seat because of Europe’s absorbing focus on regional union, and the creation of a common currency and of a common central bank. From a different corner of the globe, the ambition of Japan and of other countries in the Asian region for recognition of their increased role in the global economy appears legitimate.
For decades, the IMF failed to recognize the importance of transparency; its internal culture and the attitudes of member countries encouraged confidentiality. This strengthened the view prevailing on the outside that the IMF believed that it was answerable only to itself. External pressures on the IMF for transparency led by civil society, as well as a result of the impact of the financial crises of the 1990s, have had a salutary effect. The IMF now strives to be a transparent institution through a comprehensive program of publication of its internal documents. The policy of external evaluation of core activities and the establishment of an IEO add to a solid public record. Nevertheless, further progress can be achieved such as through a more forthcoming policy with regard to the public availability of minutes of Executive Board meetings, while public opinion needs to be reassured that there will be no backsliding in transparency.
Civil society has had a notable impact in enhancing IMF transparency as well as on other areas of concern such as country ownership of IMF programs and comprehensive debt relief for the HIPC. Civil society’s growing involvement in the triangular relationship with the IMF and with the electorates of members should assist in promoting improved governance and equity of the global financial system. The IMF should deepen its collaboration with civil society and make sustained efforts to explain itself better to the electorates of members. It would also appear to be timely for the Board to establish a framework for the further development of a fruitful relationship with civil society. However, the criteria that must guide the IMF in its actions will differ from—and could occasionally conflict with—those that guide civil society. The IMF cannot have a multiplication of stakeholders; its accountability must remain with its member governments.
IMF activities have, over time, focused increasingly on the developing countries, which are now much more integrated in the international economy than half a century ago, even though the weight of the industrial economies in the global economy continues to grow. Developments in the 1990s have accelerated this structural process with important implications for IMF governance that continue to evolve. The emphasis on poverty reduction and debt relief for a number of the poorest countries is being pursued jointly by the IMF and the World Bank, with the impetus, at the ministerial level, of joint working meetings of the IMFC and the Development Committee. The searchlight on the weaknesses in financial sectors around the globe, and particularly those in middle-income, capital-importing countries that can be subject to sudden shifts in market sentiment, has prompted the addition to the IMF’s core tasks of issues in financial sector stability that, until recently, had remained largely with national authorities and whose resolution requires a sustained strengthening of international collaboration. The participatory process of IMF policy formulation, involving civil society and the outreach to the electorates of members, needs to be further developed while IMF transparency is consolidated. The emphasis on country “ownership” of policies, as well as on governance issues of member countries, should be seen in a similar light. The IMF must also be responsive to a vastly broadened array of technical assistance needs of members, such as in institution building. The addition of major new tasks, such as those just referred to, requires much increased time and specialized knowledge on the part of the Board and of the staff. For years, the workloads of the Board and the staff have been excessive, while attempts to streamline operations were limited because of the Board’s laudable insistence on its central role in conducting the business of the IMF and the general desire to maintain a lean and homogenous staff. In order to maintain the standards of IMF governance, these issues require fresh and sustained efforts to raise institutional efficiency.
The countries most affected by the financial crises of the 1990s—with the exception of Indonesia, due largely to internal governance issues—have rebounded markedly, with strong growth, consistent macroeconomic policies, and structural reforms. The authorities of Mexico, Korea, Thailand, Russia, and Brazil should be commended for their achievements. The thrust of the IMF-supported programs and the size of the financing packages contributed to these remarkable results. Nevertheless, the perceived risk of moral hazard and concerns regarding the sustainability of external debt of individual countries have had an impact on the view that the IMF should reduce its financing role.
Further work is in progress to develop two, possibly complementary, approaches to sovereign debt restructuring, the statutory approach in which the debtor and a supermajority of creditors take the decisions, and the market-based approach involving collective action clauses in contracts. The IMF’s financing role will also need to remain aligned and responsive to changing global economic conditions. This includes the flexible setting of access limits for “traditional” balance of payments needs, as well as access limits for capital account crises, including the issue of “exceptional circumstances” that call for commensurate access. The precise dimension of moral hazard, thus far mainly perception rather than hard evidence, also needs to be clarified. Moreover, circumstances may well recur in which the IMF would find itself in a position of lender of last resort. Financial crises will occur again, unexpectedly, and IMF governance needs to ensure that the institution remains ready to deal effectively with its fundamental tasks of systemic oversight and of providing policy advice and finance, thereby giving “confidence to members … under adequate safeguards … providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity” (Article I -v).
Washington, D.C., June 2002