TREVOR MANUEL: I think that when Dominique Strauss-Kahn asked a number of us to serve on this panel,1 he could not have contemplated the kind of situation that the global economy now faces. Among its eminent members, Guillermo Ortiz is here. Michel Camdessus was quoted in the Emerging Markets newspaper on the issue. There is Indrawati Mulyani from Indonesia, and Amartya Sen. Whom have I left out? Ken Dam and Bob Rubin and Mohamed El-Erian.

Stanley Fischer, Trevor Manuel, Jean Pisani-Ferry, Raghuram Rajan

TREVOR MANUEL: I think that when Dominique Strauss-Kahn asked a number of us to serve on this panel,1 he could not have contemplated the kind of situation that the global economy now faces. Among its eminent members, Guillermo Ortiz is here. Michel Camdessus was quoted in the Emerging Markets newspaper on the issue. There is Indrawati Mulyani from Indonesia, and Amartya Sen. Whom have I left out? Ken Dam and Bob Rubin and Mohamed El-Erian.

So it is a panel that really wants to be focused on these issues. But the key question that has to arise in the minds of anybody watching the situation now is, why is the IMF so remote from the situation? This is the world’s greatest financial crisis. And as Barry Eichengreen wrote, “It is sometimes said that the crisis is a reminder of why we have the IMF. If the IMF doesn’t come up with some new ideas on how to handle it, the crisis will only remind us of why we need to forget it.”

The big challenge, then, is to look at the IMF, and I think the way in which the panel would want to see it is to try to bring the IMF back to center stage. So the agreement we have is focused, to some extent, on the internal governance. The internal governance issues are very much part of a report of the Independent Evaluation Office, whose Director, Tom Bernes, is here as well. The report, released in May of this year, focuses largely on these issues. It is an interesting report. It asks a series of questions about what Executive Directors of the Fund do and why they should be that involved in management and so on, and that is where we start, but I think it is impossible to look at those issues to the exclusion of the way in which you have phrased the last question, Andrew. And that is that you need to look at the Fund within the global economy and the kind of services and products it offers. But you also need to look at the external governance, including the issues of voice and representation. Because ownership at a time like this is fundamentally important.

The Fund must be heard. It must be resonant with decision makers across the world. And if you ask me for my view about the problems we are seeing right now, it is the absence of strong visible leadership capable of driving change and coordinating responses to the market burndown.

JEAN PISANI-FERRY: Certainly the situation has changed a lot since we were asked to participate in this panel, and this seemingly changes the perspective on our debate: at the same time you feel today both anxiety for the world economy and some sense of relief for the institution. Anxiety is justified for sure; as to relief, in a way it is justified, in a way it is misplaced.

I think it is justified for the reason that countries, as we all know, are knocking at the door, and because the IMF is an institution with considerable expertise in banking and financial crises. It is the institution where the knowledge is and the institution on which governments have to rely to draw lessons and to know what to do.

And there is also a renewed call for coordination at the global level. Certainly, it is remarkable to what extent, having reacted in a different way initially and having been pulled apart by national politics, countries within the G-7, at least, have now converged much more towards similar solutions and a common statement on what needs to be done. So there is a moment of coordination that we have not seen for a very, very long time.

And I think also we have to say that the IMF has gained, or regained, intellectual credibility. If we look back at the Global Financial Stability Report (GFSR) of April 2007, it described accurately the first phases of the crisis. If we look back at what was published in April of this year, both on the macro front and on the financial front, it was much more accurate, in retrospect, than whatever was written at the same time in other official institutions and by national governments.

So I think there are elements that justify confidence in what the institution can bring. But at the same time it must be recognized that the IMF is less indispensable than it thinks. Just as an anecdote, I attended a panel this morning in which people spoke for an hour and a half about the situation without even mentioning the name of the IMF once. So that is an indication that it is not really at the center, as you said. It is somehow remote.

I think also that, in spite of what we are probably going to see soon, the need for traditional conditional assistance is on a declining trend. It was very clear in recent years. It is going to be different in the coming years, but nevertheless the quality of national economic policies has improved. The quality of national institutions has improved. The ratio of reserves to GDP has risen very significantly in developing and emerging countries.

So the idea that this would be the traditional business coming back would probably not be warranted as a reason for blithely facing the future of the institution.

A few words on surveillance, and I will stop there. In this respect, it is difficult to have a very favorable assessment of what has been achieved. In recent times, the Fund had the opportunity of exercising surveillance or at least of exercising its voice on the quality of economic policies in the United States, after many years in which it was regarded as a U.S.-driven or G-7-driven institution telling other countries what to do. This opportunity was missed. We cannot remember what exactly the Fund told the U.S. authorities about the economic policy they had to run or the solutions to the financial crisis they had to put in place, and you may all have noticed a recent piece by Subramanian in the Financial Times suggesting Chinese conditional assistance to the United States. It is an indication of the state of affairs.

Exchange rate surveillance was also an exercise that consumed a lot of attention and diplomatic energy without delivering anything. 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. pressures, and it has not been able to tell China what it was supposed to tell it about its exchange rate policy. And finally, multilateral consultations, though an innovative and interesting exercise, have not delivered much.

So you can praise what has been achieved and recognize that the prediction that there was no need anymore for an institution delivering conditional assistance was wrong and at the same time acknowledge that the performance of the Fund in recent times has not always been stellar and that this raises questions about the future. This should help us resist the temptation to think that it is just business that is back as usual.

RAGHURAM RAJAN: Well, I am with my colleagues on the panel in trying to indulge in some ruthless truth telling because we are amongst friends.

I think this is the crisis that will define the international financial architecture for many, many years to come. It stems in part from monetary and regulatory policies followed by the country at the center of the global system. Clearly, the United States tried to boost demand to compensate for a collapse in demand elsewhere. And in a sense, the multilateral system has been failing us over the last so many years in putting the onus of being the demander of last resort on the United States. So it is not just the United States that is to blame here.

However, the United States has also failed the international system by exporting low-quality financial assets masquerading as high-quality assets around the world and, clearly, infecting bank portfolios.

The response to this crisis in the United States has been innovative but almost consistently behind the curve. The authorities were focused on inflation when the problem was liquidity. They focused on liquidity when the problem was solvency. And they are focusing on solvency when the problem is a global financial panic.

So really there is room for somebody outside to press the authorities, because in the United States, like elsewhere, even though there is knowledge within the system to drive the right policies, it is filtered through ideology, politics, and relationships of those in power. And it is important to have outsiders comment. This is where the Fund could have played an important role in the public debate.

However, where we have ended up, as the panelists have suggested, is largely that the Fund has been represented in absentia and has followed its traditional role of endorsing the moves of the G-7 after the fact, even though many of us know that there is a tremendous amount of knowledge within the Fund. Many working papers circulating in the Fund over the last so many days suggest the way ahead. The Fund probably has been ahead of the curve in its debates internally. Unfortunately, the outside has not been wiser.

This leads to the fundamental problem of governance within the Fund, that the Fund is excessively hesitant in talking to rich countries about faults in their policies. It stems from the fact that the rich countries hold the purse strings, and there is a fear that these strings would be cut or tightened if, in fact, the Fund is overly obnoxious about policies.

Obviously, you do not require me to repeat the way the Fund displays double standards on this. The Fund has been very vocal outside in criticizing, for example, limits on short sales in other countries, making again and again the valid criticism that limitations on short sales do not work. In the 2007 Summing Up for India, the Fund explicitly encouraged the Indian authorities—this was in the Board’s Summing Up—to press ahead with measures including “the expansion of short selling by all institutional investors.”

Where was the Fund when the United States banned short sales and discovered, yet again, that banning short sales is not a particularly effective way of dealing with financial markets?

What I think we are missing in these moments is a strong international, independent voice that stands for the world economy and fights for the world economy. And it is a loss that the Fund is not performing this role. Because if it did perform the role, it would be extremely useful.

Clearly, some of the roles of the Fund that we thought were gone are going to come back in the days to come. The lender-of-last-resort function is going to come back. The Fund will acquire new borrowers as a result of this crisis. And if the Fund’s lending resources are stretched—and we are still some distance from that—we could have a very healthy debate about whether, in fact, the Fund can raise financing from emerging markets, and that could alter the governance somewhat.

Moreover, because some of the borrowers will have genuine accidents rather than a conscious policy driving them into the accident, we can have a debate yet again about insurance facilities for which conditionality is low. And I am sure that will happen in the months to come.

But on the key issue of surveillance and global policy dialogue, the Fund has been lacking. I agree entirely with Jean Pisani-Ferry that the agenda focus over the last year and a half has been on exchange rate surveillance with the 2007 decision. And I think that was an unmitigated disaster, because not only did it show the Fund to be totally toothless, but it also showed the Fund to be biased, both of which I think are unfortunate at this time when we need an independent, unbiased agency to enforce what the world needs.

So let me just conclude that the real problem in the world today is not so much to do with exchange rates, although, of course, exchange rates are part of it. It is how to balance global demand. Because we have seen that even the largest country in the world with the most-sophisticated financial institutions cannot run large, persistent current account deficits without creating internal imbalances that, in this case, are exported to the rest of the world through the quality of financial securities.

We need to talk about this. We need to think of ways that we can manage this process. And if the Fund is to play an important role in this process, it has to demonstrate that, in fact, it is more independent, and that it can indulge in candor, even with respect to the large, important countries.

So in this I think we will have to have this debate in the weeks to come. I think there are many ways in which the Fund can be made more independent, can be made more reliable in regard to fighting for the international system, but that is really the subject of our conversation.

STANLEY FISCHER: I will try to answer all four of the questions you posed, some of them very briefly.

Question 1: How can the Fund be more effective in dealing with global financial instability?

The answer is first, through surveillance and analysis of the global financial situation—an activity whose high-quality results are evident in the Global Financial Stability Report, which I believe can rightly claim to have foreseen and warned about many of the developments that led to the present situation.

Second, through assessments under the Financial Sector Assessment Program (FSAP), which are excellent, and which the United States refused to have, despite having been asked frequently to invite an assessment. There is no question that that assessment would have pointed very strongly to the incoherent structure of financial supervision in the United States and would have suggested reforming it.

Third, in bilateral surveillance with member governments, including by going public when there is a need, in ways that do not create panic.

Fourth, through convening and publicizing multilateral discussions when the issues are clearly international, as they increasingly are.

And fifth—and here I raise an issue without knowing how to solve it—by being given more power in this area by its industrial country members. The Financial Stability Forum was set up after the Asian crisis in a way that ensured that the IMF would not be closely involved in this area. It was an industrial country move to keep the Fund in its place, that is, as an institution to which the G-7 would not have to listen. 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 industrial countries. It requires that they increase the IMF’s role in the area of financial stability.

In this question, Andrew, you asked whether the Fund’s role should be strengthened relative to that of other bodies. The answer to that is yes, and I would say that applies even to an organization whose merits I increasingly appreciate, the Bank for International Settlements (BIS). We can talk about this all we want, but it will take decisions by the major shareholders to change the current situation in which they, by and large, prefer to handle their own problems in smaller, more exclusive clubs, and leave it to the Fund to deal with the less wealthy and smaller nations—and then complain about the Fund’s ineffectiveness.

Question 2: More effective surveillance. First, and I think Jean said this, change the most recent surveillance decision by restoring the Fund’s mandate to perform surveillance of the macroeconomic policy framework, and not just the appropriateness of the exchange rate.

Second, let countries that demand more effective surveillance of other countries also treat seriously the results of the IMF’s surveillance of their own economies.

Third, continue and strengthen the focus on system-wide surveillance, as it is done in the World Economic Outlook (WEO).

Question 3: Lending facilities and conditionality. First, get over the Board’s hang-ups about contingent credit lines and the like and support the actual use of these instruments, as opposed to inventing them and then circumscribing their use to the point where they are not usable.

Second, in answer to another question, Andrew, conditionality is essential—but it should relate mainly to macroeconomic policy and those structural issues that are critical to macroeconomic performance, not least in the financial sector.

Question 4: If we were starting afresh, how would the design of the world’s central international monetary institution differ from that of the IMF? Let me answer that in two parts. If there had never been an IMF, we would invent one close to the essence of the current institution, but with very different shares of votes and the distribution of power within it. It would probably be an institution with far more financing. It would certainly be an institution with a highly professional staff. You would have to have that if you were designing it afresh, and the present Fund does have a highly professional staff.

Second, if there had already been an IMF, which was being radically redesigned, we would simply concentrate the changes that are now underway, and whose destination is perfectly clear—that the formerly dominant powers would become less dominant—we would concentrate those changes into a much shorter period. And if at the same time we had the opportunity to redesign the entire system, we would begin merging and closing institutions—but we would ensure the continuance of a body very like the IMF whose primary and essential purpose is, and here I am quoting from the Articles of Agreement, “to promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems”2—and I would add, a body whose centrality should once more be evident to all, including all those who have been writing its obituary for the last six years.


The committee of eminent persons appointed by the IMF’s Managing Director to assess the adequacy of the Fund’s current framework for decision making. The committee’s appointment was announced on September 4, 2008.


IMF, Articles of Agreement, Article I, “Purposes,” available at http://www.imf.org/external/pubs/ft/aa/aa01.htm.

Further Reflections on Reform