Abstract

ANDREW CROCKETT: Maybe I could put a question in a slightly different form to the panelists and to you, Stan. When the IMF was originated back in the 1940s, and for the first one or two decades of its existence, it was an organization that operated in a world that had relatively few international linkages in the financial area. The decisions, the key decisions, tended to be made by governments and, in fact, by finance ministries. They were decisions with respect to exchange rates, decisions with respect to convertibility, decisions with respect to trade. And it was natural to have the kind of organization that the Fund then was.

ANDREW CROCKETT: Maybe I could put a question in a slightly different form to the panelists and to you, Stan. When the IMF was originated back in the 1940s, and for the first one or two decades of its existence, it was an organization that operated in a world that had relatively few international linkages in the financial area. The decisions, the key decisions, tended to be made by governments and, in fact, by finance ministries. They were decisions with respect to exchange rates, decisions with respect to convertibility, decisions with respect to trade. And it was natural to have the kind of organization that the Fund then was.

Subsequently, markets have grown in importance as allocators of resources. The markets, after all, are the predominant determinants of exchange rates. We do not have individual countries maintaining reserves for convertibility purposes. The markets do that. Markets are in the lead, as far as balance of payments adjustment is concerned, and we have a global net of financial interactions that are managed, if they are managed, by groupings such as the Basel Committee on Banking Supervision and the other network of regulators. Central banks have become independent in nearly all countries. Regulatory organizations have been set up, have gotten more power, and have become independent.

Now, the Fund, as an organization of governments, but predominantly, I suppose, influenced by finance ministries, has much less direct authority over the way in which financial interactions develop amongst countries. And we have a network of other organizations, central bank organizations, you mentioned the BIS, and the Financial Stability Forum, which almost for the first time brings in regulators to these discussions. We realize that banking regulation is fundamentally important to global financial stability.

And I come back, then, to the question that I think was hinted at in my original set of questions: how can this much greater heterogeneity of international organizations be coherently grouped in a way that lets us feel that the international architecture is addressed for the kind of problems that arise? Is the Fund destined to be just one amongst many, or can we think, should we think in terms of the Fund’s taking a leading, coordinating role amongst these various groupings and trying to make sure that when we face a crisis like the present one, it is not the G-7 plus the FSF, plus the BIS, the Basel Committee, and so on? But we have got not just countries, but international organizations, that are trying to be consistent.

I hope that question is clear. I will ask maybe Jean to start and Raghu, if he has any views, and then Trevor.

JEAN PISANI-FERRY: Yes, the question is very clear.

Well, on the FSF, I think it is very interesting to see the success of the FSF. The FSF is almost nothing: it has no structure, no staff, no legal statutes. It assembles a very heterogeneous group of institutions, and yet it has become the core group that actually drives the agenda.

One explanation for that is the one that was offered by Stan Fischer, that the rich countries prefer to deal with those issues in an exclusive club and prefer not to—and I think he was absolutely right to point out that it was an explicit choice—have preferred not to give this responsibility to the IMF.

But it is not only a question of rich versus poor countries. An indication of that is to contrast how much was done at the FSF level and how little was done at the European level among rich countries faced with exactly the same kind of problems and with all the legal instruments, all the apparatus to reach agreement and take decisions. Precisely those countries, they have preferred to deal with this issue at the FSF level because it does not involve any transfer, any formal transfer, of sovereignty. It is a club, and de facto they follow the consensus within the club, and the consensus can be quite precise in the recommendation, and that recommendation can be followed through, but they prefer to deal with an ectoplasm rather than with a formal institution.

In a way, that brings us to the question of institutions. I was struck that, in the speech that Robert Zoellick made at the Peterson Institute a few days ago, he spoke of a “Facebook” of multilateral diplomacy, which is a kind of concept that did not exist at the time of the Bretton Woods agreement. In this context, I would say the Fund needs to make friends on Facebook. It is not its culture, but it is a reality that we have a burgeoning of groupings, of institutions, specialized differently, and it is not over, because we are just learning that there are talks of there being a G-14, and the Italians have said that they are going to invite some new guests at the next G-7 meeting. And I think there is no choice for the IMF but to make friends, at least to prove that it is useful and to provide a service to those institutions by being the ultimate institution that ensures intellectual consistency, provides the expertise, and makes sure that those meetings and consultations are useful.

I think the Managing Director has hinted at something of this sort when he spoke of notions of playing a secretariat role vis-à-vis these groupings. It is certainly not the kind of evolution that Michel Camdessus was putting forward a few years ago when he wanted to make the Fund, again, the core institution for international coordination and to enhance its formal role through a council. But I think, again, that is reality.

RAGHURAM RAJAN: Well, I want to emphasize it is not just expertise. I do think there is a tremendous amount of expertise in the Fund, but it is an unwillingness to use this expertise and it is, to some extent, also an unwillingness to have an outside light shine on your policies.

To some extent, this is where the Fund has changed a lot from when it was started, in my view. Then, a lot of the information about country policies, a lot of the information about the financial sector was hard to get at. Then the role of confidential adviser was very important, because it meant that you also got access to all this information. So it was very hard to be full of candor, because you would not get information if you were full of candor. You would lose access.

I think things have changed now. I think, for many of the large countries in the world, most of the information that you need is pretty much on Bloomberg and CNN. And as a result, it is quite possible for an international organization, on the basis of public information, to arrive at conclusions that are not based on anything that you get privately from the government. This is not to say that one cannot have confidential discussions with the government. But I think a very important role going forward has to be, especially in the case of large countries, to provide an outside independent assessment and not to compromise that assessment by wanting to be always inside and in cahoots with the government.

There is no organization with the kind of standing, with the kind of credibility of the Fund that can perform this role, and it is necessary in order to break through to the politics. The U.S. Treasury has the information available within the country to do what it really needs to do. But the question is, will it do it? And there you have the traditional effects of politics and personalities coming in, where an independent outside source with credibility could actually have beneficial effects in affecting the direction of the country’s policies. In this particular crisis that role has been played by academia in the United States. It has been academia that has been criticizing the nature of the proposals that have been put forward. It is academia that has been providing new solutions. This role should have been played by the Fund, could have been played by the Fund, was not played by the Fund. And it will only happen if the Fund sort of steps aside and says, “Well, we do want to be in the parlors of power, but there is also a role outside for us.”

The second thing I would like to say is that there are models of how the multilateral discussion can get going. Jean Pisani-Ferry mentioned the multilateral consultation. The spirit behind this was really a good one, which is: let us get the right parties for the problem at the table. Let us get them to discuss, let us be the secretariat for this, provide the underlying analysis, so that they can be pushed towards a solution. The problem, however, was that there was an unwillingness of the parties at the table to actually do anything about it. There was a backing off by some of the key parties because there was a change in the ministers responsible and, ultimately, there was also an unwillingness at the Fund to say, “We really must do something.” The Fund backed away, and the end result was weak: business as usual.

But that does not say that that process, multilateral consultation, cannot work in enhancing global dialogue. It breaks the issue of how many people should be at the table, because it says that an international organization like the IMF will decide who has to be at the table based on the collective will of the nations, and then we can get good dialogue going on between the relevant parties.

TREVOR MANUEL: One of these newspapers circulating around here had an article across a few pages on the Fund, under the rubric “Being and Nothingness.” I think it speaks directly to the challenge.

One has to start from the fundamental view that if you accept public policy and you accept the interconnectedness of the global economy, then you need an institution appropriate to its regulation. Now, in accepting that, I think the question is how it operates. You obviously have to exercise certain choices, as the Fund is the sum of its parts or the Fund is a regulator of note across the global institutions.

One challenge, and going back to the way in which you phrased the question, the assumption is that it is a gathering of finance ministers or their proxies. The truth of it is that in many respects, both the Fund and the Bank are exemplars of leveraged foreign policy rather than institutions shaped for the purpose of regulating parts of the financial institution. So I think that that is a big challenge that we have to get our head around.

The way in which Stan described the establishment of the FSF shows part of the problem. You either accept multilateralism and the need for it or you try to opt out. If you opt out, I am not quite sure what the consequences are. You could do it as North Korea does. Alternatively, I think you have to accept the precepts of multilateralism. And then I think that, notwithstanding the good work that you did in the FSF, Andrew, and Mario (Draghi) after you, the key issue is that all of this needs to be taken together in an über-regulator of sorts, something that does not have to do everything.

There clearly is a role for the BIS, for the International Organization of Securities Commissions (IOSCO), etc., but you need a reference point and a repository of ideas, something that allows for an iteration of processes and ensuring that, very importantly, compliance is actually a requisite object. I think, again, Stan’s reference to the refusal by the United States to undertake an FSAP assessment is something that should actually not be tolerated in an environment and a group of countries that accept that there must be certain norms for multilateralism. These are, clearly, some of the issues that we have to address.

Once we are through with that, then I think you begin to look at various loci of decision making within the institution. And then you have to go back to New Hampshire in 1944 and come through and look at the present arrangement and look at the International Monetary and Financial Committee (IMFC), which has convened here this weekend, and understand that the policymakers from countries who come to discuss issues have, at best, an advisory role vis-à-vis the Fund. That, clearly, limits decision making relative to the Board, for instance, and these are clearly issues that have to be addressed and properly aligned.

STANLEY FISCHER: Well, the issue that you raised, Andrew—how can or should the Fund operate in the modern world in which financial markets are a much more important source of financing than they were 60 years ago, in which governments are less inclined to think in terms of what is good for the international system as a whole, and in which there are many more international economic organizations—is really at the heart of many of the dilemmas currently facing the Fund. I thought that what Jean said, what Raghu said, what Trevor said, each from a somewhat different angle, were all relevant and important.

I keep thinking of whether there are other organizations that have succeeded in solving these problems. I do not think the United Nations has, because the big countries just do not accept it when they do not want to accept it, and their problem is very similar to that at the Fund. We may just have to accept that we are dealing with a problem that does not have a good solution and do as Jean said—get on and accept the world as it is, because there is not much we can do about it.

Jean’s comment that countries prefer to work with the FSF because that does not involve any transfer of sovereignty is an important insight that may explain why big countries, in particular, do not support the Fund as much as they should. It is not that the small countries like the transfer of sovereignty, it is just that they do not have that much choice.

The emphases that we heard from Jean on intellectual coherence and from Raghu on an independent, outside source of judgment are also critical. Those are assets the Fund has had and that it needs to maintain and strengthen.

Let me raise a question about multilateral surveillance. Basically, what the Fund has done in multilateral surveillance is to take on cases in which there are fundamental disagreements between countries and tried to act as a broker or arbitrator between the sides. I am not sure that multilateral surveillance, for example, in the form in which it took place over the Chinese exchange rate, is an activity that is worth engaging in, certainly not before there has been some exploration with the parties of whether the solutions the Fund is suggesting are at all feasible politically. There may be other ways, including being much more frank in public, which I think Raghu suggested, that could be as effective as the multilateral surveillance exercise.

With regard to the Fund’s relations with other organizations, most of them are not going to go away. In the end, the Fund will have to work with them by having something to offer them and also by deferring to them on occasions and working with them cooperatively.

ANDREW CROCKETT: Let me now turn to the room. And I think maybe the most practical way would be if I collected two or three or four questions—I hope brief questions—and then gave each of the members of the panel a chance to reflect on any aspects of those questions that they wanted, and that would probably take us to the time when we have to close.

Who would like to put the first question?

QUESTION: This is a two-part question—it has two aspects. There are those who say the Fund is out—this is symptomatic of the fact that the Fund is irrelevant, right? Because it has not played a major role. And there is another side that says, actually, the Fund should play a major role, which you could argue from the Fund’s perspective and from a multilateral perspective actually is correct. So you could argue that relative to the way people were thinking about the Fund 18 months ago, for a large fraction of the world, maybe there is more acceptance of the Fund today and an insistence that it have more of a role than was, maybe, the case say, 18 months ago. So that would be one question.

The second question, it seems to me, in thinking about the Fund’s role in the current context, is—if I put it that way—how you see the nature of the problem. There really are two ways of thinking about it. One is this is a micro problem of banking supervision, and the other is that it is a macro problem that gave rise to micro problems. Raghu had a sort of little bit on both. Obviously, it is both, to some degree. The question is where the emphasis is.

The second question is whether it was, if I may put it that way, made in Washington or made in the world. Clearly, the answer vis-à-vis the Fund’s role is different. It depends on whether you think it is primarily a macro issue that became a micro issue, a structural financial issue or a structural financial system failure that became a macro issue and whether it was, in some sense, all about the United States and its macro policies and micro policies or it has to do with sort of how the world was working and we got it wrong.

ANDREW CROCKETT: Next question.

QUESTION: It is a very short question, just to ask you, Andrew Crockett, to answer the three questions you gave to the panel. You raised three questions, but you did not answer them.

ANDREW CROCKETT: This is a good invitation for me to go beyond the moderator’s role and speak, which I will try to do at the end, time permitting.

QUESTION: I am staggered that we have spent 50 minutes talking about the IMF and no one has mentioned the word “Iceland.” Surely, the fact that Iceland is about to go bust and they turned to Russia, rather than turning to the IMF, is in itself a statement of how ineffective the IMF is. The IMF has been overtaken by events.

You have already said yourself the Americans do not really need you. You basically have already said that you do not actually have any effectiveness. You have already said that you do not reflect how the world is changing. Asia, Africa, the Middle East, they do not have the voting rights they should. You have had three years to discuss that. All you have created is a case for the IMF to be a very good think tank. You will probably be as good as the Peterson Institute. You produce great papers. But what you have actually said is you have got no bite. And the fact that Iceland, about to go bust, does not come to you, is it not surely a sign of the times?

ANDREW CROCKETT: You are using the second person in addressing us, but I do not think any of us is actually in the IMF!

TREVOR MANUEL: Maybe Stan will take that question.

QUESTION: Two observations, following on the previous question. Basically, there is an important new practical and urgent mission for the IMF and that is to protect the countries at the periphery from the consequences of a storm at the center. And I think that Japan has come forward with an offer of, I think, $200 billion, from its reserves, if it were to be matched by other countries with large reserves, to provide the funds, the kind of support, to these countries that the governments of the countries at the center are offering their banking systems. That, I think, is very important and practical, offering a new raison d’être for the IMF.

As far as how would you design the IMF if you started from scratch, I think one probably should consider going back to the idea of “bancor” that Keynes brought up at the time. Because the fact is that the countries at the center, particularly the United States, have abused their privileged position of being at the center and not observing the discipline that the IMF has been imposing on other countries at the periphery.

ANDREW CROCKETT: I will take maybe one more and then I will ask the panelists to comment.

QUESTION: It seems to me that the IMF benefited in the twentieth century from the reality that the United States was a benign hegemon, at least for the market economies, but in this century, as sort of demonstrated by the current crisis, the United States, although it is still the superpower in many respects, cannot act alone, and yet that is not yet reflected effectively in the way the IMF is organized, managed, and governed.

So I was surprised not to hear a little bit more about China, other than in the context of the failed multilateral surveillance. And I think the point the last questioner was making is interesting—that perhaps there is a way the IMF could be the intermediary transferring funds from some of the surplus countries to others—I guess that is his suggestion in a way—and, thus, play the role of honest broker. But that may require more engagements sooner by the G-7 with the countries that are the surplus countries.

I guess I am just asking for any reaction to that issue.

ANDREW CROCKETT: Maybe I will, this time, go in reverse order and invite Stan to reflect on the questions that we have had, then Raghu, then Jean, then Trevor, and I will sum up with a few remarks at the end.

STANLEY FISCHER: On Iceland, at least the screens I look at say that Iceland is turning to both the IMF and to Russia. There are precedents for other countries’ being willing to provide assistance to a country in crisis only if the crisis country enters an IMF program, and this may well become one of them.

With regard to the “bancor” notion, I do not think that would actually be a way of imposing discipline on the system, particularly on domestic economic policy. As far as I remember it—and I may be wrong—I do not think there would be much difference between that and between allowing issues of Special Drawing Rights (SDRs) and beginning to use SDR issues to generate global liquidity, a notion that has dropped out of consideration in recent years but that should always be kept in reserve. To do this effectively, a way would have to be found for countries to reallocate their SDRs to other countries.

Two questioners raised the question of whether this crisis is, at its core, a result of a failure of exchange rate adjustment in the case of the United States–Chinese exchange rate, or a case of U.S. macroeconomic policy going wrong and not being subjected to discipline for a very long time.

We may have been inclined, perhaps for political reasons, to underplay the role of the exchange rate issue and China’s accumulation of reserve assets on a massive scale, which facilitated the continuation of the U.S. current account deficit for longer than was macroeconomically desirable. That means that the Fund’s role in patrolling the exchange rate system did not work—something we already know.

But we also know why it did not work. For the Fund to have succeeded, it would have had to mediate between the country with the largest population in the world and the country with the largest GDP in the world and get them to reach an agreement that they were incapable of reaching bilaterally. China was not willing to change its strategy of operating with an undervalued exchange rate, which has been an extremely successful one from the viewpoint of growth. It is also a strategy that is economically sustainable for a very long time. Unfortunately, it is very hard for the Fund to persuade a country to act against what it sees as its national interest in the interests of the international system. That is just the way the world works.

Finally, the idea of the IMF’s protecting countries at the periphery: the screens I have been seeing say there are a number of countries at the periphery that need help and are beginning to turn to the Fund for help. And if, in this world of enhanced capital flows, where packages almost certainly have to be much larger than the Fund can provide, if there is an offer from Japan of providing that financial assistance, it should certainly be part of what the IMF is going to do to help its member countries in trouble. There will be more IMF programs in the months ahead. Enhanced financing is likely to be very useful in ensuring the success of those adjustment packages.

RAGHURAM RAJAN: The first question, on micro and macro. As I indicated, I think it is a little bit of both.

One of the things that we used to believe is that a reason emerging markets could not run sustained current account deficits was that, at some point, they would mess up in terms of their domestic demand, do the wrong things. The financial sector was not adequate to channel that domestic demand properly.

But we have seen the same thing happen in the most-sophisticated country in the world, which leads to the question, is this a more structural problem, and not just about governance of the financial system? But in some sense, when you get this inflow of resources, most countries do not have the appropriate techniques to channel that into the right places, and we get boom and bust, regardless of whether your system is sophisticated or not.

I do not know the answer to this question, but it certainly is a question worth asking, whether, in fact, this is an issue. And if that is the issue, then it becomes both micro and macro. The macro problem is creating the micro problem. That, I think, needs to be thought of a little more.

On the issue that the last questioner raised, given that Stan has answered some of the other questions, I do think that if, in fact, the Fund runs short of resources and borrowing capacity, and it now has a considerable amount of borrowing capacity, certainly it is time to consider whether it can intermediate resources from the rest of the world. Certainly, there are lots of reserves invested by emerging markets, and by Japan.

Now, something in the Subramanian article struck me as a little fishy. I mean, those reserves are already lent to the United States and to industrial countries. There is no question of relending them. But, yes, it would be a reallocation across the world from industrial countries to emerging markets.

JEAN PISANI-FERRY: Maybe I will start with Iceland. Very recently there was the idea that many countries in the world could rely on substitutes for the IMF. So you could have Iceland going to Russia, you could have Latin American countries going to Venezuela, you could have Asian countries going to China, etc. I think a large part of that is going to disappear just because the market will need the confidence-building element of an IMF program, which we know is run by professionals and has the ability to elicit confidence in the policies of the countries.

After all, if we assess the situation in some emerging countries that are in the spotlight, we are speaking of very traditional crises. We are not speaking of a kind of crisis of confidence or even the ones we saw at the time of the Asian crisis. We are speaking of traditional balance of payments crises, in most cases, or in the case of Iceland, we are speaking of the whole financial sector which has been destroyed and which called for a set of policies that has to be monitored. And I think that the idea of IMF substitutes that was very much present recently is going to largely disappear from the map because in harsh conditions you do not take such bets.

I very much agree with Raghu that the best rationalization we had of the situation of global imbalances we have been in recently is that the United States was offering sophisticated financial assets that the rest of the world wanted to buy. So if we take that seriously, it means, at the core, it is micro and macro. And I think the Fund is very well equipped to deal with that. It has to make progress, internally, with the consistency between its macro assessment and its financial assessment—it has not been perfectly integrated. We all know that. We had this separation between the GFSR and the WEO, and in the country assessments the financial dimension was not always taken on board sufficiently. But we know that both elements exist within the Fund, making that a strength. So I am not that worried about the Fund’s ability to deal with this dimension.

Beyond that, obviously, the question you were asking—Was it made in Washington or was it made in the world?—is a very important question politically. It is not a technical question, but politically the interpretation that is going to be given to this crisis is going to be with us for a very long time and have profound implications for the way populations and governments see their integration into the world economy.

On the last question, I think the questioner is absolutely right in emphasizing the change in the balance of power and the implication for the Fund. It has implications for quotas and voice that we have not emphasized because it was not the purpose of this roundtable, but I think it is obviously a major element, and we are not yet there, by far.

It has implications also for the way the Fund can exercise its role. Is it within itself, or does the Fund need to rely on a grouping of a “G,” in which the major players are represented and in which it can provide the assessment, the underlying expertise and representations?

Certainly, the days when the Fund had a big power behind it and was speaking to small countries are over. I mean, there are still small countries, but certainly it has to speak to much bigger players, and it is not only China and India; it is also Europe. So it is going to be, obviously, a problem that is going to remain for the future.

TREVOR MANUEL: Let me start with the last-but-one questioner. I think this calls on us to invert all of our precepts. Through all of the previous crises, we in the emerging markets knew that we were very much on the periphery. It was our problem, it was our crisis, we did not have the rules, but I think this time around we have the rules and regulations and supervision in most emerging markets.

So center and periphery I think are much inverted for purposes of discussion here. It is the only way to look at it. It presents us with a great opportunity to have a leveler and, therefore, to approach this crisis perhaps with more opportunity for change than what otherwise may have been the case.

In respect to the issues that the first questioner raises, I think Raghu was being exceedingly diplomatic about this issue. In the absence of regulation in an environment where society has been accepting of the degree of innovation and financial services that we have seen in this country in particular, I think it is necessary to pause to consider some of the basics of economics of business cycles.

If one looks at the extent of leverage that had been tolerated and the absence of real collateral, there have been fundamental problems in the regulatory system. This was an admission that Hank Paulson made, probably around April of this year, quite publicly. And I think that those issues will remain part of the discourse going forward, not in a kind of sense that we should apportion blame, but I think it is very necessary that we understand what has happened and the difficulties that have spread from here.

Now, we have heard very articulate presentations by the Indian Governor of the Reserve Bank, for instance, who has explained the kinds of decisions that they have taken in their battle in monetary policy and the fight against inflation, how their sovereignty is actually undermined by the present crisis, how India and a number of other emerging markets will find access for their markets drying up in the crunch, and how capital markets will see spreads widening.

So, clearly, we need to work through these issues. And I think that as we deal with them, we need to go back to that which brings us together after all, crisis prevention rather than crisis management.

Just a word on the last question, and I would like to bring together something that I said earlier and something that Stan also said.

One of the difficulties with institutions that have become instruments for leverage in foreign policy: listen to the recounting of the multilateral surveillance in respect of China and the kind of badgering from Washington on China about the exchange rate. It is very difficult not to come to the conclusion that this was yet another example of that kind of foreign policy intervention through the IMF. The problem that you then have to deal with is that, if this perception becomes a reality, then the IMF is undermined in the process.

So I think the challenge that we have given ourselves is to try to look at these issues and try to bring the IMF back into the center, where it belongs. It means it needs to look not just at the current account, but also at the capital account. It needs to have some review of its governance structures. And we all start from the understanding that there is no alternative and there is no point in constructing an alternative to the IMF. It needs to be brought into the center, and its work needs to be refocused.

ANDREW CROCKETT: Well, time is running out on us, and I do not have a chance to answer fully the questions that I asked, but let me just make one observation.

A number of people have said—have regretted—in the course of their remarks that the United States does not listen much to the Fund and is not influenced by the Fund. Right now in the United States there is a demand on the part of public opinion and the political process to know who was responsible for this mess we have gotten in. If it is, indeed, the case that IMF advice was neither sought nor listened to, and there was no FSAP assessment, maybe there is a more receptive audience for a bigger role for the IMF than there has been for some time past.

Let me conclude by thanking all of our members of the panel for really excellent insights into the questions that were raised and to ask you to join us at the reception that will be held outside in the atrium.

Further Reflections on Reform