POLICY: An outsider’s take on IMF reform In Ted Truman’s view, the IMF has lost sight of where it wants to go. The Senior Fellow at the Institute for International Economics argues that a new consensus must be forged among shareholders on matters ranging from governance reform to capital account liberalization. Truman’s prescriptions for the Fund also include rolling back its involvement with poor countries, giving more forceful advice on exchange rates, and encouraging IMF Executive Directors to publish their statements on the IMF’s Board.

Abstract

POLICY: An outsider’s take on IMF reform In Ted Truman’s view, the IMF has lost sight of where it wants to go. The Senior Fellow at the Institute for International Economics argues that a new consensus must be forged among shareholders on matters ranging from governance reform to capital account liberalization. Truman’s prescriptions for the Fund also include rolling back its involvement with poor countries, giving more forceful advice on exchange rates, and encouraging IMF Executive Directors to publish their statements on the IMF’s Board.

How the IMF should undertake reform is currently the subject of intense debate, with experts like Ted Truman—Senior Fellow at the Institute for International Economics—taking a strong stance on the topic. As a former Assistant Secretary of the U.S. Treasury for International Affairs and Director of the Division of International Finance of the Federal Reserve Board, Truman is also well-placed to comment on the IMF’s largest shareholder—the United States—and its policies toward the IMF. He spoke with Camilla Andersen of the IMF Survey about the challenges facing the IMF today.

IMF Survey: You have said the IMF is facing an identity crisis. Why is that?

Truman: The IMF has lost sight of where it wants to go. There is a lack of consensus among its shareholders about what its mission should be, who its main clients are, and what the benefits of membership should be.

This loss of direction can be traced back to the mid–1990s. Before then, there was broad satisfaction with what the IMF was doing, including with its role in helping former communist countries transition from planned to market economies. But when a crisis hit Mexico in 1994, a big split occurred over how to address it. The IMF stepped in and a number of countries, especially in Europe, felt that that was a mistake. The IMF did the right thing at the time. But the Fund—and the United States, which took a lead role in coordinating the response to the crisis—did a poor job of convincing other countries that it was on the right track. And when the Asian crisis hit in 1997, the divisions were still there.

Further complicating matters, the industrial countries no longer need the IMF and have thus tended to ignore its advice in recent years. As a result, the IMF’s role has been reduced. It never has had a great deal of influence, but what little influence it had—including its ability to mobilize global public opinion—has been waning. The most recent expression of this declining relevance is the IMF’s inability to influence policies affecting current global imbalances, including the U.S. budget deficit.

IMF Survey: Pressure has been mounting on the IMF to become more forceful in its monitoring of exchange rates, especially with respect to China. But isn’t there something to be said for the “quiet diplomacy” advocated by the IMF’s Managing Director?

Truman: My view is “yes, but . . .” Clearly there is a role for quiet diplomacy, but there is also a role for initiative and plain speaking—not that you should do this all the time.

In part, the IMF’s muted response is due to a lack of consensus else-where—for example, within the Group of Seven [G7] industrial countries —on how to tackle China. All they agree on is that Asia as a whole should aim for more flexible exchange rates. But we need more than just a few baby steps over time in the direction of greater exchange rate flexibility, because the current account surpluses of Asian countries are growing relative to the rest of the world.

The other shortcoming of the IMF’s response so far—and this is actually as much an indictment of the U.S. as the IMF position—is that there has been too much focus on China. People just don’t realize how difficult it is for the IMF’s Managing Director to single out one country and say: “You’re making a big mistake.” What the IMF should have done instead is to say: “There is a problem in Asia as a whole. Asian currencies need to appreciate relative to the rest of the world.” Let’s not forget that China is running a current account deficit with most of its Asian neighbors.

I don’t think of this dialogue as pressure. Rather, it is trying to figure out a way to help Asia address what is a global problem. If the Doha round of trade negotiations fails and there is a turn toward protectionism, then these global imbalances could be very dangerous for the system as a whole. It would be like a busted marriage. Everybody would be to blame—including, in this case, the marriage counselor.

IMF Survey: You have argued that the IMF should be given formal jurisdiction to deal with capital account issues. Can you explain why—given that many others don’t think that is a good idea?

Truman: I have recently changed my view on this. I no longer feel strongly about the need to give the IMF formal jurisdiction. I agree with the Managing Director’s position that the IMF should be engaged with its members’ capital account and financial sector challenges, but the basis of that engagement is neither well grounded nor accepted. There is a lot of disagreement about what the IMF should or should not be doing in this area—including on what it did in the past—even though I think the Independent Evaluation Office’s report on this subject has helped clear the air, at least intellectually.

What is needed is to establish a basis for the IMF’s advice that is broadly accepted by its membership. As part of this work, it would be desirable, but not essential, to lay out capital account liberalization as a long-term goal. There is probably more consensus on the objective of capital account liberalization today than there was on current account liberalization 60 years ago, so stating it as a goal to be achieved over 5–25 years should be feasible.

Renewing the debate on amending the IMF’s Articles of Agreement to include capital account liberalization would be one way to go about it. But it probably makes more sense to establish a consensus first. In an ideal world, we would agree on the objective, then structure a balanced amendment.

IMF Survey: How do you see the IMF’s future engagement with low-income countries?

Truman: This is a serious issue for the IMF because the poor countries are a serious issue for the global economy. Whether you look at it in political or humanitarian terms, the system has failed. The issue is, therefore, whether you should use every instrument available—even if that means distorting some of these instruments—to address this problem.

Public opinion is pushing the IMF to be very involved with low-income countries. The institution is there, it has money, so why shouldn’t it help? But even though the IMF is helping, it isn’t using its own money—its concessional loans to poor countries under the Poverty Reduction and Growth Facility [PRGF] are being financed by a special trust. So it’s sort of a mirage. And in the process, you’re turning the IMF into one more development institution.

This isn’t to say that the Fund has no role to play in low-income developing countries; it does. But this is one area where some of the balance should be shifted back toward the World Bank and the regional development banks. The IMF should maintain its role as an advisor on macroeconomic and financial policies and as a lender to help countries deal with short-term balance-of-payments problems. As part of that process, most of the functions of the PRGF could be transferred to the World Bank.

To the public, the IMF is synonymous with a big black box. And in some ways, this is not completely wrong. The Fund is less transparent than many central banks are today.

—Ted Truman

IMF Survey: You suggest in a recent paper that the IMF is falling behind “in the race to convey the truth about its policies, procedures, and accomplishments.” What do you mean by that and what can the Fund do to improve the way it communicates?

Truman: While the IMF has changed a lot in recent years, my guess is that it has a poorer image today than it did 15–20 years ago, among both the general public and elites. It should be credited for having become much more transparent, and its efforts to be heard have been well intentioned and in tune with the changing shape of the world—whether by communicating through websites or arranging seminars. But to the public, the IMF is synonymous with a big black box. And in some ways, this is not completely wrong. The IMF is less transparent than many central banks are today. The question is what can be done about it.

Greater transparency at the Executive Board would remedy some of the problems. It is just not sustainable for people not to know what’s going on inside the IMF’s boardroom. For a start, minutes of Board meetings could be released in a more timely manner—for instance, quarterly—rather than after the current 10-year embargo. The statements of individual Executive Directors should also be made public. Why shouldn’t these documents, which state the positions of individual member countries, be in the public domain?

IMF Survey: Your proposal for governance reform implies a massive reduction of Europe’s power and influence in the IMF. Why should Europe agree to that?

Truman: Giving up some voting power would help build a better IMF and that would be in the interest of Europe. The phrase I like best in the Managing Director’s medium-term strategy is “it’s not a zero-sum game.” And as others have pointed out, Europe is actually batting below its weight right now. If it consolidated its position—even if that meant reduced voting power—it would carry more weight.

But Europe, at the moment, is in a complicated halfway house—on the one hand, it is a union, but on the other hand its members want to retain their sovereignty. If Europe is going to be Europe, it has to become more unified and develop common positions. There is a risk, of course, that such positions would be based on the lowest common denominator. But I am an optimist and expect a ‘we-are-interested-in-the-global-good’ view. A first step would be for Ireland, Spain, and Poland to pull out of their non-EU majority constituencies to join one of the EU-majority constituencies. As part of this process, non-EU candidate countries in EU chairs should be encouraged to move into different constituencies. While this wouldn’t free up many seats on the Executive Board, it would represent a major breakthrough because it would set things in motion.

IMF Survey: The current U.S. administration, while in favor of giving developing countries more say, has ruled out an overall increase in IMF quotas. It has also said it will not accept any change in its own voting power. Where does that leave governance reform?

Truman: I find that view to be either cynical, naïve, or strategic. Now, I certainly don’t think the United States should give up its veto and accept a significant reduction in its own voting share at this time. I may be wrong, but it seems to me the only way forward is an overall increase in quotas. No country has ever agreed to an absolute reduction in its quota. The U.S. Treasury and the administration do not favor a quota increase because they don’t relish asking Congress to approve it, so they are trying to have it both ways. The result is that we are in a stalemate.

IMF Survey: Is the United States too heavy handed in its dealings with the IMF?

Truman: It is certainly not helpful that some people view the United States as running the IMF behind the scenes. The truth is that the United States has been the chief supporter of the Fund over the years. Historically, it has been the country that cares the most about the IMF as an institution, partly because of the United States’ unique role in the world. You cannot point to any instance where the United States pursued a narrow national interest—leaving aside, perhaps, the Cold War—through the Fund. The United States has generally regarded the IMF as a dispenser of public goods and has encouraged it to act accordingly. You could say that the United States promotes unfettered capitalism, but the reality is that we don’t push it that much, and I’m not even sure we have unfettered capitalism in the United States.

My biggest regret is that the Managing Director did not seize the opportunity to issue a clarion call for change, clearly addressed to the IMF’s membership. This reflects, in my view, a lack of urgency.

—Ted Truman

IMF Survey: What do you think of the IMF’s own blueprint for reform, the medium-term strategy?

Truman: The Managing Director himself has labeled his report a “strategy paper”—not a five-year plan or blueprint for IMF reform. The report should be evaluated on that basis. It clearly identifies the key issues facing the Fund and is eloquent in much of its diagnosis. However, it is unfortunate that it does not tie the theme of globalization back to the IMF’s mission of maximizing sustainable global growth and promoting international financial stability. Also, what struck me was that the list of proposed actions is long on process and short on actual proposals—even though the process proposals are, on the whole, sensible. My biggest regret is that the Managing Director did not seize the opportunity to issue a clarion call for change, clearly addressed to the IMF’s membership. This reflects, in my view, a lack of urgency.

IMF Survey: What are the most pressing priorities?

Truman: The IMF needs to rethink its mission. What should its role be in the global economy? How can that role be improved? My own view is that the IMF needs to redefine itself as a global financial institution rather than as a development institution.

IMF Survey: Where do you see the IMF 10 years from now?

Truman: I’m a pragmatic optimist, so I think it will be stronger, more coherent, and more respected. This is in everybody’s interest.

Ted Truman’s papers on IMF reform, “International Monetary Fund Reform: An Overview of the Issues,” and “Rearranging IMF Chairs and Shares,” are available at www.iie.com.Both papers were prepared for a conference on IMF reform that was hosted by the IIE on September 23 (see IMF Survey, October 17). The IMF’s Medium-Term Strategy is available on the IMF’s website at www.imf.org.