John Taylor, U.S. Treasury

The International Monetary Fund (IMF) turns sixty this month with a new managing director, Rodrigo de Rato y Figaredo, the former finance minister of Spain. Although the IMF mission to safeguard financial stability has not substantially altered over the years, financial globalization and the adoption of floating exchange rates have increased economic volatility across the globe and suggest the need for IMF reform.

AEI's Desmond Lachman hosted a June 9 conference to discuss challenges facing the IMF and suggestions for institutional reform. His concerns include the IMF's global exchange-rate issues silence and inaction and its lending practices to countries undergoing economic crisis. The IMF has barely commented on the push by three major global economies--Europe, Japan, and the United States--for weaker currencies. Since 1995, the IMF has dropped limits on the amount of money that may be loaned to countries in crisis, instead classifying borrowers of the funds exceeding the former limits as undergoing "exceptional circumstances." AEI's Allan H. Meltzer warned that with 70 percent of IMF loans now made to only four countries, the IMF might no longer be diversified enough to deal with potential crises.

John Taylor, under secretary for international affairs at the U.S. Treasury, discussed changes in the world economy that have affected the IMF's mission, such as a greater propensity for private cross-border capital flows in the form of securities rather than loans, the interconnected nature of today's markets, and the end of the fixed-rate exchange system. He proposed several IMF reforms: emphasizing collective action clauses in emerging-market debt; imposing clearer limits and criteria for lending under exceptional circumstances; instituting "a more streamlined conditionality" for the IMF; replacing some loans to the poorest countries with grants; and more effectively dividing tasks between the IMF and the World Bank.

Edwin M. Truman of the Institute for International Economics discussed changes in IMF membership in recent years. Most members now fall into four types: industrial nations over whom the IMF has little leverage, the poorest countries over whom the IMF holds a great deal of influence, large emerging-market economies, and developing countries who function as traditional borrowers. While the IMF originally consisted of members that alternated between borrowing and lending, no industrial nation has borrowed from the IMF for the last twenty-five years.

AEI's R. Glenn Hubbard emphasized the need for the IMF to encourage the right policy mix to accompany flexible exchange rates. For example, most econo-mists want the Bank of Japan to pursue a more inflationary monetary policy that would likely yield greater predictability in terms of yen value. Harvard University's Kenneth Rogoff added that the Chinese "intervene very heavily in holding down their exchange rate" and maintain capital controls that force citizens to invest their savings in bankrupt state banks--the release of which would cause a rapid departure of capital.

The IMF also faces significant challenges in Argentina. Lachman criticized current IMF lending to Argentina as a stopgap measure that merely prevents default on prior IMF loans. Taylor commented that the IMF has provided a framework for Argentine negotiations with private-sector lenders, under which the primary surplus must exceed 3 percent and monetary policy must be clearly delineated. Rogoff concurred with Lachman that Argentina has become a "serial defaulter" on its loans, thereby making it vulnerable to default and restructuring.