September 2007
Is the IMF Still Relevant?
In October 2007, Dominique Strauss-Kahn assumed the helm of the International Monetary Fund (IMF). He did so at a time when the IMF is no longer a major lender to emerging market economies and when the IMF seems to have little to say about today's large global payment imbalances.
Panelists at this seminar will discuss what Strauss-Kahn's priorities should be to increase the IMF's relevance. Should the IMF play a more significant role as umpire in today's exchange rate disputes? How might the IMF give a greater voice to countries like China whose role in the international financial system has increased? Should the IMF be streamlined to bring its expenditures more in line with its dwindling income?
Timothy Adams, former U.S. Treasury undersecretary for international affairs; Andrew Crockett, former head of the Bank for International Settlement; Allan Meltzer, former chairman of the International Financial Institution Advisory Commission; Edwin M. Truman, former U.S. assistant treasury secretary; and Onno Wijnholds, current European Central Bank representative at the IMF answered these and other questions on September 25, 2007, at AEI. Desmond Lachman of AEI moderated.
Desmond Lachman
AEI
As it awaits the arrival of a new managing director, who is due within a month, the IMF finds itself facing the most challenging period in its sixty-year history. The organization's current difficulties are partly due to a dearth of large borrowers. To this end, practically all of the countries that borrowed large sums have since repaid their debts. Moreover, few countries will need to apply to the IMF for large sums anytime soon, because many nations have built up large reserves and established private sector connections.
The IMF therefore faces redundancy. But a potentially more serious issue for the IMF is one of legitimacy. Many growing economies are underrepresented on the governing board of the IMF relative to their share in total world output. This situation has come about as a result of the IMF's failure to adjust its voting allocation formula to take into account changes in the global economic balance.
Timothy D. Adams
The Lindsey Group
While the IMF has not been closely involved in the latest financial crisis, it could still play a role at some point in the future. Admittedly, the IMF has not been perfect in the past, but neither has any other public institution. Despite its problems, the IMF is relevant now and can become even more relevant in the future.
The IMF needs to better reflect today's global economic balance. Due to the IMF's failure to take emerging markets into account, these nations now rightfully blame the IMF for not addressing their needs and wants. In the future, the IMF must take emerging markets into account while also transforming itself into the economic toolbox of the world.
Andrew Crockett
JPMorgan
There is a need for a legitimate global institution that can promote cooperation among world economies. Although the IMF is not currently that institution, it could still become it, and of all existing institutions, it is best positioned to do so.
In recent years, decision-making power has been passing from governments to markets. Hedge funds have become a locus of activity and are important actors in the global economy. In today's market-driven system, verifiable financial information is of critical importance. The IMF can play a role in providing this information and ensuring its accuracy.
The most likely financial crisis of the future is one of capital markets. Such a crisis cannot be solved by simply tossing money at governments. But the IMF can still play a crucial role in such situations, as long as it can mold itself into a coordinating mechanism for the financial ecosystem. The IMF should not establish itself as an umpire and adjudicator between national authorities. It should not dole out assignments to governments, because governments are never going to pay heed. Instead, it ought to assume the role of a facilitator of discussions, and function as a forum and secretariat.
It is more important to discuss what the IMF should do than how it ought to be governed. Given how much it has grown of late, the IMF probably has more resources than it needs, especially if it is to be a facilitator.
Allan H. Meltzer
AEI
The IMF needs to downsize, and it must also stop pushing for income redistribution. Otherwise, it will cease to be relevant.
The IMF has its origins in a judgment that John Maynard Keynes arrived at in the 1920s. Keynes's conclusion was that public fixed-exchange rates represented a public good that needed to be supplied. The IMF was formed specifically in order to supply this good. The IMF, however, has failed either to manage or keep the system that it originally was put in charge of.
Since countries seem to care more about their own interests than about global stability, stability too is a public good--and one that the IMF can supply, especially in African countries that lack reserves. In this way, the IMF can keep crises from spreading.
The market has much more to do with growth than foreign aid. This notwithstanding, the IMF should address the matter of poverty. But the IMF should not do so through the newly opened Poverty Reduction and Growth Facility, whose establishment was a mistake. Instead, the IMF should provide performance grants.
Edwin M. Truman
Peterson Institute for International Economics
The IMF remains relevant. It should not be done away with, but instead ought to be modified. Over its sixty-year history, the organization has evolved greatly. The fund must be supported by its members so that it can continue to adapt to today's needs.
The IMF must act less as a good friend to nations and more as a regulator. It must leave development and poverty-reduction activities to others and remain mindful of its relationship with the World Bank.
The IMF currently faces two major challenges: legitimacy and relevance. The Fund's legitimacy crisis is probably the most serious, with a flawed system of voting allocation lying at the heart of the problem. Despite all of the changes that have taken place in the world, the IMF's voting allocation system has barely changed since the 1970s. A new formula is needed to realign voting power in the Fund. Bold steps must be taken; gradualism will not resolve this situation. It appears that the current management is unwilling to take such steps and is instead steering things in the wrong direction. The new IMF voting formula proposed by current and incoming management does nothing more than replicate the status quo.
J. Onno De Beaufort Wijnholds
European Central Bank
In the past, the IMF has often been called unnecessary, only to suddenly become indispensable a little later. This shows that throughout some periods, the IMF is more relevant than it is during others. The IMF has nevertheless been relevant at all times, good or bad.
To maintain and build upon its current position, the IMF must focus on the areas in which it has a competitive advantage: providing advice to low-income countries, particularly on monetary, exchange rate, and fiscal policy; and addressing financial sector issues. The current financial crisis presents the Fund with an excellent opportunity for getting involved. Finally, instead of just focusing on crisis resolution, the Fund should concentrate on crisis prevention, which it can engage in on a permanent basis.
The Fund can also be a facilitator of multilateral consultations. In addition, the Fund can institute a voluntary code of conduct for the financial services industry. Moreover, the IMF can offer additional lending instruments to developing nations, which would allow economies experiencing outflows to tap the fund with little to no conditions.
On the whole, the IMF ought to become leaner and more focused. It needs to concentrate on monetary rather than development matters, particularly since the World Bank is better positioned to deal with poverty-reduction issues.
AEI intern Boris Vabson prepared this summary.
