Are we able to make multilateral institutions work effectively? Or is our world now so divided that even those we have inherited are doomed to founder? These questions have been raised in many contexts in recent years, notably in the United Nations. But they are also raised by the debate over reform of the International Monetary Fund. What makes this example disturbing is that it should be a simple case: not only does the institution exist, but it has clear functions on which reasonable people broadly agree. Nevertheless, progress is enormously difficult.
My view of international institutions is pragmatic. States need to co-operate if our increasingly interdependent world is to function. The best way to do so is via multilateral institutions with clear objectives, legitimate governance and professional staffs allowed to exercise independent judgment.
Against these standards, how far do the present reform efforts of the IMF measure up? “Not well enough” is the answer.
The objectives of the fund today are monetary and financial stability in an integrating world economy. The fund exists to help its members achieve those objectives at both national and global levels. Particular attention must be paid to systemically important countries – those whose actions have global implications. In carrying out its functions, the fund also needs to concentrate on its core areas: monetary, fiscal, exchange-rate and financial policies and regimes.
The IMF will always have limited ability to achieve its aims, principally because its areas of competence are also core components of sovereignty. As Tim Geithner, chairman of the New York Federal Reserve, noted in June 2004: “The Fund, from its inception, was burdened by a mismatch between the aspirations of its architects and the authority and instruments they gave the institution to pursue those ambitions. Its authority over the policies of its members was limited. Its resources were small and the facilities established to deploy those resources were modest relative to the problems they were designed to address.”
In practice, the fund has leverage over distressed debtors and even then, as Argentina has recently shown, its influence is limited if a government is prepared to default. Worse, while creditors and solvent debtors are indifferent to fund advice, distressed debtors resent it. The fund, in short, is impotent where it is not disliked and disliked where it is not impotent.
Given these grim realities, how should the effort at reform be pursued? The first part of the answer is by being as clear as possible about what the fund exists to do: it is not development, for example, which is why its role in poor countries needs careful reconsideration. The second part of the answer is by appreciating that the fund will be successful only if legitimate. Countries that have a choice will refuse to be bound by the diktats of an organisation subservient to those they view as either present or past imperialists. Since the European Union has 32.2 per cent of the votes, the US another 17.4 per cent and Japan 6.2 per cent, that is quite certainly what they feel.
For some functions, the lack of legitimacy matters little. Providing the public goods of information and global analysis in such publications as the World Economic Outlook and the Global Financial Stability Report are examples. But the credibility of surveillance, particularly over such sensitive issues as exchange-rate policies and co-ordination of global macroeconomic adjustment, depends deeply on legitimacy. For handling financial crises and conditionality of emergency lending, legitimacy is evidently a central issue.
The current allocation of voting rights is not dramatically out of line with economic realities (see charts). True, developing countries argue that quotas should be allocated partly on the basis of gross domestic product at purchasing power parity. While this argument is understandable, it is not evident why that should be relevant to an institution concerned with international monetary phenomena.
The difficulty with the distribution of votes and of seats on the executive board is two-fold. First, surveillance cannot be credibly even-handed. Still more important, when it comes to emergency lending, those with the votes do not need the money and those who may need the money do not possess the votes. This lack of parity has made the fund an extremely unattractive insurer. All those who can have decided, therefore, to self-insure, with strange and costly consequences for the world economy, as I noted here last week.
Legitimacy, in short, is an essential component of the overall reform effort. From this perspective, as developing country critics have rightly noted, the decision to adjust the quotas of China, Mexico, South Korea and Turkey, albeit welcome, is an inadequate first step, with little certainty that further steps along this road will follow.
It is incredible that of the 24 members of the executive board six are members of the eurozone, seven are members of the EU and eight are western European. Not one of these countries will ever draw on IMF credit. Six of them do not even possess an independent monetary policy. Yet they insist not only on their continued overrepresentation on the board, but on their droit de seigneur in choosing the managing director. If the ancien régime is unwilling to accept the changes that are needed for the fund to regain legitimacy across the world, it cannot complain if it ends up presiding over a disregarded, indeed discarded, institution.
What then is needed? The answers are: first, a sizeable reduction in the European share of the votes; second, a radical reallocation of constituencies to reduce the number of European members of the board; third, an open global search for the head of the IMF (and, for that matter, of the World Bank); and, finally, the grant of substantial independence in the exercise of the fund’s mandates to that managing director and the staff.
The IMF is an organisation with substantial capacity. It has, too, the potential to play a valuable part in managing the world’s transition to an integrated global financial system, with all the stresses that is bound to create. It will never be perfect. But it can become less imperfect than it is. The key to achieving this is making a clearer link between its objectives, its legitimacy and staff independence.
Europeans talk endlessly about making multilateralism work. They are right to do so. This, at last, is a chance for them to take the lead, not just in rhetoric, but in reality, too.
