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The Future of the International Monetary Fund

Three comments are offered here on Deena Khatkhate's perspective on the functioning of the International Monetary Fund in the new global order and the nature of reform needed (April 5, 2008). This article, the first of three, argues that for the IMF to remain relevant, it must function as an effective forum that develops and monitors compliance with the rules of a competitive world economy.

DISCUSSIONaugust 30, 2008 EPW Economic & Political Weekly72The Future of the International Monetary FundWarren CoatsWarren Coats (WCoats@aol.com) is a consultant for the IMF as well as several international development institutions.Three comments are offered here on Deena Khatkhate’s perspective on the functioning of the International Monetary Fund in the new global order and the nature of reform needed (April 5, 2008). This article, the first of three, argues that for theIMF to remain relevant, it must function as an effective forum that develops and monitors compliance with the rules of a competitive world economy.In his insightful and provocative analy-sis of the future of the International Monetary Fund (IMF) in today’s globa-lised goods and capital markets, Deena Khatkhate has raised many important questions about the IMF’s potential contri-butions to the smooth functioning of the world economy as we now find it and might expect to find it in the near to medium term (beyond which few of us can see). Aside from the rapidly shrinking role of theIMF in helping countries finance balance of payments shocks and/or adjust-ments and thus, in assisting and pressu-ring underdeveloped and transition eco- nomies to establish the macroeconomic discipline needed to more fully participate and benefit from the global economy, the IMF of today and tomorrow, if it is to remain relevant at all, must function as an effective forum in which to develop and monitor compliance with the international rules of the game of a competitive world economy. Compliance with these rules is increasingly reliant on voluntary accept-ance byIMF members of the mutual bene-fits of such rules and of adherence to them. TheIMF’s leverage to pressure members to adhere to good policies that came from its conditionality for access to IMF financing is vanishing as the importance of its finan-cing is vanishing. Countries’ increasing reli-ance on the market and their own resources for the maintenance of external balances is a positive and welcome development but raises the question of how enforcement of the rules of the game is to be achieved.The IMF’s primary remaining instru-ment, policy surveillance,1 can only sur-vive and play a constructive role if its members voluntarily see the value to themselves of adhering to the rules mutu-ally developed and agreed to for the smooth functioning of the global system. Khatkhate rightly notes that there is a serious debate over the extent to which global imbalances reflect benign outcomes of market preferences2 or macroeconomic maladjustments. Regrettably, the environ-ment within theIMF today is stifling de-bate among the IMF’s still very talented staff and thus, depriving the world of the ideas and analysis of how best to under-stand and adapt to a changing world that might otherwise emerge.Marginalised Participation As Khatkhate notes, this throws the spotlight on the voting strength of indi-vidualIMF members, which is now heavily skewed toward the industrial countries even after the recent, largely cosmetic in-creases in the quotas of clearly under- represented members like China, Korea, Mexico and Turkey. Member quotas in the IMF determine not only their vote but also their financial contribution and potential access to funds when borrowing. If the international financial rules of the game largely require the voluntary adherence of IMF members, the prospects of success will rest heavily on the sense of each member that it has participated in their formulation and that they are fair and appropriate for all members. This is more likely if member representation is more reflective of each member’s economic and financial size in the world economy. While any such measure would actually increase the quota and hence, vote of the US, which has voluntarily accepted a smaller, though still the largest, quota, European Union (EU) member countries would need to accept smaller quotas.The effectiveness of the IMF as the table at which all participants in the world economy are represented is also being undermined by the increasingly dominant role of smaller policy groups of developing countries into small, exclusive groups (theG-3,G-7,G-7 plus 1,G-10, etc). These groups, while perhaps useful for some purposes, further marginalise the sense of participation and common purpose of most of the rest of the world.US PositionWhy should the US andEU care? In today’s globalised world, facilitated by incre-dible advances in telecommunications
DISCUSSIONEconomic & Political Weekly EPW august 30, 200873and transportation technology, the acknowledged failure of central planning and increased economic liberalisation, the world’s economic leaders have as muchto gain as every one else in an open and orderly trading system of goods and capital. The enormous benefit to the US from the widespread use of its currency around the world in various ways, is sustained by its playing by the rules. It unwillingness to do so on occasion has and will further erode the dollar’s domi-nance of a reserve currency. The cooling of US support for freer trade, despite its contribution to raising living standards in theUS (not to mention for its trading partners), current contribution to soften-ing the economic impact of the deflation of the housing price bubble from increase in exports, is particularly unfortunate from a security perspective. Countries and peoples with important trading ties to theUS have an incentive to be more vigilant against terrorism directed toward the US. The US’ short-sighted uni-lateralism in other areas (global warm-ing, war on terrorism, war in Iraq) in re-cent years will raise the cost to the US of its dominant world power position and ultimately erode it. There are many areas in which multi-lateral, supranational cooperation is bene-ficial to all but to succeed all who are ex-pected or need to cooperate will need to be a part of the process. The IMF is the natural and most promising forum for such cooperation in balance of payments and global financial development issues. Better representation of all nations at its table is essential to its success.Khatkhate is surely also correct in not-ing that future usefulness of theIMF will be enhanced by more clearly and sharply defining its objectives. Mission creep (longer quasi developmental lending – poverty reduction and growth facility, debt relief under the heavily indebted poor countries initiative,AMLCFT assessments, etc) is a problem and should be reversed. Whether the federalisation (regionalisa-tion) of the IMF as suggested by Khatkhate can be formulated and implemented in ways that can make a positive contribution will require much more discussion. Such a development would seem to have much in common and raise similar issues as due re-gional trade agreements in relation to glo-bal trade agreements under the World Trade Organisation.The debate over the way forward needs to go deeper than it has to dateNotes 1 The IMF continues to make important contributions to capacity building through its technical assist-ance to central banks, finance ministries and sta-tistical agencies and to the development of best practice through its research and its participation in the development and refinement of inter-national financial sector standards and codes. 2 The present international imbalances could just reflect, according to the critics, the optimising decisions of agents like desire for high savings in Asia, and attractiveness of investment in the US which need not necessarily pose any risks to the global economy.On Reforming the IMF Esra BennathanWhile Deena Khatkhate’s proposals are those of an insider of the International Monetary Fund, an “outsider” lists the many areas where the IMF should have a sharper focus, the roles that it should abandon and the new functions that the agency should perform. Deena Khatkhate (henceforth DK) has stated (April 5, 2008) a case for reforming the International Monetary Fund (IMF), impressive in its reasons and recommendations, and further-more,made by one who remains very much an insider with long experience of the Fund [Khatkhate 2008]. What follows, however, while prompted by DK’s proposals are the notes of an outsider, uninhibited by direct experience of such institutional constraints as cannot be reformed away while Fund and important elements of its staff remain.Looking thus from the outside, and after first reviewing theIMF’s functions, and then what has now urged on change, I propose two general objectives that any reform of the Fund ought to meet, achieve-ment of the first depending on the second: reinforcing its effectiveness and authority, and conforming, so far as is consistent with a sharpened focus of the Fund, to what members and informed opinion in those members expect of the IMF. Follow-ing on, I discuss changes, whether of func-tions or method, including laying the groundwork for a standard role of crisis manager, also adding a formal new func-tion, essentially to monitor and lower cer-tain pervasive impediments to the flow of equity investment into developing coun-tries. A brief summary concludes.A Working ProfileThe primitive functions of the IMF as they stand after the collapse in 1973 of the Bretton Woods system and then after the crises of the 1980s and 1990s, consist, first,of lending to its members for external deficits, originally mainly short-term but increasingly also at longer term, and granted upon acceptance of the Fund’s conditions (the famous “conditionality”) relating principally to the country’s financial, exchange rate and fiscal policies.Facilities for longer-term lending were added in time: an Oil Facility after the firstoil shock, the Structural Adjustment Facility and especially the Extended Fund Facility, the source of a massive loan to India (about $ 5 bn) following the second oil shock in 1979-80. Esra Bennathan (ebennathan@aol.com) is professor emeritus of political economy in the University of Bristol and former senior economic adviser, World Bank, Washington.

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