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On Reforming the IMF

While 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.

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 ( is professor emeritus of political economy in the University of Bristol and former senior economic adviser, World Bank, Washington.
DISCUSSIONaugust 30, 2008 EPW Economic & Political Weekly74A major basic function with a large claim on staff resources is the regular surveillance of the financial and exchange rate condi-tions of members – the periodic Article IV consultations, 130 of them in 2004-05 – and the coordination among members of ex-change rate policies, explicitly to prevent policies with adverse effects on others. For its lending, but especially for situations of crisis, the IMF has claimed for itself the status and function of the lender of last resort. There have been objections, ostensibly because this function is not readily trans-ferred from the domestic to an international setting.1 Further, the IMF sees itself as crisis manager and has indeed been acting as such in the crises of the 1990s – a function which goes beyond lending to the counter-acting of panics and to the organisation of international support to the main crisis vic-tims, notably with attempts at bailing in private finance [Fischer 2004, chapter 4]. These are the Fund’s main functions, or-dained or evolved. Some others, not so central, have been added as time went on. DK sees some of these as manifestations of mission creep, not perhaps on so majes-tic a scale as the World Bank reached un-der president James Wolfensohn [Einhorn 2001] but enough to justify pruning if costs have to be contained.The Push to Reform in ContextThe immediate context of proposals for the reform of the IMF is the decline in lending and, connected with it, the decline in the Fund’s income which is principally derived from lending. Lending to developing coun-tries has remained substantial but the level has been declining and the trend of the net flow has become increasingly negative: re-payments exceeding new loans. The IMF’s revenues have therefore been declining by the year, indicating less need for external assistance for balance of payments reasons, or less demand for help from this source.If fewer calls are made on the IMF as lender, part of the reason may be the remarkable accumulation of reserves by de-veloping countries. A conventional measure of the size of reserves relative to trade are the months of imports that they cover. For all developing countries, those rose between 1990 and 2004 from 2.9 months to 6.8 but much higher levels were reached by China (from 8.5 to 11.9 months). These are just the numbers for individual years. In India, the level in 1990 was a mere two months but five years later it stood already at 5.1 months, and in 2004, at 12.2 months [World Bank 2007]. These levels are much in excess of what in the past was taken as prudent, namely, three months of imports, close to the 1990 level for all developing countries. If India’s was almost twice that level in the mid-1980s and again in the mid-1990s, it will have been in consideration of the swings in her current account after the sec-ond oil shock when the deficit (1978-79 to 1980-81) rose from 0.3 to 1.7 per cent of GDP or, from 4 to 26 per cent of exports [Joshi and Little 1994]. But in the 10 years from the mid-1990s to 2004 India’s relative level of reserves more than doubled. With liberalised capital accounts, one of the realities of globalisation, prudence also counsels keeping some reserves against unforeseen losses of short-term capital, and it counsels with a loud voice after the Asian crises of the 1990s. The IMF appears to have given advice to that effect. So did Alan Greenspan, former governor of the US Federal Reserve System, and important members of the Economics professoriate (Michael Bruno, Martin Feldstein and others). Between 1999 and 2004, the short-term component of the total debt of low income countries fell slightly, from 13 to 11 per cent. For the aggregate of middle income developing countries, however, it rose from 18 to 23 per cent [World Bank op cit].Excess reserves can therefore be defined in different ways: one, call it ExcessI, is the percentage of total international re-serves that remains after removing from the reserves the cost of three months’ im-ports, or another, ExcessII, which is that percentage after removing, in addition, the entire short-term debt. For 2004, ExcessI stood at 55 per cent (of total re-serves) for all middle income developing countries. ExcessII, for those countries, came to 24 per cent, and to 56 per cent for China and to 75 per cent for India. At 2004 values, ExcessII of the middle income countries (24 per cent) equalled 5 per cent of their gross national income. There have been various estimates of the cost of holding those international reserves, the estimate being usually of the fiscal cost. Rodrik (2006), however, set out to measure the national cost of what I call Excess I – the larger of the two – on a sample of 18 developing countries (China and India included), for 2004, taking cost as the difference between the yields on foreign reserves, notably on short-term US Treasury securities, and a cautiously assumed cost of private short-term foreign borrowing (5 per cent). The result is a cost of Excess I close to 1 per cent of developing countries’ GDP, or approximately an annual 3 per cent of the total debt stock of developing countries.What is to be concluded from this accu-mulation of national reserves that is rele-vant to the position of the IMF, to the view to be taken of its effectiveness in recent decades and thus to possible reforms?The case of China is to be taken sepa-rately inasmuch as her accumulation of reserves is in pursuit of a policy of holding down the value of the currency, in the face of large and mounting external surpluses. China’s conduct has thus been in breach of the commitment (under Article IV of the IMF’s Articles of Agreement) to avoid manipulating exchange rates to gain un-fair competitive advantage (over many countries, east and west, India included). The IMF’s ArticleIV consultations will have left the Fund in no doubt on what was going on, and also on the cross-border effects of the policy. If it objected, the objection seems to have had little effect and to the rest of the world, stayed rather inaudible while it should have become a loud, public protest and warning.The costly accumulation of reserves by so many developing countries betokens, at its simplest, a lack of confidence in the stability of the international economy and in the institutions theoretically available to assist in average cases of external im-balance and to offer insurance at reasonable cost. TheIMF was intended to be a principal institution for this purpose. By this evidence alone, its effectiveness in this regard seems to have been limited in recent decades, whatever the reason.Part of the reason (nothing to do with the much advertised transfer of savings from east to west) is undoubtedly the great capital mobility under globalisation. The focus of the Fund’s attention, as Stanley Fischer repeatedly stressed (2004, chapter 6)hasto be moved to the capital account rather than the earlier concentration on the current account, and this has consequences for the
DISCUSSIONEconomic & Political Weekly EPW august 30, 200875required skill mix in the staff. If reserve accumulation may be justified as insurance against rapid exits of short-term capital, the Rodrik critique is that this is not optimal policy. Optimality requires combining reserve accumulation with reduced short-term debt exposure, yet, as shown, exposure in-creased (absolutely and as proportion of total debt) while reserves, at considerable cost, were stacked up along with it.If the Fund, in discreet ArticleIV con-sultations, advised on short-term debt management is not known: it should have been an increasingly pressing concern. Short-term capital controls had been ad-vocated, famously, by Tobin (“throwing sand in the wheels”) and came to be prac-tised by Chile with a tax on short-term in-flows tapering down with length of stay. The Fund came to evince some cautious sympathy with Chile-type policies. But some outright interventions like Malaysia’s block-ing ofoutflows that threatened turning into floods the IMF could not countenance, pointing to the deep division between the Fund and the critics [e g, Bhagwati 2004] of its policy to encourage the liberalisation of the capital markets of its more advanced developing country members.What Ought to be Expected from ReformLooking at it from the outside, much of the IMF’s work in recent years and in its various functions, seems characterised by limited effectiveness. Low effectiveness cannot be a matter of deficiency in skill and drive: the Fund staff are of truly high ability. It rather seems to reflect a gradual narrow-ing of the limits on its effective authority and power. The economic progress of so many developing countries will have con-tributed to this loss: accumulating reserves at some cost will have appeared to some governments a price worth paying for holding Fund conditionality at bay. Inde-pendently of such progress, authority and disciplinary power would have been lost, first, in 1973, at the end of the Bretton Woods system of fixed exchange rates. TheIMF lost its function and authority to sanction deviations and devaluations, a function that it exercised in the agreed, common and commonly understood interest of the wider membership in the system. In compensation, other functions were given emphasis or new ones added. Coordina-tion of exchange rates, now no longer fixed, became an obvious successor task to the policing of fixity, though one not as easy to define. In the new phase, there re-mained theIMF’s role as lender and this constituted muscle so long as demand held up. It appears to have weakened.The Fund’s own recent step to reform involves cuts in staff towards a cost saving of $ 100 mn. The reported intention is to refocus activities away from lending to-wards a greater emphasis “on knowledge and global economic surveillance” (Finan-cial Times (FT), April 30, 2008). This ap-pears the outcome of discussions resulting in a new funding plan and some realloca-tion of voting power in favour of develop-ing and emerging economies.Without benefit of insight into the IMF’s internal directions and plans for balancing activities, the past seems to say that what is to be developed and emphasised must above all have the promise of recovered authority and effective influence. That should be the basic criterion for concen-trating effort and resources in Fund pro-grammes: what enough members now regard as important for their own policies, internal and external, for protection against external crises and a stable envi-ronment for their dealings with the rest of the world. And what experience shows to lie within the competences of the Fund and staff and what it shows to be a diver-sion into work for which the IMF and staff have no competitive advantage. Reform has to respond to expressed demand. First comes agreement on what countries demand in a reformedIMF, then accommodation with capacity. In this respect, funding is a necessary condition, but not sufficient in-surance against relapse into relativelylow effectiveness, and a frustrated staff.India, by dint of her position in the developing world and in international trade and finance, and not least because of the quality of her economic thinking, should be expected to seek a part in the shaping of a reformed Fund. The debate on reform of the 2008 IMF which DK intended to start ought thus to turn on what India should expect from reform of the IMF and what she would commit to in return. The EPW has been a platform for this debate before: see ‘Changing the IMF’ (January 29, 2000), an editorial statement which remains remarkablyvalid for 2008.DirectionsThemes that members expressly want pursued by the IMF in the era of early globalisation, centre on the inter-relations, actual or potential, between financial policies and developments in different economies. That is the sense of British prime minister Gordon Brown’s proposal (for which he canvassed French govern-ment support) that the IMF’s watchdog function be strengthened to provide an early warning system for financial crises (FT, March 24, 2008) or of the proposal, made by Germany’s president Horst Köhler (a former head of the IMF) that the Fund be appointed to oversee the stability of the international financial system (FT and Frankfurter Allgemeine Zeitung, March 15, 2008). Both proposals were made in the middle of the credit crisis of 2007-08, a major instance of international financial instability. Along broadly the same lines lie the views of members’ authorities as revealed in an evaluation of IMF exchange rate policy advice [IMF2007]. A substantial numberof authorities felt that theIMF was not rising to its responsibility as brokerfor international policy coordination, and the main atten-tion in internal discussions was given to cross-border effects of policy (spillovers). While the range of topics is not new to theIMF and some have been in hand for some time more steam is now called for: if reform places the agenda centre stage it implies shifts in the orientation and con-centration of work, not least because the existing analytical and modelling base is fragile for some, and controversial in other areas. A well known example is the dismal explanatory and predictive power of exchange rate modelling: attempts to link exchange rate movement to movements in the underlying monetary fundamentals remain unsuccessful and the findings of Meese and Rogoff (1983) and Meese (1990) to this effect still stand.2 The Fund’s own evaluation (or rather that of its im-pressive Independent Evaluation Office) has uncovered weaknesses in important parts of its country policy work: projec-tions of the implications of policy reform and of the macroeconomic responses tend to be limited if not totally inaccurate. And
DISCUSSIONaugust 30, 2008 EPW Economic & Political Weekly76the obvious need to advice members on capital account management leads on to highly controversial ground, especially in the matter of controls [Bhagwati 2004]: Edwards (1999) doubts if any really work.Prediction and prevention of financial crises are major tasks that are now being pressed on the IMF and the Fund is not un-prepared, having been engaged for some time on assessments of financial stability or vulnerability of member countries. Ex-perience points to some weaknesses. Early warning mechanisms have performed in-adequately, possibly because country sur-veillance tends to miss structural or insti-tutional causes of crises [Conway 2006]. This is generally underexplored territory. Bordo et al (2001) surveyed banking and currency crises over the long run. Frequency over the past 30 years may have increased somewhat or just stayed near-constant. But in either case, attempts to identify causes have not been persuasive [Rose 2001]. History is all that one is left with. Pessimism, however, should not extend to the possibility of identifying failure of policy, of the state of its banking system or of financial deve-lopments in the country (and its banks) that might permit or even provoke local crises, or vulnerability to contagion. And a view has to be taken on the wider consequences of leaving the adjustment of major interna-tional imbalances to the exchange rates alone: a contentious issue between the IMF and the US which at one point (in 2007) seems to have held up agreement on Fund reform (FT, October 23, 2007).In Times of CrisisFund conditionality in general, and condi-tionality in crisis lending in particular, and also crisis management, are the IMF’s most visible interventions in government decisions and policies and therefore also the most contentious: it suffices to read Stiglitz (2002). In financial crises that centre (at least, initially) on the industrialised countries, the Fund may find itself kept at a distance. We see this in the credit crisis of 2007-08 which, furthermore, has hit individual banks rather than the countries and there-fore lies outside the normal compass of the IMF. But where crisis envelops developing and emerging market countries, the Fund should be prepared and forearmed for acting as both crisis lender and crisis manager: paraphrasing Stanley Fischer (2004, chapter 1, Introduction), while the primary responsibility for ensuring the stability of the international financial system lies with the central banks of the major economies, those banks are not and should not be charged with resolving the foreign exchange crises of other countries, especially the emerging market countries. The case for a lender of last resort func-tion was made by Stanley Fischer in 1999 (2004, chapter 1) and, then, with special attention to the interests of developing countries, by Arjun Sengupta (2000), eight years ago. Even then, and more so in 2008, the resources that might be required in case of a financial crisis of the type of the 1990s exceed what the IMF could lend from its own capital. They would have to be assembled by a crisis manager who would be central to the operation of applying the funds. That should be the acknowledged role of the IMF. It has to be acknowledged in advance for the necessary plans for a Lending Coalition of Last Resort to be laid and published, to give confidence. Unavoid-ably, with the confidence comes moral haz-ard which it is notoriously difficult to pro-vide against and still awaits ingenuity in contract and security design that would penalise reckless lending or guard against leapfrogging by creditors as in a bank rush.As for the record of the IMF in times of crisis, there is much contention, from the root-and-branch condemnation by Stiglitz to the more selective objections of Bhag-wati. The balance of what was concluded in studies of the effects of IMF lending, conditionality and management of the crises of the 1990s and early 2000s is more positive. Conway (2006), in his survey of the research, specifically with regard to changes in the current accounts, growth rates and rates of inflation and of invest-ment in participating countries finds that the results were on the whole (and given a year or two) favourable and in line with the intentions. It could have been better. And as Fischer (2004, chapter 4) points out, private sector involvement in the preven-tion of financial crises and their resolution (the bailing-in of the sector) remains one of the most difficult issues in the reform ofthe international system, and thus an important question to exercise the IMF. DK’s proposal includes a degree of decen-tralisation of IMF functions to regional or-ganisations, to lighten the load on the IMF and allow sharpening of the focus on central tasks. But monitoring and assessing financial stability and vulnerabilities and preparation for, and performance of, crisis management are tasks for the centre: contagion is prima-rily regional, whether contagion in crisis or contagion of standards and perception.‘Delegated Monitor’International financial crises tend to start with debt. If the share of equity in the capital flows to developing countries were to increase, the system would become less crisis-prone.There are barriers. Rogoff (1999) identi-fied strong biases in the prevailing finan-cial system towards debt finance especially towards intermediation by banks, and thus against equity finance and direct invest-ment. Among the sources of the bias is de-posit insurance in both debtor and creditor countries; next, the reliance in interna-tional lending contracts on enforcement via the courts of creditor countries and G-7 institutions, but then also the underdeve-lopment of equity markets in many deve-loping countries, lagging in development behind the general economy.Those biases are difficult to counteract. Attempting to counteract some of them would drive lenders away. But there are impediments, of a kind familiar from eco-nomics, for which economics points to solutions. They were identified in the work of Jean Tirole and are of two sorts of market failure, each arising from incom-pleteness of the contract upon which the foreign investor invests in the developing country or the foreign lender lends. A pri-vate borrower in the developing country cannot secure his creditor against adverse impacts of government policy such as new regulations or taxation. Equity acquired by foreigners is probably even more vul-nerable. Nor does a sovereign borrower bindhimself or his successor not to borrow more from other sources which would dilute the value of the initial investment. If lenders and investors could be secured against the risks of such interventions or if the risks could be substantially reduced, the developing country should gain from easier access to foreign finance, capital and
DISCUSSIONEconomic & Political Weekly EPW august 30, 200877enterprise. To achieve these improvements, Tirole (2002) proposes a new function for the IMF.3 It is to be appointed Delegated Monitor, monitoring the policies of devel-oping countries which affect the position of foreign creditors and investors, present or potential, whether adversely or beneficially, and alerting the government and the public of potential borrowers, lenders and inves-tors of its findings and of changes in the level of security against intervention by the host government, which is the uncontracted counterparty to the lending or investing. The new function is plainly intended to benefit developing countries that have entered what Arjun Sengupta (op cit) refers to as the second phase of globalisation, where capital accounts are liberalised. The IMF, however, should find that this function is a ready extension of its role as adviser of developing countries on financial policy, as provider of credibility (in capital markets or to the donor community) [IMF op cit], and its tested surveillance programmes. Unlike other functions that were taken up in the past 20 years, it should fit smoothly into its portfolio. The sole extension would be provision for regular contact with the private sector of borrowers and local part-ners of foreign investors, and foreign lend-ers and investors, actual or intending. This may involve a complaints procedure which should not, however, overlap with the juris-diction of other international institutions.Changing for ReasonA summary list of what is proposed as the objects of change, of changes that should meet those objects, and of what should be retained and developed, completes this look from the outside.(i) IMF Authority: A main purpose and requirement of changes should be that they support and, indeed, recover and en-hanceIMF authority in its relation with de-veloping countries, low-income and mid-dle-income, and the industrialised mem-bers. In terms of the Fund’s functions this object argues for a sharpening of focus. (ii) The Demand for an IMF: Within con-straints of the Fund’s constitution, explore actively what members and their public see as the purposes of the institution and what they expect of it. (iii) Ruthless Truth-teller:A role in whichmember countries found the Fund wanting [IMF 2007, chapter 2]. This seems to point to the perennial problem of bal-ancing confidentiality with member countries against informing and warning the wider community, developing coun-tries and others, of developments in member economies and policies with po-tential external affects. The move should emphatically be towards greater trans-parency, if necessary at the cost of a nar-rowing of the Fund’s clientele.(iv) Comparative Advantage: Argues for removing certain functions and adopting others. The Fund’s Structural Adjustment Facility by many reports had little impact and staff may not always have been attuned to the requirements of successful operations under this hat [Collier and Gunning 1999]. The IMF’s Technical Assistance, though well within the competence of staff, was appar-ently mainly acceptable to some member countries if floated on a loan [IMF 2005]. That argues for providing assistance only where at least local cost is borne by the member. The function of Delegated Moni-tor, however, lies well within, IMF compara-tive advantage. Similarly, the planning, de-sign and preparations for Fund-led Lender Coalitions of Last Resort in consultation with central banks are a natural task.(v) Article IV Surveillance: An essential part of Fund activity and product. Man-agement of the capital account has to be-come a major topic, along with monetary policy and system and management of the exchange rate. For the IMF, some of these are rather new specialisms, with new demands on the staff. Publication of reports to become normal procedure, exceptions to be time-limited (also allowing for partial publication) and grounds for individual exceptions to be made public.(vi) Use of Independent Outsiders: Con-sider placing the evidence for main con-clusions ofOutlook and similar economic andfinancial prospect reports, before com-mittees of independent outsiders for their assessment. Publish their comments.(vii) Staff: The value of the Fund. Maintain or rebuild the IMF’s high internal culture. The experience, ingenuity, intuition and judgment of the staff are essential when dealing with topics (e g, exchange rate management) for which analytic guidance is fragile. Loss of staff with country experience should have a cost in terms of insight into countries’ policy intentions and may preju-dice the value of Article IV consultations.Notes 1 In the domestic setting where the role of “lender of last resort” is well defined, it must be able to lend unlimited amounts, hence capable as are central banks, of creating money. Further, by restricting acceptable collateral it should be able to separate viable from insolvent borrow-ers [Bagehot 1873]. Neither is easily done in an international setting where the borrowers are countries. These are valid technical points, but each capable of being met by additional ar-rangements for establishing a functioning in-ternational lender of last resort. The question at issue, however, remains, whether the IMF should be left with the decision at times of crisis, on whether to lend: to whom, when, in what cir-cumstances, and on what conditions. 2 Engel and West (2005) is a recent attempt to find the link. 3 This is an unauthorised interpretation of how Tirole’s proposal might be brought to implementation.ReferencesBagehot, Walter (1873):Lombard Street,Wm Clowes and Sons, London.Bhagwati, Jagdish (2004): In Defense of Globalisation, Oxford University Press, New York.Bordo, Michael and Barry Eichengreen, Daniela Klin-gebiel and Maria Soledad Martinez-Peria (2001): ‘Is the Crisis Problem Growing More Severe?’, Eco-nomic Policy,April 32, 53-82.Collier, Paul and Jan Willem Gunning (1999): ‘The IMF’s Role in Structural Adjustment’,Economic Journal,109, No 459, F634-F651.Conway, Patrick (2006): ‘The International Monetary Fund in a Time of Crisis: A Review of Stanley Fischer’sIMF Essays from a Time of Crisis’, Journal of Economic Literature,XLIV No 1, 115-44.Edwards, Sebastian (1999): ‘How Effective Are Capital Controls?’, Journal of Economic Perspectives, 13, No 4, Fall, 65-84.Einhorn, Jessica (2001): ‘The World Bank’s Mission Creep’, Foreign Affairs, 80, No 5, September- October, 22-45.Engel, Charles and Kenneth D West (2005): ‘Exchange Rates and Fundamentals’,Journal of Political Economy, 113, No 3, June, 485-517. Fischer, Stanley (2004): IMF Essays from a Time of Crisis: The International Financial System, Stabili-sation and Development, The IMF Press, Cambridge, Massachusetts and London, England. Chapter 1: ‘On the Need for a International Lender of Last Resort’, Reprinted fromJournal of Eco-nomic Perspectives, 13, No 4, 1999, 85-104. Chapter 4: ‘The Role of the IMF’, Presentation to theInternational Institution Advisory Commis-sion (Meltzer Commission), Washington DC, February 2, 2000. Chapter 6: ‘Reforming the International Financial System’, Reprinted fromEconomic Journal, Vol 109, No 459 , F557-76, November 1999.International Monetary Fund (2005): ‘Evaluation Report’, Independent Evaluation Office,IMF Tech-nical Assistance. – (2007): ‘Evaluation Report’, Independent Evalua-tion Office,IMF Exchange Rate Policy Advice.Joshi, Vijay and I M D Little (1994): Comparative Macroeconomic Studies: India, Macroeconomics &
DISCUSSIONaugust 30, 2008 EPW Economic & Political Weekly78This article comments on the reforms suggested by Deena Khatkhate, with specific reference to changing the quota formula and the proposal for a federal IMF.In the thought-provoking paper on reforming the International Monetary Fund (IMF), Deena Khatkhate sheds light on some specific issues that pertain to the IMF’s medium-term strategy and puts forward a bold proposal for further reform. Regarding the impact ofIMF policy advice on member countries, he rightly points out that the membership of the IMF has become dichotomous with non-borrowing and borrowing members, with the IMF’s leverage limited only to the latter. On quotas and voice reform, he re-minds us that past experience does not bode well because whenever theIMF man-agement and its leading stakeholders promised to revise quotas to give greater voting power to the emerging market and developing countries, the result was doing the same thing over and over again and getting the same result. The first question to ask with regard to several proposals for IMF reform that are currently under consideration is indeed why are they “narrow in scope and seem out of touch with the current reality with far-reaching structural changes in the global economy…” [Khatkhate 2008]. The issues and questions raised by Khatkhate go to the core of the recent IMF reform efforts but in trying to address them, one finds that they raise still more questions, pointing to the many “devil is in the details” problems that one is confronted with when it comes to ac-tually implementing the IMF reform strate-gy. Whereas there are many ideas and leads in the paper, I shall confine my comments to two points, which I think are of conside-rable importance but did not receive suffi-cient attention in Khatkhate’s article. First, I focus on the IMF’s quotas and voice reform and more specifically, on the need for changing the quota formula because the first three problems in the IMF’s governance are: quotas, quotas and quotas. Second, I comment on Khatkhate’s proposal for a fed-eral IMF, focusing in particular on some is-sues with regard to its implementation and adherence to notions of justice.Changing IMF Quota FormulaTake the proposal for changing the IMF’s quota formulas and other reforms that are aimed at increasing the voice and represen-tation of emerging market and low-income countries. These reforms look good prima facie because without them, these countries will not be sufficiently engaged in the IMF to help generate the energy and dynamism required to strengthen the global financial system.1 Even after these reforms, however, the quotas will still be heavily skewed toward the industrial countries. This raises some questions such as why make just prima facie arguments and why not go deeper into the issue? In this con-nection, it should be noted that the Com-muniqué of the International Monetary and Financial Committee of the board of governors of the IMF, which was issued on April 12, 2008, welcomed the agreement by the executive board on the package of quotas and voice reforms as an important contribution to enhance the Fund’s credi-bility but noted that the “committee also looks forward to further work by the ex-ecutiveboard on elements of the new quota formula that can be improved before the formula is used again”. This raises the question of why is the problem of the quota formula still with us and the answer in turn raises several other questions. Is the IMF Revisiting Proposals for Reforming the IMF Iqbal ZaidiPolitical Economy, 1964-1991, The World Bank, Washington DC.Khatkhate, Deena (2008): ‘Reforming the IMF in a New Global Order’,Economic & Political Weekly, April 5, 32-38Meese, Richard (1990): ‘Currency Fluctuations in the Post-Bretton Woods Era’,Journal of Economic Perspectives, Winter, 4(1), 117-34Meese, R and Kenneth Rogoff (1983): ‘Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?’, Journal of International Economics, Vol 14, 3-24.Rodrik, Dani (2006): The Social Cost of Foreign Exchange Reserves, NBER Working Paper Series Working Paper 11952, National Bureau of Economic Research Cambridge, Massachusetts, January.Rogoff, Kenneth (1999): ‘International Institutions for Reducing Global Financial Instability’, The Journal of Economic Perspectives, Fall, 13, No 4, 21-42Rose, Andrew K (2001): Comment on Bordo et al ‘Is the Crisis Problem Growing More Severe?’, see above: Bordo,Michael et al. Sengupta, Arjun (2000): ‘Financial Management of Globalisation: IMF and the Developing Coun-tries’, Economic & Political Weekly, January 15, 115-29.Stiglitz, Joseph E (2002): Globalisation and Its Discontents, W W Norton & Company, New York and London.Tirole, Jean (2002): Financial Crises, Liquidity, and the International Monetary System,Princeton Uni-versity Press, Princeton and Oxford.World Bank (2007): Global Development Finance,Vol II: Summary and Country Tables, The World Bank, Washington DC.This paper should not be reported as representing the views of the IMF. The views expressed in this paper are those of the author and do not necessarily represent those of the IMF or IMF policy.Iqbal Zaidi ( is at the International Monetary Fund, Washington DC.

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