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Revisiting Proposals for Reforming the IMF

This article comments on the reforms suggested by Deena Khatkhate, with specific reference to changing the quota formula and the roposal for a federal IMF.

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.
DISCUSSIONEconomic & Political Weekly EPW august 30, 200879implementing a quotas and voice reform that is forward-looking enough to take into account the need to adjust members’ repre-sentation to future changes in the global economy? Does the reform reflect the broad mandate of the IMF and are appropriate variables used in the formula that determine the voting power of the member countries?The answers to these questions are con-tentious but it is fair to say that one reason why the quota problem is still with us is that the discussion on IMF quota formula was confined to an unduly narrow area and important issues were given short shift. Concerted efforts were made in many quarters to validate the traditional ap-proach of basing voting power in the IMF largely on countries’ respective weights in the world economy, with the justification being provided in terms of the so-called narrow mandate of the institution. The discussion in the IMF’s executive board was confined to minor changes to the quota formula and it was disconcerting that little consideration was given to the in-clusion of new variables and the exclusion of some of the traditional variables in the re-vised quota formula. Most directors recon-firmed that the formula should be based on an updating of the traditional economic and financial variables and should comprise at most four variables. As Wittgenstein would say, Ein bild hielt uns gefangen (“We were held captive by a picture”). Of course, he is ask-ing deep metaphysical and epistemological questions but the analogy carries over into the present context. The problem is that we just do not go down deep enough when placing our question marks. Wittgenstein pointed out that there are several ways in which the grammar of language works and it is a mistake to notice only surface gram-mar, “In the use of words one might distin-guish surface grammar from depth gram-mar…compare the depth grammar, say, of the word ‘to mean’, with what its surface grammar would lead us to suspect. No wonder we find it difficult to know our way about” [Wittgenstein 1953]. It is not necessary to carry out a grammati-cal inquiry in the Wittgensteinian tradition of the IMF quota formula to get to the root of the problem but it is worth mentioning what Wittgenstein would call the calculus conception of treating rules and rule-following, which can lead to two different types of problems. First, by rigidly obeying a rule, there is the risk that one is coerced by the rule if the rule tells one what to do, that is, it dictates one’s activity. Second, there is the risk that rule-following is taken to such an extent that “like, say arithmetic, the rules determine in advance what the outcomes will flow from applying them: for example, it is tempting to think that once I have defined addition and subtraction and the relation of equality, the whole of arith-metic automatically follows – it is as if every arithmetical truth (and falsehood) is already ‘contained’ in or settled by, those basic rules. Accordingly, it seems that there is something inexorable about the rules, which makes the correctness or otherwise of what I do wholly independent of my doing it” [Grayling 2001]. In the present case,we are held captive by the old quota formulae and Khatkhate has put his finger on the right spot, namely, that when the IMF moves, it does not necessarily guarantee that it will be in the right direction.Quota RevisionGiven the weaknesses of the quota formu-lae, it is no surprise then that they have been used only as a rough guide for deter-mining actual quotas, either for adjusting quota shares or for setting up quotas for new members. There has not been any significant rebalancing of quota shares in several decades, although there have been major changes in the world economy, in-cluding sharp differences in growth rates of GDPs and exports among individual countries as well as different analytical groupings of countries. The distribution of selective quota increases (generally based on calculated quotas), which has not man-aged to eliminate the large discrepancies between actual and calculated quota shares. Most quota reviews provided for mainly equiproportional increases in quotas and the selective increase component was not even used in some reviews. Also, quota formulae have had a limited role in deter-mining the actual quotas of members when they join the IMF. Although the quota formulae are used as an independent measure of a prospective members’ rela-tive economic size, the quota resulting from the formulae – the calculated quota – is often very different from the actual quota assigned to the member.In Mirakhor and Zaidi (2006), we pro-pose a new way of looking at the quota formula, which overcomes the main shortcomings of the present approach and one which, we think will go a long way in addressing the democracy deficit and governance problems facing the IMF. We point out that John Rawls’s theory of justice provides an appropriate method for understanding what should be the case, in the context of voice and voting shares, before international institutions are to be justifiable to their members [Rawls 1999; 1996]. We use the Rawlsian notion of “justice as fairness” to show that justice in the governance structure requires a distribution of voting power that partici-pantsacceptasthe end-result of a fair processandthe implementation of this process suggests that a major revision of the quota formula is long overdue. Our analysis shows that the calculated quotaswould besharply different if ap-propriate variables for the potential sup-ply and demand for IMF resources were to be used and moreover, if the broad man-date of the IMF was fully reflected in the quota formula. Quotas are calculated ac-cording to a member’sGPD, the level and variability of current account transactions and official reserves and they largely deter-mine members’ voting power. The demand variables that reflect a member’s potential need to borrow from the IMF have severe shortcomings. The openness variable (levelofcurrent account transactions) is based on the argument that relatively more open economies are more vulnerable to external shocks and therefore will be more likely to use IMF resources. The biggest irony is that the advanced economies have 70 per cent of the share in globaltotals of current payments and re-ceipts, which means that the bulk of the share in calculated quotas from the de-mand variable is eaten up by countries that have not borrowed in decades and are not expected to borrow in the foreseeable future. Variability of current receipts, which is the other demand variable in the quota formulas, is not much better because the advanced economies’ share is over 60 per cent. If these variables are supposedly capturing the demand for IMF resources, then why is it that they have virtually no correlation with the actual use ofIMF
DISCUSSIONaugust 30, 2008 EPW Economic & Political Weekly80resources? The reason why a good proxy for the actual use of IMF resources is needed is not because one is interested in determin-ing access levels but because of the need to have adequate representation of borrowing countries in the executive board.Need for New VariablesThe traditional openness and variability variables in the quota formulae need to be replaced with new variables that have a high correlation with the actual use ofIMF resources. There are good reasons for why the capital flow volatility variable should be included in the quota formula but it should be normalised to reflect major diffe-rences across countries. If two countries ex-perience the same capital account shock in absolute terms, the smaller economy will face a greater burden, which suggests that the volatility of capital flows should be measured as a proportion of GDP. Several im-portant differences between the capital flows of industrial versus developing countries should also be taken into account.One promising approach would be to include those variables in the quota formula that are good predictors of the demand for IMF resources. The new demand variables could include: thepast use of IMF resources; sub- investment grade credit rating; sovereign bond spreads; and reserves short-term debt.Some observers have argued that the traditional variability variable is distinct from an attempt to measure actual vulner-ability or likelihood of usingIMF resources because a member with high variability may nonetheless be in a strong external position with little probability of actually drawing on the IMF. Thus, the traditional variable may be thought of as an attempt to capture more structural features of a member’s economy that may make it subject to external shocks. However, this argument is wrong for a number of reasons. First, it cannot be that this variable is meant to capture the potential size of a member’s need for recourse to the IMF but notthe probability of such recourse because the fact of the matter is that we really are interested in capturing the probability of recourse to the IMF. The probability measure clearly has an important bearing on the quota formula because it would reflect the voice of the debtor countries in the institution. Second, the point that the new demand variables mentioned above will be reward-ing imprudent policies needs to be quali-fied because while moral hazard exists and can be an important consideration in some policy measures, it should not be exagger-ated. Third, it is hard to understand how moral hazard could be a problem in the present context, namely, that governments will implement risky policies because even when things go wrong, they benefit from a higher IMF quota. Fourth, the traditional variability measure also has the same problem of rewarding imprudent policies because countries that do not diversify their exports will have a higher quota based on the traditional variable.Regarding the supply variables and the capacity to contribute financial resources, GDP converted at market exchange rates has been used but purchasing power parity (PPP)-based GDP is the more rele-vant indicator for measuring potential contributions. The latter variable correctly shows that the larger the volume of goods and services an economy produces, the greater is its size in the world economy. PPP leads to a larger relative GDP for deve-loping countries because it correctly puts a higher relative weight on production in the non-traded sector for these countries than would be implied by conversion at a market exchange rate. In this regard, the argument for using the market GDP misses the crucial point that there is no need to convert non-traded goods and services at market ex-change rates to pay for quotas. Quotas are a small fraction of GDP or exports and one cannot imagine an IMF so large that coun-tries will have to sell nontradables to pay for their quotas. The World Economic Out-look (WEO) uses PPP-based GDP for meas-uring global and regional GDP and its growth and indeed, PPP is widely recog-nised to be the appropriate measure for comparing the volume of goods and serv-ices produced by an economy, except when it comes to the quota formula.Those who lend should certainly have a say in whether to lend but the creditor countries should recognise that whereas they have certain voting powers that come from the weights in the quota formula for the supply of capital variables, the interests of the debtor countries should also be taken into account with variables that are the best predictors of futureIMF borrowings. Original position argumentation requires that the position of the debtors should be the best possible after taking into account the creditors’ interests, so that, were the positions to be swapped, the creditors would accept their new position as fair. In sharp contrast to what the Rawlsian approach would require for justice as fair-ness, it is clear that creditors would mind if they swapped positions withdebtors. Since this is not the case, the present quota shares do not pass the fairness test. One implication of this failure to pass Rawls’ test is that the IMF programmes have been overloaded with conditionality – recall the programmes during the Asian financial crisis in which programmes had more than a hundred performance criteria or benchmarks and the subsequent delib-erations that led to the streamlining of conditionality. It is hard to imagine the advanced countries ever being asked to implement such programmes. Since the present quota formulae have severe weaknesses and are not well-de-signed to capture the likelihood of bor-rowing from theIMF, the interests of debt-ors were not taken sufficientlyintoaccount. However, it would be wrong to stretch the “original position” argument so far that it forces one into the untenable position of defending, for example, the proposition that IMF quota formulae should be the equilibrating mechanism that balances out all other inequalities, injustices and effects of luck so as to make members in-different between being an advanced economy and being a developing econo-my. To say that the trustees are behind a “veil of ignorance” is to say that they do not know the following sorts of things: their countries’ economic size, level of eco-nomic development, population, possible need forIMF resources, etc. However, they are aware of the general types of possible situations in which countries can find themselves and the purposes of the IMF, such as multilateral and bilateral surveil-lance, provision of conditional liquidity (IMF-supported adjustment programmes) and provision of unconditional liquidity special drawing rights (SDRs).Regarding the question whether the population variable should be included in the quota formula, the answer is not just an unequivocal yes but one might also
DISCUSSIONEconomic & Political Weekly EPW august 30, 200881wish to add that it is about time that we did the needed to address the democratic deficit, given that it was recognised as far back as the Bretton Woods conference. Some observers have argued that even though population is not a variable in the quota formulas, it is in effect included – and thus not explicitly needed – because there is a correlation between population and other variables, such asGDP. This has at least three major shortcomings. First, since population data are available, there is no need for a proxy variable. Second, the correlation coefficient between popu-lation and GDP is quite low to begin with and declines very sharply when large emerging market economies are excluded from the sample. Third, GDP is meant to capture a country’s economic size and ability to contribute resources, not the worth of human beings as human beings, which cannot be measured by some aggre-gate economic concept. The quotas and voice reform is above all else the belated recognition that global decision-making affects the economic welfare of all indi-viduals and the public goods provided by theIMF seek to maximise global economic welfare. Each one of us, irrespective of income and wealth, has an equal stake in those public goods, which means that including population in the quota formula would at long last recognise our inherent stakes in the international public goods.The original position argument has to be used with some care, namely, to imagine a situation in which a group of individuals are brought together to agree upon the basic constitution of a society or social institution that they are about to enter but in which to ensure their impartiality, they are placed be-hind a veil of ignorance. In the present con-text, self-interested rational persons behind the veil of ignorance are given the task of choosing the principles that shall determine the governance structure of the IMF. In deciding what the quota formula should be for determining, among other things, the distribution of the voting rights in theIMF, we should try to imagine what formula the representatives of the coun-tries would choose if they did not know what type of country they were going to represent. The veil denies them any knowledge that is morally irrelevant. With the expulsion of bias-inducing knowledge, the participants in the original positionare forced, even if self-centred, intothemoral point of view and the principles chosen in Rawls’s framework would be fair. It is very important to note that in Rawls’s framework, the trustees in the hypothetical situation of choosing principles for cooperation are imagined as rational, self-interested individuals who aim at doing for themselves as well as possible and who have needs that can be met more effectively by cooperation than non- cooperation. They do not know the size of the territory, population, financial situation, level of their economic development or other such information about the people whose fundamental interests they represent. However, they do know that reasonably favourable conditions are attained by having an institution like theIMF, i e, inter-national monetary cooperation is worth-while. Thus, the method enables each trustee to secure his ends, subject to certain circumstances, conditions and constraints but what is of considerable importance is that their justification does not reflect some antecedent understanding of what justice is, metaphysically or conceptually. This is one of the strengths of Rawls’s approach, namely, that it is meant speci-fically to correct for any mistaken under-standings that might nevertheless be widely diffused. The basis for correction is a prag-matic one insofar as it addresses the ques-tion of how well does this understanding facilitate the achievement of certain goals.Unfortunately, this pragmatic approach was not adopted in the recent quotas and voice reform at theIMF and a large weight in the formula was given to the GDP at market rates; traditional openness and variability variables – with minor changes – were retained. The quota formula is so burdened by these flawed variables that the only way to achieve even a modest shift in voting power toward the emerging market and low-income countries was to perform compression in the overall for-mula and have countries forgo their share of the calculated increase in the quota. Thus, the quota formula is neither simple nor transparent and moreover, even after compression, the shift in voting shares is very small in relation to what ought to be the quotas and voice reform. All these complications and the lack of simplicity and transparency are there only because we have to undo the distortions caused by the flawed variables in the formula. This point and other issues raised above show that Wittgenstein was right – we have been held captive by a picture and cannot ask the really deep questions when it comes to changing the quota formula. Limits of One MetricAnother reason why the quota formula is overburdened is that it attempts to capture many different aspects of the IMF’s financial structure in just one metric. The multiple roles of quotas mean that the formula necessarily has to balance sometimes competing considerations about what variables to include and the weights to attach to each variable. How-ever, there is no particular need to have a rigid relation between financial contribu-tion, access to Fund resources, voting power and share ofSDR general allocations. For example, the criteria for deciding whether and how much to lend should be decided under access policy because access limits for borrowers might be very different for countries with similar voting power in the IMF, depending on the individual coun-try’s circumstances. It is already the case that waivers are permitted to allow access outside the quota-based limits specified under the articles (seearticleV, section 3 (b) (iii) and 4, underwhichuseofFund credit is limited to 100 per cent of quota, unless waived). A cogent case can be made for fully delinking quotas from all deci-sions on access – the access to IMF resourc-es should be determined by factors such as the need for financing, the strength of the adjustment programme and the like and not just one number that comes out of the quota formula. As with access levels, there are good reasons why the share of SDR al-locations should not be linked to quotas. In fact, the industrial countries have no need for SDR allocations and this should be an explicit consideration in SDR allocation de-cisions. These concerns raise the important point regarding the need for an amend-ment to the IMF’s articles of agreement.Toward a Federal Monetary FundTurning to Khatkhate’s proposal for a federalIMF, the last thing one would say about this intriguing idea is that “we were
DISCUSSIONaugust 30, 2008 EPW Economic & Political Weekly82held captive by a picture”. Khatkhate notes that “it promises a radical, imaginative and constructive solution based on realpolitik, allowing for new trends in international finance…the members of the IMF will have to hold equal status, more or less, in the deliberations of the IMF, if a consensus in its policies has to remain its centrepiece.” This last point about fair voice and repre-sentation for all members cannot be over-emphasised in reforming theIMF. Implications of Rawlsian ApproachWhat are the implications of the Rawlsian approach to fairness for IMF governance? The answer would be that a rational rep-resentative of a country considering the governance structure behind the Rawlsian veil of ignorance (i e, a device which screens out information, among other things, about population, national output, level of development, etc) would not support the current voting distribution that gives almost no weight to the Westphalian principle of “one nation, one vote” and an exact zero weight to the democratic principle of “one person, one vote”. A rational person would not want to support an institution to which members cede some important aspects of national sover-eignty in the interest of global monetary cooperation and whereas the institution impacts in important ways – not only when there is anIMF-supported adjust-ment programme but also because of surveillance, regulatory and policy advice activities – the livelihoods of hundreds of millions of people, the governance struc-ture does not give any weight to the popu-lation variable in the quota formula. As Khatkhate has pointed out, this issue has gained more significance because the IMF’s lending role is declining relative to surveillance, technical assistance and other activities, which would suggestlarger weights for the Westphalian and demo-cracy principles and smaller weights forthe traditional creditor/debtor variables. The Rawlsian approach makes clear that ways to ensure that low income coun-tries (LICs) have adequate opportunity to participate in governance of the institu-tion should be one of the top priorities of efforts aimed at enhancing the IMF’s legiti-macy. The LICs’ share in the world economy is small but the IMF has a far larger role in these economies and spends a dispropor-tionately larger amount of resources in work on these countries relative to theirquota.These considerations suggest that the IMF should build what Rawls calls an “infrastructure of justice” that ensures every country some reasonable level of voting power and the opportunity to influence decisions, thereby giving it a proper chance to achieve full membership of this global institution. In other words, working with-in the framework defined by the veil of ignorance, rational agents choose principles of justice on the basis of their fiduciary duty to the individuals or countries whom they represent. Their choice is not of an objectively correct conception, of justice but of that conception, which is most suita-ble for fitting a certain kind of cooperative role in the institution whose members are represented in the original position. In the Rawlsian approach – specifically in achieving an overlapping consensus – the aim is not to have a regulative device and in particular, it is not as though the principles of justice are adjusted to the claims of the dominant political and social interests. It is important to distinguish be-tween the two stages in justice as fairness and to be clear that the idea of anoverlap-ping consensus is used only in thesecond stage. In the first stage, justice as fairness is seen as a free-standing political concep-tion that articulates the values applicable to the special domain of the political, as marked out by the basic structure of the institution under consideration. To facilitate the achievement of certain goals, we should understand the circumstances that make it necessary to develop and propagate the principles of justice. Suppose that scarcity of supply relative to demand forIMF quotas is char-acteristic of the situation, which seems reasonable because there is no price mech-anism to equate supply and demand. This is part of what makes the propagation of distributional principles and practices necessary: given scarcity and certain other factors, countries will not individually or collectively, self-equilibrate to ensure demand-supply equilibrium. In the second stage, an account of the stability of justice as fairness is formulated, which provides the basis – in view of the content of its principles and ideals as formulated in the first stage – to generate its own support. In other words, the idea of an overlap-ping consensus is introduced only in the second stage to explain that despite the plurality of conflicting comprehensive philosophical, economic and moral doc-trines, free institutions may gain the allegianceneeded to endure over time [Rawls 1989]. Khatkhate has argued that the decen-tralisation of the structure of the IMF and its new vision of surveillance will be more effective in managing the global imba-lances. He has noted that it will be rela-tively easy for the federal Fund to reach consensus among members, to improve governance with membership less unequal than before and focus on its core functions in which it will have a comparative advan-tage. Regarding the growing role of the regional financial institutions and the need to improve the governance of the IMF, there is no question that the quotas for many fast-growing market countries are way out of line from their economic weights and these countries, unhappy about their lack of representation in the IMF board, have in a way already started leaving the fold of the institution. They have been accumulating vast reserves to markedly lower the probability of any re-turn to theIMF-supported adjustment pro-grammes and furthermore, if these coun-tries conclude that they will not be getting adequate representation and sufficient in-fluence in the IMF, they are likely to con-tinue on the path of bolstering the regional arrangements such as the Chiang Mai Initiative in Asia. The Chiang Mai Initiative is an ambitious effort launched in 2000 by the Association of South-East Asian Nations (ASEAN) countries plus South Korea, China and Japan to create a regional financing facility, including a network of currency swap lines. Under the initiative, these countries agreed to set up a fund to prevent a recurrence of a financial crisis in the Asian region. Recently, at the 41st annual meeting of the Asian Development Bank’s board of governors in May 2008, finance ministers of the ASEAN+3 countries en-dorsed an agreement to advance their pre-vious currency swap accords by raising a minimum capital of $ 80 billion to create a fund, which is tasked to rescue crisis-hit
DISCUSSIONEconomic & Political Weekly EPW august 30, 200883countries by providing them with emer-gency funds. In this regard, Khatkhate points out that if theIMF is federalised, its function would mainly centre on coordi-nation to harmonise the relations among regions, to avoid deviation of regional sur-veillance from the central framework and to supplement resources to the regions in the event of financial crisis.Concluding RemarksA number of proposals for IMF reform, including those discussed in Khatkhate’s paper, have been put on the table and in pursuing a strategy that calls for a more focusedIMF, there is a need to do more than focus on efficiency gains because there is no avoiding the questions regarding justice and fairness. As Khatkhate notes, his pro-posal has important implications for the sort of issues that “will have to be con-fronted by the regional blocks under the proposed arrangements. The technical di-mensions relating to issues like voting power and its basis, membership profile of the regional as well as the federal executive boards, etc, are likely to be formidable.” He goes on to note that “the regional unions like the European Union, Asian or Latin Americanunionscan adapt a surveillance frameworkdesigned by the federal IMF within their respective regions with such changesasare necessary”. To his credit, hedoesrecognise that there remain many complexproblems – historical, political and technical that may arise in federalis-ing the IMF and that “the EU is what it is afterlongbattles were fought to resolve numerous political and national conflicts”. There is no doubting that there will be a host of contentious policy issues and tech-nical details that will have to be worked out if the international community decides to move in the proposed direction, inclu-ding the division of responsibilities on surveillance activities and the resources provided to the IMF and the regional funds, the strings attached to the loans and the time frames for repaying these institutions. However, in focusing on these issues and technical details, one should not lose sight of the question of voice and representation that this article has empha-sised and indeed was mentioned by Khatkhate as one of the reasons for think-ing along the lines of his paper.In analysing any proposal for reforming theIMF, one would want to attach some caution with regard to taking a narrow view of theIMF’s mandate. Despite the claims of some who view the IMF as a financial institution, with little or no im-plications for global governance, the fact of the matter is that theIMF is sui generis. TheIMF is a unique organisation and one of the most important characteristics of this uniqueness is that its members have invested a part of their individual eco-nomic sovereignty into the IMF’s surveil-lance activities. Furthermore, the institu-tion has global economic and financial rule-making powers that are not replicat-ed in any other international organisation. The IMF is the focal point of the inter-national monetary system and provides a unique framework for international monetary cooperation. The IMF never was and it is impossible to envisage it as being transformed into a narrowly defined monetary institution. For example, the IMF has developed a number of elaborate reporting systems for member countries, including the financial sector stability assessments to report on the member countries’ financial sectors and the reports on the observance of standards and codes to assess their adherence to certain standards. These reports are important to the IMF’s surveillance activities, as are the bi-annual WEO, the global financial stability report and most importantly, the annual article IV consultations with members. The sur-veillance activities take up more than one-quarter of the IMF’s administrative budget. Since the IMF produces theseandother public goods that are not subject to market discipline or even have a price attached to them, how can it possibly be engaged in mere financial transactions and be narrowly defined as a pure financial institution?The image or conception of the IMF as a purely monetary institution is sometimes overstated and the IMF that has been out there, in the particular, concrete sense of its history and future prospects, has a broad mandate to a greater or lesser de-gree. In this regard, the dichotomy be-tween the narrow financial institution and broader institution, with the latter being an important element of global govern-ance through its surveillance and regula-tory activities, is overdone. Rather than posing the problem as a choice between two competing conceptions of the IMF, as proponents of the narrow view do – and whereas this is not Khatkhate’s position but he should have discussed it in the con-text of his proposal – it should be recog-nised that this dichotomy is really only a less thoroughly or more lightly defined mandate for the IMF. For how else can an institution that has the mandate to pro-vide conditional liquidity that impacts directly on the formulation and imple-mentation of macroeconomic and struc-tural policies or has important regulatory and supervisory powers, avoid global governance issues? We are dealing with a continuum, not a dichotomy. Somewhere between the impossibly pure monetary institution and the institution so completely encumbered with a broad mandate that it is unable to engage in core activities lies the properly mandatedIMF, which is capable of focusing on the critical work pro-gramme and delivering its output, without ignoring or disavowing what it owes to the international community in terms of that precious endowment that member coun-tries have given it, that is, some of their economic sovereignty. Locating the space in which a properly constituted IMF can work is vital to the future effectiveness of the institution, and should be a central concern of all those who advocate reform-ing the international monetary system.Note 1 The reforms approved by the board of governors in May 2008 include a simpler quota formula; a second round of ad hoc quota increases to enhance the representation of dynamic econo-mies; a tripling of basic votes that will increase the voice of low-income countries; and an addi-tional alternate executive director for executive directors elected by a large number of members, which will benefit the two African constituencies on the executive board.ReferencesGrayling, A C (2001): Wittgenstein: A Very Short Intro-duction, Oxford University Press, p 91.Khatkhate, D (2008): ‘Reforming the IMF in a New Global Order’,Economic & Political Weekly, Vol 43, No 14.Mirakhor, A and Z Iqbal (2006): ‘Rethinking the Governance of the International Monetary Fund’, IMF Working Paper No WP/06/273, International Monetary Fund, Washington DC.Rawls, J (1989): ‘The Domain of the Political and Overlapping Consensus’,New York University Law Review, Vol 64, pp 233-55. – (1996): Political Liberalism, Columbia University Press, New York. – (1999): A Theory of Justice, revised edition, Harvard University Press Cambridge, Mass.Wittgenstein, L (1953): Philosophical Investigations, GEM Anscombe and R Rhees (eds), Blackwel, p 664.

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